I love my Self-Invested Personal Pension (SIPP). When I retire I expect to admire it even more, because it’s set to generate a large chunk of my everyday income after I stop working.
A SIPP’s attractive because HMRC tops up investor contributions with generous tax relief. I direct a large chunk of my own SIPP into dividend-paying FTSE 100 stocks, which give me both income and growth. So how much does an investor need to target a steady retirement income of, say, £2,000 a month?
That adds up to £24,000 a year. Under the so-called 4% rule, which suggests an investor who withdraws that percentage of their pot each year will preserve the underlying capital, they’d need £600,000.
Passive income from FTSE 100 shares
I reckon it’s possible to generate 5.5% a year from a spread of higher-yielding FTSE 100 and FTSE 250 stocks. That would reduce the target pot to just £435,000.
That’s still a fair wedge, and takes time to build. It’s doable, but there’s no time to lose. Take a 30 year-old who already has £20,000 tucked away. If they invest £200 a month and their money grows at an average of 7% a year, their total pot could hit £570,000 by retirement. Thanks to SIPP tax relief, that £200 monthly contribution only costs a 40% taxpayer £120 (£160 for 20% taxpayers).
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.
Lloyds Banking Group’s back
One stock that could fit neatly into an income-focused SIPP in my view is Lloyds Banking Group (LSE: LLOY). After a bruising decade following the financial crisis, the FTSE 100 bank is re-establishing itself as an income and growth machine, this time with tighter regulation and stronger safeguards in place.
Lloyds’ share price has enjoyed a remarkable run, up 78% over the last year and 150% across five. I’d expect it to slow from here though. Lately, banking profits have been boosted by higher interest rates, which have widened net interest margins, the gap between what banks pay savers and charge borrowers. With rates sliding that kicker should fade.
On the other hand, lower rates could also revive the housing market, which will boost Lloyds, as it’s the UK’s biggest mortgage lender via subsidiary Halifax. It’ll face plenty of competition though.
Lloyds recently lifted its interim dividend by an inflation-busting 15%. The trailing yield has slipped to just below 3.3%, due to its surging shares, but the income should climb over time. Lloyds’ shares are also more expensive than they were, with the price-to-earnings ratio creeping up to 15.4.
Spread risk around
My SIPP contains a spread of around 15 different FTSE shares, offering both income and growth potential. I certainly think Lloyds is worth considering as part of a spread of companies, even if the next few years are unlikely to repeat the recent bonanza. Diversification’s key, and so is getting stuck in early. A little effort today can potentially generate a high and rising passive income years down the line.
