The Self-Invested Personal Pension, or SIPP, is a brilliant way to build a big pot of money for retirement. It comes with an unmatchable tax break, in the shape of upfront tax relief on contributions. So how does that work?

Whenever somebody invests in a personal pension, HMRC automatically applies 20% basic rate tax relief. This means each £80 contribution is topped up to £100. Basic rate 40% and additional rate 45% taxpayers can claim further relief through their annual tax return. So the same £100 only costs them £60 and £55 respectively. This is a brilliant booster, especially since it applies right at the start of the investment process.

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.

How much will I make from tax relief?

Let’s say a higher rate taxpayer invests £300 a month in a SIPP. We’ll also assume they continue to invest that sum for 30 years, and their money grows at an average compound rate of 8% a year. After 30 years, they would have £440,445. But with upfront tax relief they’ll have a lot more as they can put away £500 a month. With the same growth assumptions, their SIPP’s worth £734,075. That’s a staggering £293,630 more, courtesy of HMRC. Which goes to show how valuable SIPP tax breaks are.

At that rate, an investors could build a million-pound SIPP in 34 years. They could get there a lot faster if they increase their contributions every year, as their pay increases.

The downside is that in contrast to an ISA, withdrawals are taxable. Even then, the first 25% can be taken tax-free. Overall, it’s a brilliant package and complements ISA tax breaks beautifully. So where should SIPP savers invest?

Lloyds dividends will fund my pension

At The Motley Fool, we think buying individual FTSE 100 shares is a brilliant way to do it. Banking stocks such as Lloyds Banking Group (LSE: LLOY) have done particularly well lately, offering heaps of share price growth and dividend income. The Lloyds share price is up a hefty 48% over the last year, despite recent stock market volatility. Over five years, it’s grown 147%.

Better still, investors have received dividends on top. Applying SIPP tax relief piles benefit upon benefit.

Buying individual stocks can be a little risky. Lloyds is primarily focused on the UK, offerings savings and loans to consumers and smaller businesses. The UK economy isn’t in a good place right now, and profits may slow. If that happens, the share price could retreat. Dividends are never guaranteed, although I think this one looks more solid than most.

I hold Lloyds in my own SIPP, and plan to continue holding it for years, through the ups and downs of the investment cycle. I’ll reinvest all my dividends while working, and draw them as income when I retire. It’s more than possible for an ordinary investor to build a £1m SIPP. It helps to start early and stick with it. Lloyds is a good stock to consider, and I can see plenty more FTSE 100 shares worth looking at today too.