Since their launch in 1989, Self-Invested Personal Pensions (SIPPs) have been great for individuals wanting to take control of their retirement planning. And with generous tax relief it’s no surprise to me that 1.7m are now in existence.
But is it really possible to take a £20,000 SIPP and generate an annual passive income of £12,569? I think so. Here’s how.
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.
In the beginning…
The first thing to do is pick some stocks. How many? Well, it depends on an individual’s risk appetite as well as the size of the portfolio. Although opinion differs as to the ‘ideal’ number of shares to buy, the consensus appears to be 10-20 for a SIPP of £20,000.
Rather than choose individual stocks, some investors prefer to buy a tracker fund, replicating the performance of one particular index. From 2016-2025, the FTSE 100 returned an average of 9.5% a year, with dividends reinvested. As tempting as it might be to withdraw the cash, the long-term effects of compounding show how it pays to be disciplined.
A 9.5% return might not continue into the future. But if it did, it would turn £20,000 into £193,367 after 25 years. This might seem like a long time but patience is vital.
A look at the Footsie’s annual returns shows a wide variation. For example, £20,000 invested at the start of 2018 would have shrunk to £18,955 two years later. But by taking a long-term view, history suggests the bad years will be more than compensated for by the good ones.
Backing winners
However, I think it’s possible to achieve a higher return than 9.5%. Someone clever enough to have invested in the FTSE 100’s 20 best performers over the past 12 months, would have seen a 97.2% increase in the value of their SIPP.
Admittedly, the chances of doing this are very slim and it’s unlikely this will be repeated year on year. But it does illustrate how it’s possible to achieve some impressive returns with the ‘right’ stocks.
| Rank | Average share price movement (%) |
|---|---|
| 1-20 | 97.2 |
| 21-40 | 36.9 |
| 41-60 | 16.9 |
| 61-80 | 0.5 |
| 81-100 | -27.0 |
And finally…
Once retirement age is reached, some people like to draw down a proportion of the capital from their SIPP each year. Others prefer to buy dividend shares and live off the income. There are no rights and wrongs. Either way, it’s a good idea to seek professional advice.
One income share that I like is M&G (LSE:MNG). Based on amounts paid over the past year, it’s currently (9 February) yielding 6.5%. Apply this to our £193,367 SIPP and it would provide a retirement income of £12,569 a year, more than a full State Pension.
For the first nine months of 2025, the savings and investment group reported a £3.9bn inflow of funds. And its assets under management increased by 3% to £365bn.
Potential threats to its payout include increased competition from low-cost challengers and turbulence in global markets. But thanks to its strong balance sheet – it has a solvency ratio of 230% — and an increasing number of people looking to take responsibility for their own retirement planning, I’m optimistic that it can continue to pay an above-average dividend.
It’s important to remember that payouts can fluctuate as they are a distribution of earnings. But like M&G, there are plenty of high-yielding shares with impressive track records of dividend growth to consider for a SIPP.
