Using a Self-Invested Personal Pension (SIPP) is one of the best retirement decisions a British investor can make. The account provides relief from dividend and capital gains tax, which means wealth builds more quickly before retirement. Eventually, taxes are applied when money is withdrawn, but this upfront relief enables a far more powerful compounding process.
With the average retirement age hovering around 65 (despite the State Pension age being a bit higher), a 40-year-old still has roughly 25 years (or more) to create a meaningful pension pot. That might sound like a tall order, but with the right structure and discipline, it’s achievable.
Calculating growth
The tax benefits of a SIPP make a big difference. With a 20% average income tax rate, every £300 invested per month effectively becomes £360. The UK market has returned just under 7% a year on average. However, it’s quite possible for a diversified investor to achieve closer to 8% or even 10% over the long term. Not that this is guaranteed and investors can lose money as well as make it.
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.
Let’s be cautious and assume an 8% return. In that case, £300 per month over 25 years could grow to around £354,160. Applying the recommended 4% drawdown rate (which means an investor should be able to withdraw an income without depleting their capital), this would deliver an income of £14,166 a year, or £1,180 per month.
If the portfolio returned 10% a year, the pot would reach approximately £486,880, providing nearly £20,000 annually, or £1,622 each month. When combined with the £966 state pension, that adds up to a comfortable retirement income at today’s rates.
So which stocks to pick?
Plenty of FTSE 100 stocks have averaged close to 10% annual returns over the past decade. Of course, past performance never guarantees future success. To reduce risk, it’s important to diversify effectively so that one poor performer doesn’t drag down the entire portfolio.
I like to mix growth and income shares.
For growth, leading blue-chips like Rolls-Royce and 3i Group have been outstanding. For dependable income, British American Tobacco and Legal & General have rewarded shareholders consistently. To balance these, defensive options such as Tesco and Unilever can provide stability during economic downturns.
One I like
A personal favourite of mine is National Grid (LSE: NG). Over the past 20 years, the share price has risen by 109% — equivalent to annualised returns of just 3.76%. That may not sound exciting, but it has long been a committed dividend payer, typically offering a yield around 5%. When dividends are included, average annual returns creep closer to 9%.
The dividend looks secure, with a payout ratio of 77.4% and more than two decades of continuous payments. As a government-regulated infrastructure firm, it’s also relatively insulated from the economic cycle, which is reassuring for anyone investing with retirement in mind.
That’s not to say there aren’t risks. Infrastructure upgrades are expensive, particularly given the transition to renewable energy. National Grid recently had to trim its dividend to manage costs, reminding investors that even defensive shares face challenges.
Nevertheless, efficient operations are helping, with revenue down 7.2% last year but earnings still growing 6.2%.
For those seeking reliable growth alongside steady income, I think National Grid is one of the top stocks to consider for a SIPP portfolio.
