Building a retirement fund: why AI stocks might power a SIPP
Planning for retirement always feels like a balancing act between security and ambition. A Self-Invested Personal Pension (SIPP) however, can offer both.
With an annual allowance of £60,000 (or up to 100% of earnings) and tax relief on contributions, itâs one of the most attractive ways for UK residents to build long-term wealth.Â
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.
A key attraction is the flexibility. Investors can choose everything from shares and ETFs to investment trusts, providing far more control than a standard workplace pension.
The beauty is compounding. Over decades, reinvesting dividends and letting growth build on itself can turn steady contributions into a sizeable nest egg. And frankly, most people will need it. The UK State Pension, currently worth £221.20 a week for those with 35 qualifying years of National Insurance contributions, is a useful safety net.
But with a pension age of 66 (and rising), the annual payout of just £11,500 is rarely enough for a comfortable lifestyle.
Thatâs why investors often look for growth opportunities to supplement retirement planning. And right now, one of the most compelling themes is artificial intelligence (AI).
The future’s AI
AI’s no longer confined to Silicon Valley start-ups. Itâs being integrated into everything from tech and telecoms to healthcare and housebuilding. But investing directly in speculative AI names can be risky. Instead, it can make sense to look at the companies providing the backbone — warehousing, digital infrastructure and cybersecurity.
In the UK, Tritax Big Box REIT and Volex are examples of firms supporting the infrastructure that AI depends on.
That said, I still think the biggest opportunities remain in the US. Fortunately, a SIPP allows exposure to US shares, opening the door to tech titans like Nvidia and Amazon. Yet with their share prices now trading at eye-watering valuations, I prefer to hunt for lesser-known players with more attractive entry points.
One such stock to consider is Cognizant Technology Solutions (NASDAQ: CTSH). The American multinational specialises in IT consulting and outsourcing, with strengths in analytics, mobile computing, business process outsourcing and software testing. It serves a wide array of sectors including healthcare, financial services and retail â all industries ripe for AI adoption.
Hidden value
What caught my eye recently was Cognizantâs April 2024 partnership with Microsoft, designed to expand the reach of generative AI and Copilots (Microsoft’s generative AI chatbot). This deal positions the company not just as a service provider but as a key player in rolling out AI-powered productivity tools to businesses worldwide.
But operating in IT security brings inherent risks. Cognizant is facing a high-profile lawsuit from Clorox, which is seeking $380m in damages regarding a cybersecurity breach. Incidents like these can result in significant financial and reputational losses, hurting the company’s share price.
Valuation-wise, it looks appealing. Its price-to-earnings (P/E) ratio is just 14.7, well below the US tech average. Revenue’s growing at 6.3% year-on-year, earnings are up 12.27% and the balance sheet’s squeaky clean, with only $1.18bn in debt against $20bn in assets.
On top of that, it offers a modest dividend yield of 1.8%.
Cognizant hasnât yet enjoyed the same surge as other AI-exposed stocks. But if its sector ambitions gain traction, the returns could be significant — and thatâs exactly the kind of long-term growth potential that could help supercharge a SIPP before retirement.
The post Building a retirement fund: why AI stocks might power a SIPP appeared first on The Motley Fool UK.
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Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon, Microsoft, Nvidia, and Tritax Big Box REIT Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
