Building a long-term passive income with a Self-Invested Personal Pension (SIPP) is a brilliant way to prepare for retirement. Even after a tremendous rally in 2025, the UK stock market continues to offer terrific dividend-earning opportunities for investors. And when leveraging the tax advantages of a SIPP, even a modest investor can aim to earn an extra £1,500 each month.
How’s this done? And how much money do investors need to make it happen?
Calculating targets
By relying on simple FTSE 100 index funds, investors today can expect to earn a yield of close to 2.9%. However, by being more selective and crafting a custom portfolio, it’s possible to earn closer to a 5% dividend yield each year without taking on too much additional risk.
If the goal is £1,500 a month, or £18,000 a year, then at a 5% payout, a SIPP would need to be valued at £360,000 – more than double the average size of UK pension pots.
Obviously, this is quite a large chunk of change. But for those who can spare £500 a month from their salary, it’s a threshold most people can reach.
Don’t forget, SIPPs offer tax relief. So for anyone paying the basic rate of income tax, every £500 deposit is topped up to £625 by the government. And assuming an investor’s portfolio matches the stock market’s average 8% annualised return, investing £625 each month will compound into a £360k pension pot in roughly 20 years when starting from scratch.
This goes to show that even someone who’s just turned 48 with no pension savings can still drastically improve the quality of their retirement lifestyle.
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.
Finding 5%-yielding stocks
Earning a market-beating yield requires a bit of investigative work. Higher dividend yields are often a reflection of the risk attached to a business. That’s actually why so many double-digit-yielding stocks often end up announcing payout cuts.
However, there are always some exceptions. And looking at the FTSE 100 today, one of these exceptions might be Imperial Brands (LSE:IMB) with its near-5% payout.
Not all investors are keen on tobacco stocks. But this moral objection, while understandable, organically lowers interest in tobacco stocks, creating more attractive valuations and, in turn, higher yields.
That’s proven quite advantageous for income-seeking investors who’ve been earning a high yield for years, backed by dividends that have been getting hiked every year since the pandemic. And with the addictive nature of its products unlocking substantial pricing power, this pattern isn’t expected to change anytime soon.
However, even with these favourable dynamics, dividends aren’t guaranteed. Increasingly strict regulations combined with a steady rise in consumer health consciousness are seeing a structural decline in tobacco consumption. And even Imperial Brands has seen its cigarette volumes start to shrink.
Management isn’t blind to this shifting landscape and has been aggressively investing in a new portfolio of ‘healthier’ products. And while these remain a relatively small part of the revenue stream today, it’s nonetheless expanding rapidly with the long-term aim of becoming a dominant source of income to offset the decline of traditional tobacco.
Whether Imperial Brands will be successful in this transition is where the uncertainty lies. But with a fairly undemanding valuation, this could be a risk worth considering for SIPP investors seeking passive income.
