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A newborn with just\u00a0\u00a32,000 invested in a Self-Invested Personal Pension (SIPP) could one day retire with close to\u00a0\u00a3850,000. No that\u2019s not a typo \u2014 and it all comes down to how pensions work and the extraordinary power of compounding.<\/p>\n
To start, when money\u2019s paid into a pension, the government adds\u00a0tax relief. For someone with no earnings \u2014 including a baby \u2014 parents or grandparents can contribute up to\u00a0\u00a32,880 a year, and HMRC automatically tops the SIPP<\/a> up by 20%.<\/p>\n So a \u00a32,000 contribution doesn\u2019t stay \u00a32,000 for long. It becomes\u00a0\u00a32,500\u00a0once the\u00a0\u00a3500 tax relief\u2019s added.<\/p>\n From there, the maths becomes astonishing. If that \u00a32,500 compounds at\u00a09% a year\u00a0\u2014 roughly in line with long-term global equity returns \u2014 it grows to around\u00a0\u00a3849,000 over 65 years. No monthly contributions. No stock-picking. Just one lump sum, left alone for a lifetime. That\u2019s compounding. <\/p>\n 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\u2019s because every pound of growth starts earning returns of its own.<\/p>\n What makes this strategy so compelling is how little it requires up front. It\u2019s a meaningful gift, \u00a32,000, but it\u2019s not transformational for many families. Yet when combined with tax relief and six decades of compounding, it can become exactly that.<\/p>\n The lesson\u2019s simple: in investing,\u00a0time beats everything. Start the clock early, and the results can be extraordinary.<\/p>\n 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.<\/p>\n Where to invest?<\/p>\n 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\u2019d leave room for something a little more exciting, and that could come in the form of the Scottish Mortgage Investment Trust (LSE:SMT<\/a>).<\/p>\n