Dr James Fox explains how an investment into a SIPP at birth could compound into a nice retirement pot even if no extra money is added over the years.
Posted by Dr. James Fox
Published 15 January, 6:00 am GMT
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A newborn with just £2,000 invested in a Self-Invested Personal Pension (SIPP) could one day retire with close to £850,000. No that’s not a typo — and it all comes down to how pensions work and the extraordinary power of compounding.
To start, when money’s paid into a pension, the government adds tax relief. For someone with no earnings — including a baby — parents or grandparents can contribute up to £2,880 a year, and HMRC automatically tops the SIPP up by 20%.
So a £2,000 contribution doesn’t stay £2,000 for long. It becomes £2,500 once the £500 tax relief’s added.
From there, the maths becomes astonishing. If that £2,500 compounds at 9% a year — roughly in line with long-term global equity returns — it grows to around £849,000 over 65 years. No monthly contributions. No stock-picking. Just one lump sum, left alone for a lifetime. That’s compounding.
Most people think pensions are something to worry about in middle age. In reality, the most powerful years are the very first ones. Money invested in the early decades has far more time to snowball. That’s because every pound of growth starts earning returns of its own.
What makes this strategy so compelling is how little it requires up front. It’s a meaningful gift, £2,000, but it’s not transformational for many families. Yet when combined with tax relief and six decades of compounding, it can become exactly that.
The lesson’s simple: in investing, time beats everything. Start the clock early, and the results can be extraordinary.
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.
Where to invest?
When investing for a long period and with a relatively small figure, it may be best to invest in trusts or funds. This could include one fund tracking the performance of the US market, and one tracking the performance of the UK market. However, I’d leave room for something a little more exciting, and that could come in the form of the Scottish Mortgage Investment Trust (LSE:SMT).
This investment trust sits at the adventurous end of the FTSE 100, backing some of the world’s most ambitious growth companies through a single, globally diversified portfolio. Scottish Mortgage blends listed giants with hard-to-access private firms, giving investors exposure to everything from SpaceX (15.2%) to TSMC, Amazon, Nvidia, Meta and ASML.
The top holdings read like a roll-call of the technologies shaping the next decade, spanning artificial intelligence (AI), semiconductors, e-commerce and digital payments, with private names such as Stripe and Bytedance adding extra upside potential.
Right now, the trust trades on a 9% discount to net asset value, meaning investors can buy this portfolio for less than the underlying assets are worth. That can be an attractive entry point if sentiment improves.
However, there is risk. Scottish Mortgage uses gearing (leverage), which amplifies gains in rising markets but also magnifies losses when growth stocks fall.
For long-term investors comfortable with volatility though, the combination of elite holdings and a discounted price could prove compelling. I certainly think it’s worth considering.
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