When investing in a Self-Invested Personal Pension (SIPP), the government gives us a helping hand by topping up our contributions with generous tax relief. For a basic rate taxpayer, each £100 that goes in only costs £80.
For someone who pays tax at 40%, the £100 costs them just £60. Better still, capital gains and dividends roll up free of tax, while we can take 25% of our pot free of income tax. Further withdrawals will be added to a person’s income for that year, and potentially be subject to income tax.
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.
FTSE 100 dividends build wealth
Let’s say someone’s aiming for a monthly income of £1,750 from their SIPP in retirement. How much do they need to invest?
This is where the classic 4% withdrawal rule can help. It suggests that if an investor takes 4% of their pot each year, the underlying capital will never run out. If the goal is £1,750 a month, or £21,000 a year, their pension pot will need to be worth around £525,000.
This is a pretty hefty chunk of money. But thanks to tax relief, and the long-term compounding advantages of FTSE 100 shares, it could be more achievable than people think.
Let’s say somebody invested £650 a month, and their portfolio generates an average return of 7% a year. In that scenario, it would take them 25 years to hit that £525k target. Of course, £650 is a lot of money to find every month, but 40% tax relief would reduce that to £390. Still a lot, but slightly less daunting.
I have a SIPP myself, and it contains around 15 to 20 different FTSE 100 stocks, combining share price growth potential with high levels of dividend income.
Persimmon shares look good value
So how do we reach our ultimate goal? There are some incredible yields on the FTSE 100 today. Housebuilder Taylor Wimpey, for example, has a trailing yield of just over 10%.
Another housebuilder, Persimmon (LSE: PSN), pays dividend income of 5.64%. A key reason for these high yields is that shares in the sector have taken a beating. High house prices and mortgage rates are stretching affordability, hitting buyer demand. The cost-of-living crisis has driven up materials and labour costs, squeezing margins.
The Persimmon share price has fallen 37% over the last 12 months as a result. Yet the sell-off may also be an opportunity for braver investors to think about getting in ahead of a potential recovery.
Persimmon looks good value, trading at a price-to-earnings ratio of just over 11 (a figure of 15 is typically seen as fair value). It’s picking up the pace of house completions, with plans to build 11,000 to 11,500 homes this year, rising to 12,000 in 2026.
What it really needs now is a few more interest rate cuts, plus some much-needed economic optimism. When that comes, sentiment could jump quite quickly. That could mean capital growth to add to the dividends paid.
We’re not there yet but I think the stock is worth considering for patient investors who understand the risks. This is just one of a number of FTSE 100 stocks worth looking at today. If this one doesn’t appeal there are plenty more out there.
