A Self-Invested Personal Pension (SIPP) is a great way for people in the UK to save for retirement. They include dividends and capital gains that are not taxed, as well as tax breaks that give investors more power to grow their portfolios. Together, these things make it possible to build stock market wealth much faster than with other investment accounts, maybe even the Stocks and Shares ISA.
How big does a SIPP need to be to make a good amount of money without doing anything? Let’s say you make £500 a month. How long do you think it will take to reach this goal? Are you ready?
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Please keep in mind that how taxes are handled depends on each client’s specific situation and may change in the future. This article is only meant to give you information. It is not meant to be, and it is not, any kind of tax advice. Before making any investment decisions, readers should do their own research and get professional advice.
How big is it?
If you follow the popular “4% annual drawdown” rule and have a portfolio of reliable but boring stocks, you would need a £150,000 nest egg to make £500 a month.
I think it’s a good idea because it gives you a steady income over time. But is this the plan I would use? No. When I finally start getting money from my SIPP, I plan to switch the stocks in my pension to high-yield dividend stocks.
This way, I can get cash from dividends while also keeping my money safe and maybe even growing it. Also, this strategy might mean I need a smaller pension pot to get the same £500 in passive income.
If I decide to invest my money in dividend stocks that pay 6%, I would need £100,000 in my SIPP at this rate. If I put £300 a month into an investment for 14 years and got an average annual return of 9%, I could reach that number.
Which stocks should you buy?
The only problem with this plan is that dividends are never guaranteed. But investors can improve their chances of still making a steady income by holding a variety of stocks. You can do that by picking individual stocks. For example, I have 20 shares in my own portfolio to make sure I have a steady income.
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But you can also reach the same goal by buying an investment trust or exchange-traded fund (ETF) that pays dividends. This can cost less and take less work than buying individual shares.
For example, the JP Morgan Global Equity Premium Income ETF (LSE:JEPG). This fund gives you access to a huge 247 companies around the world that pay dividends.
A great fund for dividends
Its goal, which it set up in 2023, is “to provide income and long-term capital growth.” We can’t give it a score on the second point because it’s only been around for a few years. But I can say that over that time, it has more than lived up to its dividend promise. The ETF pays a dividend every month, and its trailing yield over the past year has been an impressive 7.6%, which is better than the FTSE 100.
There is one possible problem: almost two-thirds of the fund’s money is in US stocks. So, if people don’t want to buy as many New York-listed companies, the product might not get the capital growth it wants.
I don’t think this will happen in the long run, though. I also think that the ETF’s great industrial diversification and exposure to many other parts of the world make it a great choice for a SIPP for monthly income.
Listen to Mark Rogers when he gives you a stock tip; he knows what he’s talking about. His main newsletter, the Motley Fool Share Advisor, has been running for almost ten years and has given thousands of paying members the best stock picks from the UK and US markets.
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