A Self-Invested Personal Pension (SIPP) is an excellent way of saving for retirement. With a wide variety of investment choices available, generous tax relief, and flexible contributions, it’s one way of providing an income for later in life.
Pensions UK, an industry trade body, reckons £31,700 is needed to provide for the basic needs of a single person and to give added financial security. Here’s how a SIPP could be used to achieve this.
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Not enough
At the moment (30 January), for those with a full record of contributions, the State Pension is £230.25 a week (£11,973 a year) for those aged 66 and over.
This is a long way short of the £31,700 mentioned above. It’s also less than the £13,400 that Pensions UK says is the minimum needed.
My way
That’s why I opened a SIPP a few years ago. I’ve been trying to save what I can with a view to boosting my pension. If all goes to plan, I will have enough in my retirement pot to buy dividend shares that will give me a generous income stream. Assuming a 5% yield, I would need a SIPP worth £634,000 to generate £31,700 a year.
The State Pension would then bring the level of income very close to the £43,900 that’s said to be needed for a comfortable retirement.
However, there are plenty of shares around at the moment that offer a higher return than 5%. In fact, there are over 120 of them on the FTSE All-Share index. Of course, the list needs to be treated with some caution. A high yield might not be sustainable and dividends can fluctuate significantly from one period to the next.
Even so, I still think there are plenty of excellent income stocks available at the moment.
Consider this…
One example is Admiral Group (LSE:ADM), the FTSE 100 insurer. With 75% of its turnover coming from motorists, it’s seeking to grow its household, travel, and pet insurance offerings.
Although recent history shows an erratic payment pattern, the group’s established a reputation for paying an above-average dividend. To be honest, I’m not expecting the trailing 12-months yield of 8.6% to be on offer for much longer.
Indeed, the company says it plans to divert some of its surplus cash to share buybacks. But even with a 20% cut it would be broadly in line with the long-run average which, according to RBC, is 6%.
| Year | Interim dividend (pence) | Special dividend(s) (pence) | Final dividend (pence) | Total dividend (pence) |
|---|---|---|---|---|
| 2020 | 55.0 | 36.2 | 86.0 | 177.2 |
| 2021 | 87.9 | 148.9 | 42.2 | 279.0 |
| 2022 | 44.2 | 75.3 | 37.5 | 157.0 |
| 2023 | 38.0 | 29.6 | 35.4 | 103.0 |
| 2024 | 51.3 | 49.3 | 91.4 | 192.0 |
| 2025 | 85.9 | 29.1 | TBC | 115.0 (TBC) |
Of concern, fierce competition and price cutting has resulted in the group’s share price falling 25% over the past five months. A problem with the motor insurance industry is that the only customers that seem to show any loyalty are those who can’t be bothered shopping around for a cheaper deal.
More positively, Admiral has a strong balance sheet and as something of a differentiator, is offering its LittleBox telematics product to all drivers — not just the younger ones — to better assess the risk profile of its customers.
With a yield of 6%, a SIPP would need to be worth £528,333 to generate £31,700 a year in dividends. Savvy investors like to have a diversified portfolio, which helps spread risk across several shareholdings. Fortunately, I think there are a number of high-yielding shares, a bit like Admiral, that are worth considering.
