A Self-Invested Personal Pension (SIPP) offers a range of benefits for UK retirement savers. They include tax-free dividends and capital gains, plus tax relief that gives investors more clout to grow their portfolios. Combined, these make it possible to create stock market wealth far faster than using other investment accounts, maybe even the Stocks and Shares ISA.
The question is, how large does a SIPP need to be to generate a healthy passive income? Let’s take a monthly income of £500, and calculate how long it might take to reach this goal. Are you ready?
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How big?
An investor with a portfolio of reliable-but-unexciting stocks and using the popular ‘4% annual drawdown’ rule, would need a £150,000 nestegg to earn £500 a month.
It’s a good idea, in my opinion, as it provides a relatively stable and sustainable income over time. But is it the strategy I’d use? No. When I eventually take an income from my SIPP, I plan to rotate my pension’s holdings into high-yield dividend shares.
This way, I can generate cash from dividends while also preserving my capital, and potentially even growing it. What’s more, this tactic may mean I need a smaller pension pot to get the same £500 passive income.
Let’s say I decide to put my money in 6%-yielding dividend stocks. At this percentage, I’d need £100,000 sitting in my SIPP. It’s a figure I could reach by investing £300 a month for 14 years and achieving an average annual return of 9%.
What stocks to buy?
The drawback of this plan is that dividends are never guaranteed. However, investors can boost their chances of still earning a reliable income by holding a diversified range of stocks. That can be done by choosing individual shares — I personally hold 20 shares in my own portfolio for income resilience.
Yet the same goal can also be achieved by buying a dividend-paying exchange-traded fund (ETF) or investment trust. This can be cheaper and less effort-intensive than buying specific shares.
Take the JP Morgan Global Equity Premium Income ETF (LSE:JEPG). This fund provides exposure to a whopping 247 income-paying companies from around the world.
A top dividend fund
Established in 2023, its goal “is to provide income and long-term capital growth.” We can’t rate its performance on the second point, given it’s been in existence just a few years. However, I can say its more than proved its dividend credentials over that time. The ETF pays a monthly dividend, and over the last year its trailing yield’s been an impressive, FTSE 100-beating 7.6%.
There’s one potential fly in the ointment: almost two-thirds of the fund’s invested in US shares. So if broader appetite for New York-listed companies wobbles, the product might not deliver the strong capital growth it’s targeting.
I don’t think this scenario will play out over the long term though. Besides, I believe the ETF’s excellent industrial diversification and exposure to many other parts of the globe still makes it a top SIPP pick to consider for monthly income.
