A Self-Invested Personal Pension (SIPP) is a powerful way of building wealth and takes very little effort to set up. Yet, a third of Britons don’t have a retirement plan. But it’s never too late. Fortunately, there’s plenty of time for a 55-year-old to build up a decent fund to help provide for a more comfortable old age. Here’s one approach.
Possible outcomes
Of course, leaving it late isn’t ideal. But someone investing £1,000 a month for five years – assuming an annual growth rate of 5% — could still have a pension pot of £68,090.
Obviously, saving more for longer — at a higher growth rate — should achieve a better result. The table below shows what can be achieved over different periods with various rates of return.
| Annual return/period | 5 years | 10 years | 15 years |
|---|---|---|---|
| 5% | 68,090 | 154,992 | 265,903 |
| 6% | 69,824 | 163,264 | 288,308 |
| 7% | 71,598 | 172,018 | 312,863 |
| 8% | 73,413 | 181,283 | 339,778 |
What next?
Once an individual reaches retirement age, they have a number of options available to them.
For example, they could follow the ‘4% rule’, which essentially involves drawing down 4% of their investment pot each year. In theory, this means the fund could last 30 years.
Alternatively, they might prefer to purchase an annuity, which will pay out a guaranteed sum for life.
Another possible approach is to retain the capital and buy dividend shares.
In my view, before deciding on the best strategy to adopt, I think it’s a good idea to seek professional advice. Everyone’s individual circumstances are different, so there’s no ‘one-size-fits-all’ approach.
What am I doing?
Personally, I’m always looking for dividend shares for my SIPP.
And one I like is Legal & General (LSE:LGEN).
At the moment (16 January), it’s the highest-yielding on the FTSE 100. But a yield of 8.1% could be a sign that investors believe its dividend might be cut soon. Sometimes, things just look too good to be true.
However, the pension and savings group’s directors intend to increase it by 2% a year up until 2027. But as well as a rising dividend — in cash terms, it’s increased 22% since 2020 — there’s another reason for its massive yield. Namely, the group’s disappointing share price performance – it’s gone nowhere since January 2021.
Of course, it’s impossible for a company to give guarantees when it comes to its dividend. However, Legal & General’s track record is impressive. It last cut its payout during the global financial crisis in 2009. And to the credit of the management team, it was able to keep it unchanged at the height of the pandemic in 2020.
Of concern, the group faces increased competition from some new entrants to the market. These tend to have a lower cost base, which helps them undercut their large rivals. Also, the income that it generates from its £500bn+ of investments will fall during periods of market volatility. This could adversely impact the group’s earnings and its dividend.
Weighing everything up
However, the group has a strong balance sheet, recognisable brand, and easily meets the minimum solvency requirements of the industry regulator. It also has an impressive pipeline of new business that it’s looking to win. It says it’s on track to take over and manage £50bn-£65bn of pension schemes from 2024-2028.
For these reasons, I think Legal & General’s a stock for 55-year-olds and others to consider. But it’s just one of many UK companies that offer attractive dividends at the moment.
