A Self-Invested Personal Pension (SIPP) allows an investor to build their own powerful portfolio of shares, funds, and ETFs. When used properly, these DIY pensions can make retirement significantly more comfortable.
SIPP contributions also get tax relief, which can then be invested to drive higher returns. Given enough time, regular contributions can create a portfolio that generates a significant second income.
Here’s how large it would need to be to pay £3k a month.
Building long-term retirement wealth
Let’s assume a 35-year-old starts with a £10,000 sum they transfer from a workplace pension to their SIPP. If this person then invested another £200 a month, this would magically become £250 a few weeks later due to government tax relief.
Let’s now assume the investor drip-fed the same sum in consistently, earning an average 9% return. With dividends reinvested, the SIPP would grow to £605k after 30 years (excluding brokerage charges).
At this point, the portfolio would be generating just over £36,000 a year in dividends, assuming a 6% yield. That would be equivalent to £3,000 per month.
Alternatively, an investor could draw down the SIPP rather than pass it on to loved ones.
Naturally, each person’s situation will be different when it comes to tax. Currently someone can take a quarter of their pot tax-free once they reach 55 (changing to 57 in 2028).
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.
A multi-pronged powerhouse
What sort of stock might be worth considering long term for a SIPP? I think Amazon (NASDAQ:AMZN) is well worth a look today.
The company is best known for its e-commerce operation, Prime Video streaming platform, and hardware (Alexa, Kindle, etc). However, Amazon also has two juggernaut businesses: cloud computing (AWS) and digital advertising.
Last year, AWS sales rose 20% to $128.7bn, with fourth-quarter sales jumping 24% (its fastest growth in 13 quarters). Within AWS, Amazon Bedrock is like the ‘App Store’ of AI. It now hosts over 100 models, helping disseminate AI at scale to thousands of blue-chip companies worldwide.
Meanwhile, Amazon has quietly become a digital advertising powerhouse, with revenue exceeding $68bn over the past 12 months. It’s now the world’s third-largest digital advertiser.
For the full year, total sales increased 12% to $716.9bn. Symbolically, this was higher than Walmart‘s $713.2bn, making Amazon the world’s largest company by sales. It’s on track to hit $1trn in revenue within the next few years!
Some billionaires are bullish
Now, one thing that has spooked the market is that Amazon plans to invest a colossal $200bn or so in 2026. While it anticipates a “strong long-term return on invested capital“, this can’t be guaranteed. Margins might come under pressure in future.
However, it’s worth noting that smart money has been flowing into the stock recently. In the fourth quarter, a handful of prominent billionaire hedge fund managers were buyers, including Bill Ackman, Seth Klarman, and Stanley Druckenmiller.
Down 17% in six weeks, Amazon stock’s forward earnings multiple is around 26 versus a 10-year average of 73. As such, it looks on sale, which is why I plan to invest myself in March.
Currently, Amazon is investing heavily in data centres, AI chips, robotics, and low earth orbit satellites. But I fully expect profit margins to expand over time, driven by AWS, digital advertising, and automation in its e-commerce business.
