A Self-Invested Personal Pension (SIPP) enables an individual to manage their own retirement fund. There’s flexibility as to the types of investments that can be held but the most popular is equities.
And with both life expectancy and the state retirement age increasing, planning for old age has never been more important.
Crunching the numbers
One company that’s likely to benefit from these trends is pensions, wealth management and insurance group Legal & General (LSE:LGEN). And I think its shares could help turbocharge a SIPP with a view to generating passive income of nearly £20,000 a year.
That’s because the stock’s presently (23 July) offering an above-average yield of 8.2%. Starting with a lump sum of £10,000, this would generate income of £820 in year one. Reinvesting this amount buying more shares would earn dividends of £887 in the second year. Repeat this for 40 years and the initial stake will grow to £233,932.
After four decades, the SIPP could generate annual income of £19,182. Alternatively, it would be possible to draw down a certain amount each year. However, before doing this, it’s important to take tax advice.
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.
Some points to remember
As impressive as these numbers might appear, my example comes with three caveats. Firstly, it assumes there’s no change in the company’s share price. Of course, it could go down (or up). Also, for the numbers to work, it requires the yield to remain unchanged. High-yielding shares could be a trap as their generous payouts may — ultimately — prove unsustainable.
Finally, it’s never a good idea to put all of your investment eggs in one basket. Diversification helps spread risk across more than one share.
However, despite these words of caution, the point I’m trying to make remains valid. By investing in high-yielding shares, I think it’s possible to create a healthy retirement pot.
Good long-term prospects
And I think Legal & General could be one of those shares. Apart from one year when it was unchanged, its dividend has increased annually since the financial crisis of 2008-2009. A 2% yearly rise up until 2027 is planned. Although there are no guarantees, this makes it one of the most generous and consistent dividend payers around.
A significant proportion of its future growth is anticipated to come from its pension risk transfer (PRT) division. By the end of 2028, it’s seeking to secure £50bn-£65bn of new funds. It recently acquired the £800m Honda UK pension scheme. In 2024, retirement products contributed over two-thirds of core operating profit.
From 2024-2027, the group’s targeting an annual increase in core earnings per share of 6-9%.
A global slowdown could make this more difficult to achieve. The investment income from the £496bn of equities and bonds that it holds is needed to meet its financial obligations. And it operates in a highly competitive industry.
However, with its strong balance sheet (it has over twice the level of reserves needed by the regulator), impressive dividend history and exposure to a market that’s likely to grow over time, I think the stock’s one of the most attractive on the UK market.
That’s why I think Legal & General’s shares could help deliver impressive long-term results as part of a well-diversified SIPP or otherwise. It’s one to consider.
