The new tax year is almost here, giving SIPP investors new opportunities to build a big retirement income. Here’s how to nail a reliable £3,000 monthly second income in later life.
Building a SIPP
First, let’s talk about why £3k is a good target to aim for. That works out at £36,000 a year, which — when combined with the State Pension — could deliver a very comfortable lifestyle.
Pensions UK says that the average single person needs £43,900 a year today to live comfortable. Considering that living costs rise over time, I think a £36k annual SIPP income is a sensible goal.
Now let’s get down to the nitty gritty. How large does a SIPP portfolio need to be to generate this?
It depends on the average dividend yield you can achieve with your investments. The FTSE 100 index’s average yield sits at 3% to 4%, but an investor could potentially get much better than this with some careful stock selection. I think a yield of 6% is certainly possible, backed by top stocks like Legal & General (9.2% currently), HSBC (LSE:HSBA)(5.2%), and Tritax Big Box REIT (6.1%).
With an average 6% yield, you’d need a SIPP worth £600,000.
Wealth boosters
Brits can invest £60,000 into one of these products a year, or 100% of their annual earnings, whichever is lowest. The thing is, only a tiny number actually have that kind of cash on hand to invest.
So how realistic is it to aim for a £600,000 portfolio in retirement? In a word: very. SIPP investors are protected from capital gains and dividend taxes, giving them more money to accelerate the compounding process. Users also benefit from generous tax relief which ranges from 20% to 45% depending on your tax bracket. This can provide a massive extra dollop of cash.
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.
However, the real engine is the wealth-building power of the stock market itself. Let’s use HSBC again as an example. Over five years, it has delivered an average annual return of 27.9%. That’s through a combination of share price gains and dividend income.
The FTSE bank has successfully harnessed booming wealth levels and population sizes in Asia over the last decade, supercharging profits and shareholder returns. Unsurprisingly, its doubling-down here and selling assets in more mature markets to focus on these emerging regions.
Boston Consulting analysts think Asia will account for 30% of new financial wealth by 2028. On this basis HSBC’s strategy seems an excellent one, as does its decision to invest in areas like wealth management. I’m confident it can thrive even as competitive threats grow.
Bottom line
I’m not saying every share an investor buys will deliver a near-28% yearly return like HSBC. The bank itself faces challenges that could impact its own returns, like slowing Chinese growth and escalating global trade tariffs.
But even if they can achieve the broader stock market’s long-term average of 9% with their portfolio, they could still realistically target a huge retirement income.
At this rate, a £500 monthly investment combining an investor’s own funds and tax returns could create a £600k SIPP in just over 25 years.
