Worried about retirement? Here’s how big a SIPP needs to be to live comfortably

The Self-Invested Personal Pension (SIPP) is one of the most powerful retirement wealth-building tools available to British investors. And yet, according to the Financial Conduct Authority, only around 10% of the adult population in Britain is making use of this investing vehicle.

That’s particularly shocking given the widespread lack of retirement readiness across the country. For example, a recent survey by Checkbox revealed that a third of Britons don’t have a retirement plan in 2025. At the same time, BlackRock’s 2024 Read On Retirement survey found that 61% of the UK population is worried about outliving their pension savings.

Leveraging the power of a SIPP could be the key to change this, helping more investors to secure their retirement. And for those who start earlier, it might even be the key to enjoying a more lavish lifestyle.

Starting with £500 a month

To live a comfortable retirement in the UK, the estimated annual retirement income needed in 2025 is around £43,100 a year. Assuming an individual’s eligible for the full State Pension, just shy of £12,000 of this will come from the government.

However, that still leaves us £31,100 short. This is where a SIPP enters the picture. Instead of putting money into an interest-bearing savings account, it can be put to work in the stock market. And thanks to several special tax benefits, having just £500 a month can go a long way.

After tax relief, anyone in the Basic Rate income tax bracket putting £500 into their SIPP each month will end up with £625 of investable capital. Investing this at a 10% annual return for 25 years translates into a portfolio worth roughly £830,000. And by following the 4% retirement withdrawal rule, savvy savers can generate a passive income of £33,200 a year – slightly more than what’s needed.

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.

Caveats to consider

While investing in an S&P 500 passive index fund has historically delivered 10% annualised returns, there’s no guarantee that it will continue in future. But even if it does, 10% may not be enough. That’s because the cost of living could rise. At the same time, while SIPPs allow wealth to grow tax-free, income taxes eventually re-enter the picture when taking money out.

This is where adopting a stock-picking strategy can provide a potential solution. Take a look at Rightmove (LSE:RMV). The UK online property portal has been a publicly traded company for two decades. And during that time, it’s delivered an average annualised return of 16.8%. Investing at this rate doesn’t generate an £830,000 SIPP, but rather a £2.8m portfolio generating a £113,880 retirement income.

This tremendous success came about as management was able to be a first mover in the space while the internet was still relatively young. With the company continuously improving its platform, subscription and advertising revenues surged, generating a network effect that made Rightmove increasingly more valuable as more estate agents and homebuyers relied on it.

In recent years, Rightmove hasn’t kept up with its historical performance. While the business is still strong, its larger size simply makes growth more challenging, especially since the online property portal marketplace is now significantly more competitive.

Nevertheless, by studying pioneering businesses with notable competitive advantages, investors can go on to earn impressive long-term gains that pave the way for a much larger SIPP.

The post Worried about retirement? Here’s how big a SIPP needs to be to live comfortably appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Rightmove 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.

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