What sort of target can someone realistically aim for when putting money into a Self-Invested Personal Pension (SIPP)?

The answer could vary dramatically, depending on a few variables. Let’s take them in turn.

Timeline

Time can work to an investor’s advantage.

It allows them to compound gains.

It also means that someone investing in what they think is a business with brilliant unrealised potential (or an already brilliant one that is undervalued) can sit back and wait for years or decades in the hope that the market will recognise that.

Contributions

Alongside time, how much someone puts into their SIPP will be a key element in figuring out what it will ultimately be worth.

That could be in the form of a lump sum, regular contributions along the way, or both.

Over the long term, regular contributions can add up. Ten years of £500 monthly contributions would come to £60k.

Compounding that could make it even more.

By contributing £500 per month and compounding it at 5% annually, the SIPP should be worth over £77k after a decade. After 20 years, it could be worth over £205k. After 40 years (which I think is a realistic contribution timeframe for many SIPP investors, depending on their age), it should be worth around £763k.

That is even before considering the potential tax benefits of investing through a SIPP.

For example, that £500 monthly contribution ‘topped up’ by the government by 20% to £600 per month and compounded at 5% annually for 40 years would be worth close to £916k. For higher rate taxpayers, the benefit could be even greater.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Building wealth – and eroding it

Is 5% a realistic compound annual growth rate?

To answer that, think about what could help the money grow – and what might eat into it.

An obvious factor eating into it could be fees and commissions, especially over the long term. So it is important to choose carefully when selecting a SIPP provider.

Another factor that could make the value shrink is share prices falling. Conversely, share price growth could boost it. Dividends could also help. Over the course of decades, dividends are very substantial for some SIPPs depending on how they are invested.

Whatever the approach, choosing a diversified portfolio of high-quality companies bought at attractive prices is important.

Doing that, I think someone could not only aim for a 5% compound annual growth rate, they could realistically target a higher one.

Laser focus on quality, for the long term

One share I think investors should consider is FTSE 100 asset manager M&G (LSE: MNG).

It yields 6.7%. The company also aims to grow its dividend per share each year, though dividends are never guaranteed.

The yield actually used to be higher because share price growth has outstripped dividend growth, but it is still substantial.

The M&G share price is up 54% over the past five years.

Asset management is a massive industry set to benefit from ongoing high demand in coming decades.

With millions of customers, a well-established reputation, and strong brand, I believe M&G has competitive advantages that can help it do well.

One risk is turbulent markets leading policy holders to pull out funds, hurting profits. If M&G’s asset managers perform well enough, though, I reckon that risk should be manageable.