A SIPP is one of the most effective ways I’ve found to build a long-term passive income stream. Every contribution to a Self-Invested Personal Pension gets a lift from the government. A basic-rate taxpayer only needs to put in £80 for every £100 that ends up in their pension. A higher-rate taxpayer pays £60.
On top of that, any gains or dividends compound free of tax over the years, and 25% of the pot can be taken tax-free from age 55 (rising to 57 from 2028). The rest is subject to income tax in the usual way.
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 income stocks
Let’s say the retirement income target is £2,000 a month, that’s the equivalent of £24,000 a year. Using the classic 4% ‘safe withdrawal rule’, the pot needs to be roughly £600,000. That’s a hefty sum, yet within reach for those who start early and contribute regularly.
If someone saves £450 a month and their SIPP delivers an average total return of 7% a year, they’d hit that £600k in around 30 years. With higher-rate tax relief, that £450 contribution falls to a more affordable £270.
I hold a mix of FTSE 100 shares inside my SIPP, mixing stocks with strong income with those offering a little more growth. Wealth manager M&G (LSE: MNG) is a particular favourite.
Fresh momentum
M&G was spun out of Prudential in 2019 and had a slow start. The pandemic didn’t help. I still added it to my SIPP in early 2023, at a time when the UK financial sector was out of favour. I felt the combination of a modest valuation and a chunky dividend offered a decent long-term opportunity.
Interest rates were high at the time. My view was that as rates eased and yields on cash and bonds fell, M&G’s generous payout would look even better.
Rates didn’t fall as quickly as I expected, yet the trailing yield of 7.37% is still pretty brilliant. The share price has beaten my expectations, jumping 40% over the last year. My total 12-month return is nearing 50%, but these are early days.
Latest figures
On 5 November the group reported another solid quarter. Assets under management and administration rose 3% to £365bn, amid healthy inflows from investors.
CEO Andrea Rossi hailed its strong progress and said the partnership with Japan’s Dai-ichi Life should bring further flows.
No stock is without risk. Rossi warned of the “volatile macroeconomic environment”. As an active manager, M&G is also up against low-cost trackers like exchange traded funds (ETFs).
New product areas such as bulk annuities could fuel growth but competition is intense. I expect the share price to slow after the recent a strong run, yet I still think it’s worth considering with a long-term view.
Staying diversified
SIPPs reward patience. Regular contributions, broad diversification across at least a dozen stocks and a long-term mindset can turn steady saving into real wealth. Building a pot large enough to generate £2,000 a month takes time, yet the combination of discipline and compounding can get investors a lot closer to that goal than they might think.
