See how much you’d need in a SIPP to target a £2,500 monthly retirement income
A Self-Invested Personal Pension (SIPP) is an effective way of building a serious retirement pot, thanks to tax relief on contributions, long-term growth and the ability to take 25% free of tax.
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.
Ambitious investors could use it to target a meaty passive income in retirement from FTSE 100 shares, but it does take time. Let’s take the case of someone aiming to generate annual income of £30,000 a year, or £2,500 a month. Using the benchmark 4% withdrawal rule, the safe rate of income that shouldn’t deplete the overall plot, that would require a SIPP totalling £750,000.
FTSE 100 dividend shares
Hitting that demands both time and discipline. For instance, if somebody invested £650 a month into a diversified portfolio of FTSE 100 equities and their money compounds at 7% a year, they could get there in roughly 30 years. Tax relief makes this more achievable. That £650 would only cost a basic rate taxpayer £390 in practice.
Even if the eventual pot fell short, the effort would still provide a meaningful buffer in retirement. Much better than relying purely on the State Pension.
Picking the right stocks
Rather than simply passively tracking the FTSE 100, I’d rather invest in a spread of 15-20 companies I really like, balanced between dividend payers and companies with reliable cash flows. Cigarette-maker Imperial Brands (LSE: IMB) isn’t for everybody, but it’s been hugely rewarding lately and could be one to research further.
The shares have done brilliantly, climbing 40% in the last year and an impressive 135% over five years. Ironically, many investors bought the stock purely for its dividends, assuming capital growth might be limited. In practice, theyâve enjoyed the best of both worlds, with strong share price appreciation alongside a trailing yield of 4.95%.
One of the big attractions of dividend stocks is that companies aim to increase shareholder payouts year after year to keep up with (or ideally beat) inflation, and that’s the case here. The forecast yield for 2025 stands at 5.24%, rising to 5.5% in 2026. As ever, dividends aren’t guaranteed. But this one looks more solid than most.
Obviously, tobacco companies face plenty of threats. Their products kill, and attempts to find safe ways of delivering nicotine have had mixed results. Imperialâs push into e-cigarettes and heated tobacco offers fresh growth opportunities, but regulators are watching them closely too. That may partly explain todayâs low price-to-earnings ratio of just 10.5. That low valuation reflects these risks.
Equities risks and rewards
Half-year results, published on 14 May, showed group revenue fell 3.1% to £14.6bn. However 12-month free cash flow hit £2.4bn, with a 99% conversion rate. Which suggests the dividend is nicely supported.
Investing is a personal thing. For example, I don’t buy tobacco stocks, but I do invest in other sectors that investors might turn their noses up at. Diversification’s key. By building a balanced portfolio across different sectors and industries, I don’t have to panic if one or two underperform, hopefully others will more than make up for it.
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More reading
- Mining or oil? Tech or tobacco? 3 things to consider when choosing shares for a SIPP
- 2 cheap FTSE 100 growth shares I won’t touch with a bargepole!
- Hereâs how investors could target £2,338 in dividend income from 353 shares in this FTSE giantâ¦
- How to use dividend stocks and an ISA to target a £12,000 second income
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands Plc. 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.
