A SIPP opened at birth could be worth £10m in 55 years

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Parents can pay just £2,880 a year into a child’s SIPP (Self-Invested Personal Pension) — the government tops it up to £3,600. Given enough time, the results are extraordinary.

The mechanics are simple but powerful. Parents and grandparents can pay up to £2,880 per year into a child’s SIPP — and even though the child pays no tax, the government adds 20% relief, bringing the total annual contribution to £3,600. That’s it. That’s the whole strategy.

Let’s assume that the parents, and then the child, maintain those contribution for the next 55 years. Admittedly, by the end of the period — 50-odd years from now — the contributions would actually be quite small relative to the value of money.

Time does the heavy lifting

Assuming the money is invested in global stocks returning 11% annually — broadly in line with the S&P 500‘s performance over the past 55 years — those modest contributions compound into something remarkable. After 20 years the pot sits at around £230,000. After 35 years, £1.2m. By year 55, just over £10m.

The really striking thing is how much of that growth happens at the end. The final decade alone adds more than £6m — more than the preceding 45 years combined. This is what compounding actually means in practice: the longer it runs, the faster it accelerates. The total amount paid in over 55 years is just £198,000. The rest — more than £9.9m — is pure growth.

There are caveats, of course. The money is locked away until at least age 57 under rules coming into force in 2028. Returns of 11% are not guaranteed — markets can disappoint for years at a time.

And many families simply cannot commit £2,880 per year from birth. But it’s worth playing around with the numbers. Even tiny contributions — say £20 per month — can make a huge difference over time.

Where to invest?

For long-term SIPP investors, few investment trusts make a stronger case than Scottish Mortgage Investment Trust (LSE:SMT).

Run by Baillie Gifford, the investment trust does something most retail investors cannot: access exceptional private companies before they list.

This is clear from its larger holding — SpaceX. The company is valued at £800bn on Scottish Mortgage’s balance sheet, but that figure could double if SpaceX moves forward with its listing this year — it already represents around 16% of the portfolio.

The company also provides investors with instant diversification, owing a host of household names and companies you’ve never heard of.

The philosophy is patient — positions held for years, sometimes decades, ignoring short-term noise. That comes with real risk: the trust fell more than 50% in 2022 as growth stocks re-rated sharply. What’s more, concentrated private holdings can be illiquid and hard to value accurately.

However, it’s certainly an interesting proposition, and well worth considering.

The post A SIPP opened at birth could be worth £10m in 55 years appeared first on The Motley Fool UK.

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James Fox has positions in Scottish Mortgage Investment Trust Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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