How much do you need in a SIPP or ISA to target a second income of £36,000 a year in retirement?
The State Pension isn’t enough for a comfortable retirement, so investors ideally need to generate a second income on top. I think a brilliant way of doing this is to invest in a portfolio of dividend-paying FTSE 100 companies through a Stocks and Shares ISA or Self-Invested Personal Pension (SIPP). Or both.
A bumper passive income of £36,000 a year, or £3,000 a month, would transform retirement. So how big a pot do investors need to generate that kind of money?
Investment tax breaks
The answer depends on the dividend yield generated by the underlying shares in their portfolio. If it’s 4% a year, the pot would need to be a pretty hefty £900,000. Lift that yield to 5.5% and the target shrinks to roughly £655,000.
Building that kind of money means investing year after year, using those ISA and SIPP tax breaks and reinvesting every dividend to help it compound and grow. The earlier people get started, the easier it becomes. The effort will be worth it in the end.
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.
Building income steadily
Generous yields always catch my eye, but must be treated with caution. Yields automatically climb when the share price drops, so an ultra-high one can be a warning sign of a company in trouble. Thatâs why I look closely at the business before deciding whether to consider buying.
One of my favourite FTSE 100 income stocks is wealth manager M&G (LSE: MNG). Today, it boasts a trailing yield of 7.3%, one of the highest on the index. At times it’s topped 10%.
Impressively, the shares have been climbing too, up 37% in the last 12 months, as investors rediscover their affection for UK blue-chips generally and the financials sector in particular. That gives a total return closer to 45% once income’s included.
Last month’s Q3 results showed total assets under management up 3% to £365bn amid healthy client inflows. M&G also has a solid Solvency II coverage ratio of 230%, up from 223% at the end of 2024. That suggests the dividend should be sustainable.
M&G only floated in 2019 after being carved out of FTSE 100 insurer Prudential, and has lifted the dividend every year so far. But progress has been bumpy, with barely there increases of just 0.38% in 2021 and 0.51% in 2023. Guidance points to modest but steady dividend growth of around 2% in the coming years.
Dividends and share price growth are never guaranteed. If we get a wider stock market crash, customer inflows could reverse and the shares could plunge.
That said, I think M&G’s worth considering as a high-income segment of a balanced ISA or SIPP containing around 12-15 stocks. Today, I’m reinvesting those dividends to generate growth, but in retirement I’ll draw them tax-efficiently to boost my spending power. Then all the effort will have been worthwhile. Buying shares and watching them grow is also fun.
The post How much do you need in a SIPP or ISA to target a second income of £36,000 a year in retirement? appeared first on The Motley Fool UK.
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Harvey Jones has positions in M&g Plc. The Motley Fool UK has recommended M&g Plc and Prudential 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.
