To qualify for the maximum State Pension — currently (19 April) £241.30 a week — an individual will need to have 35 qualifying years of National Insurance (NI) contributions.
What this means in cash terms depends on someone’s earnings and their employment status. But a typical worker earning £45,000 a year will pay £2,593 in NI this tax year.
In other words, £90,755 (£2,593 a year for 35 years) could unlock an annual pension of £12,548. Someone enjoying 25 years of retirement could receive £313,700. This is a tremendous return but, unfortunately, it isn’t enough to provide for a comfortable retirement.
However, a SIPP (Self-Invested Personal Pension) could help bridge the gap. Let me explain.
One possible approach
According to Pensions UK, a single person needs an annual income of £43,900 to enjoy a comfortable retirement. And by investing in a SIPP, I think it’s possible to produce a nest egg large enough to provide the additional £31,353 needed to supplement the State Pension.
Of course, the size of an individual’s pension pot will be determined by the amount invested, for how long, and the rate of return. For example, if someone invested £2,593 a year for 35 years — and achieved an annual return of 8% — they would have a SIPP worth £482,562.
At this point, a portfolio of dividend shares paying 6.5% a year, could produce an annual income of £31,366. Alongside the State Pension, this should be enough to have a decent retirement.
Something to consider
One stock that’s yielding 6.5% at the moment is LondonMetric Property (LSE:LMP). It owns a £7.4bn portfolio of 683 property assets, in what it describes as “structurally supported” sectors. The group avoids investing “where income security and growth is less assured”. This means the majority (54%) of its assets are in the logistics industry.
Presently, its annual contractual rental income is £420m.
A special status
As a real estate investment trust (REIT) it has to return at least 90% of its rental profit to shareholders each year by way of dividend. Otherwise, it loses certain tax advantages. Generally speaking — no guarantees, of course — this means LondonMetric Property should offer an above-average yield. Conventional trading companies are unlikely to have a payout ratio of 90% or more.
However, there’s a potential threat to its earnings if interest rates remain higher for longer. By having to return such a high proportion of profit to its shareholders, the group’s forced down the route of having to take on debt to buy properties.
Not only would a higher interest rate environment increase borrowing costs, it could also limit future access to finance and, therefore, restrict growth.
Also, the UK commercial property market’s highly cyclical. Tenants going bust is an ever-present risk.
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.
Final thoughts
However, LondonMetric Property has a strong track record of raising its dividend. It also has a 98% occupancy rate, which reflects the quality of its portfolio.
I also like its emphasis on triple net leases. Under these types of agreements, the tenant is responsible for maintenance costs, insurance, and property taxes, as well as the rent. This reduces the level of the operational risk faced by the group.
That’s why I think it’s a stock worth considering by those looking to boost their income, whether in retirement or earlier in life.
