How much should a 30-year-old put in a SIPP to make a £100k passive income at 65?

Passive income is one of the most powerful ideas in personal finance. Money that goes to work, while investors get on with their lives.

For a 30-year-old aiming to retire at 65, a Self-Invested Personal Pension (SIPP) could be the most efficient way to build it. With enough time in the market and the right level of contributions, a six-figure retirement income doesn’t look out of reach. It takes time and effort, but a £100,000 retirement income would make it worthwhile. In 35 years’ time, it won’t be worth as much as it is now, but it should still be a very nice annual sun to live on.

Building the future

Every £80 paid into a SIPP is automatically topped up to £100 by the government for basic-rate taxpayers, with higher earners paying in just £60. That tax relief gives contributions an immediate boost.

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.

By building a balanced portfolio of mainly FTSE 100 stocks, those savings could potentially deliver a big retirement income.

Especially if invested in a diversified spread of blue-chip income stocks, such as British American Tobacco (LSE: BATS).

The company has long been a favourite in the FTSE 100 for dividend seekers. It continues to reward shareholders despite constant pressure on its core product. On 3 June, it said full-year revenues would beat earlier expectations by 1% to 2%, while adjusted operating profits are on track to rise 1.5% to 2.5%.

British American Tobacco is on fire

Both revenues and profits are forecast to grow faster in 2026. US operations are recovering strongly, thanks to a rebound in cigarette sales and rapid growth in oral nicotine brand Velo. The business continues to innovate, invest and return capital to shareholders.

The share price has jumped a stunning 53% over the past year. That’s trimmed the dividend yield to 6.22% on a trailing basis, which is still an outstanding level of income. 

With more than 25 consecutive years of dividend increases under its belt, British American Tobacco is a dividend superstar. Despite its strong run, the shares trade on a modest price-to-earnings ratio of just over 10.

Despite it being worth considering, it won’t suit every investor. Tobacco carries regulatory risks. Litigation is always a threat. And smoking rates are falling across the developed world. But the company keeps making money. And the dividends keep flowing.

Diversification counts

No portfolio should rely on a single company or sector. A well-built SIPP that includes financials, healthcare, energy, mining and tech alongside income stocks like this could provide more resilience over time.

Mixing dividend shares with long-term growth stocks could generate annual income returns of around 6%, while still offering the chance of capital gains. To draw £100k a year from a 6% yield, a portfolio worth a hefty £1.67m is required.

With 35 years to build that, it would take almost £1,000 a month. Basic-rate tax relief reduces the monthly cost to £800. For higher-rate taxpayers, it falls to £600. This assumes 7% annual compound growth.

Obviously, most of us can’t afford to save anywhere near that much. The vast majority of 30-year-olds have more urgent calls on their cash.

But even smaller sums could still grow into something worthwhile. With patience, diversification and the ability to sit through volatility, there’s a realistic shot at building serious passive income by 65.

The post How much should a 30-year-old put in a SIPP to make a £100k passive income at 65? appeared first on The Motley Fool UK.

More reading

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• 3 shares that could help a SIPP double in value
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• 5 dividend shares yielding 5.9%+ to consider in July
• 44% under ‘fair value’ and 16% annual earnings growth forecast, should I buy more of this 6.8%-yielding passive income gem?

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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