What is the difference between investing £10k into a FTSE 100 index tracker and putting the same amount into a Self-Invested Personal Pension (SIPP), then using that to invest the whole amount into the same index tracker?
The answer may surprise you!
The SIPP structure can offer investors a compelling benefit
When we invest, we often expect that the amount of hard-earned cash we put into the investing platform might be chipped away at by things like fees, commissions, and dealing costs.
Unfortunately, that is also true when investing through a SIPP.
However, a SIPP can offer one big immediate advantage compared to other investing structures: tax relief.
I am not talking about the tax-free capital gains and income inside the wrapper, just like a Stocks and Shares ISA offers. That is also true of a SIPP, although the rules on withdrawal (both about tax and when it can be done) are different to an ISA.
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.
Doing more with the same amount of money
No, I am talking about tax relief.
In short, the government will boost the amount you put into your SIPP as a way of effectively refunding (without interest) the income tax you paid on the money involved.
For higher and additional rate income tax payers that can be a huge benefit.
Even for a standard rate income tax payer, though, this could be very powerful. In fact — and oddly — even non-taxpayers can get that tax relief.
In practice, it means that someone putting £10,000 into a SIPP would in fact have £12,500 to invest without putting in any more money of their own.
More money, more returns
Let’s put that in perspective.
Over the past five years, the FTSE 100 index is up 45%. So someone who put £10k into a tracker in a share-dealing account five years ago would now be sitting on around £14,500.
But someone who put that same amount (£10k) into a SIPP and then bought the same tracker would now be sitting on a SIPP valued at around £18,125.
That is before even taking into account dividends along the way.
The amount of passive income earned would be 25% higher thanks to the effect of tax relief in the SIPP, compared to making the same moves outside the SIPP wrapper.
On the hunt for SIPP winners
As it happens, I do not currently own any index trackers in my SIPP.
But I have been investing directly in some FTSE 100 shares.
One that has been doing poorly is JD Sports (LSE: JD). While the FTSE 100 is up by 45% over five years, the same period has seen the JD Sports share price sink by three-fifths.
Nor is the dividend exciting. A 1.7% yield falls well below the 3.1% offered by the wider index.
So, why am I hanging on?
I am not ignoring the risks. Weakening consumer spending threatens demand for pricey athleisure wear. The value of JD Sports’ expansion programme over the past few years remains to be proven. But it has boosted the British company’s global footprint and economies of scale.
The brand is strong and the company remains highly profitable. Profit before tax and adjusting items last year fell, but still came in at £852m.
The share looks undervalued to me. I plan to keep it in my SIPP!
