How much should one have in a SIPP to target passive income of £2,200 a month?
Building up enough money in a Self-Invested Personal Pension (SIPP) can be a good way to ensure a more comfortable retirement. Investors enjoy tax relief of between 20% and 45%, depending on their personal income tax bracket.
It can be especially helpful for people who donât have lots to invest initially or who make regular contributions of low to moderate in size.
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.
If an investor picks a good selection of strong, reliable dividend stocks, the target of an average yield of 7% is not entirely fanciful â although it still carries risk.
One example of a 7%-yielding stock
Consider Land Securities Group (LSE: LAND). Itâs a real estate investment trust (REIT) with a dividend yield that’s often above 7%. It has a long history of payments and has grown dividends every year since the pandemic.
Crucially, dividends are well-covered, with a payout ratio of 75% and cash coverage of 1.16 times.
Valuation-wise, it looks somewhat undervalued, with a price-to-earnings (P/E) ratio of about 10.27 and a price-to-book (P/B) ratio of 0.62. Since 2023, its net margin has improved drastically, from -38% to 42.8%.
But despite excellent financials, Landsec exhibits some risks that an investor should think about. Property stocks depend heavily on interest rates — high rates make borrowing costly for tenants who might delay leases or fail to stretch their budgets.
Also, property values and rental income are very sensitive to domestic economic fluctuations like inflation, wage growth and consumer confidence. But in Landsecâs most recent annual report, like-for-like rental income rose 5% and occupancy climbed to about 97.2%, suggesting resilience.
Still, the price is down some 7.4% year-to-date, which shows the market is still nervous. These are issues that could affect yield sustainability or even risk dividend cuts if conditions worsen. An investor should weigh up these factors carefully.
A £2,200 monthly passive income
To achieve a passive income of £2,200 a month (that is about £26,400 a year) via dividends at a 7% yield, a portfolio of stocks worth about £380,000 is needed. Thatâs a large sum for many. But contributions over time help reduce the upfront burden.
By investing £300 per month into a portfolio with an average yield of 7% and assuming market growth of 3% per annum (with dividends reinvested), the pot might grow to about £370,790 in 25 years. Of course, actual results could vary significantly due to environmental or geopolitical changes, regulation or sector-specific shocks.
In a worst-case scenario, even 30 years of monthly contributions should get close to that kind of pot. What matters is starting early so compounding can do its work.
What to consider
The yield is important, but it isnât everything. Sufficient dividend coverage and a long track record of payments are also essential. Sector risk is also relevant. REITs like Land Securities are especially exposed to inflation, interest rates and regulation.
A target of £2,200 a month passive income via a SIPP is achievable in theory but it demands disciplined regular investing over decades. An investor should consider including yield-oriented stocks like Land Securities as part of the mix but also balance with growth-oriented names to cushion volatility.
Weigh up dividend coverage, financial health and economic sensitivity when selecting stocks. Starting early, contributing regularly and being realistic about risk are key traits of successful investors.
The post How much should one have in a SIPP to target passive income of £2,200 a month? appeared first on The Motley Fool UK.
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Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has recommended Land Securities Group 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.
