If a 40-year-old puts £500 a month into a SIPP, here’s what they could have to retire on

The Self-Invested Personal Pension (SIPP) has, since its inception in the late 1980s, helped millions of Britons to target a comfortable retirement.

With a SIPP, individuals don’t pay income, capital gains or dividend tax on the gains while they’re growing their wealth . And they benefit from tax relief (at 20% to 45%, depending on a person’s income tax bracket) that can be invested for further compound gains.

The return someone makes from a SIPP naturally depends on what they invest in. But here’s what a 40-year-old might expect to retire on if they invested £500 each month.

A £900k+ nestegg

As I say, one of the benefits is the payment of tax relief. For a basic rate taxpayer who invests £80 themselves, the tax relief tops it up to £100, with the extra £20 paid directly into the account by the government several weeks later.

This means that our 40-year-old, if they fell into the basic rate tax band, would have an extra £125 each month on top of their own £500 investment. Higher- and additional-rate taxpayers could claim back even more through self assessment.

With a SIPP, individuals can choose to buy stocks, investment trusts, funds, bonds, commodities, and certain types of property and land. On the other hand, holders can decide simply to keep their contributions in cash savings.

With these categories, investors can expect to see very different levels of risk and returns. But for the sake of this example, let’s say our investor chooses to buy equities, trusts and funds with their £625 monthly investment.

With this method, they could realistically target a 9% average annual return over the long term. If they did this up to the State Pension age of 68, they could make around £942,690 to retire on. Not that 9% is guaranteed, of course.

Lower return

This investing approach can involve more risk than holding cash in a SIPP. But the difference in eventual returns can be considerable.

Let’s say our 40-year old decided to save instead of invest, and chose a pension with a reasonable 3% savings rate. Over the same 28-year-timeframe, they’d have made £328,485, far below the £900k described above.

On the plus side, this is guaranteed, while returns from share investing can wildly miss the target. It’s why I believe holding a proportion of one’s capital (whether in a SIPP or elsewhere) in cash is a great idea for managing risk.

But the potential to make truly life-changing returns mean that, in my opinion at least, investing in shares, funds and trusts merits serious consideration.

Top trust

A lower-risk way of doing this could be to consider buying an investment trust like the Allianz Technology Trust (LSE:ATT).

By investing in a basket of stocks, vehicles like this help individuals to effectively spread risk. In total, this particular trust holds shares in 45 high-growth companies including Nvidia, Meta, Apple and Microsoft.

Investors pay a 0.7% management charge to hold the trust. And returns could be bumpier going forward given the threats of US trade tariffs and competition from Chinese companies.

But I think Allianz’s tech trust could still deliver exceptional long-term shareholder profits as sectors like artificial intelligence (AI) and quantum computing take off. Since March 2020, it’s delivered an average annual return of 20%.