How I’d invest £10k in a SIPP to target £28,000 annual passive income

Taking advantage of a Self-Invested Personal Pension (SIPP) is a terrific way to start earning some extra income for retirement. Apart from granting tax relief, these investment accounts also eliminate capital gains and dividend taxes from the equation, resulting in a significant acceleration of wealth creation.

So let’s say an investor has £10k saved up in the bank. How much passive income could they earn in a SIPP once retirement comes knocking?

Building wealth in a SIPP

The amount of tax relief investors can enjoy ultimately depends on which income tax bracket they fall under. For this example, let’s assume an investor is paying the basic rate of 20%. That means after depositing £10,000 into a SIPP, they actually end up with £12,500 of capital to work with.

Once money has been deposited into a SIPP, it’s typically impossible to take it back out until turning 55 years old. And as of April 2027, this threshold is being increased to 57. But that also means a 30-year-old investor today now has a 27-year time horizon – plenty of time to grow significant retirement wealth.

There are a few ways to put this money to work. Arguably, the most straightforward is with a FTSE 100 tracker fund. The UK’s flagship index has historically delivered an 8% annualised return over the long run. And investing at this rate for 27 years would grow a SIPP to £107,615 which translates to a passive income of roughly £4,305 when following the 4% withdrawal rule.

Stock market crashes, and corrections are bound to emerge during this period. And depending on the timing of these events, investors may have less than expected when retirement comes around. Nevertheless, the prospect of earning a 40% return on initial investment each year is quite exciting. But investors can potentially unlock even more.

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.

Stocking-picking for higher returns

Instead of tracking an index, investors can opt to build their own portfolio of individual stocks. This comes with considerably more risk and demands a far more hands-on approach. Yet, when executed sucessfully, it can pave the way to monstrous returns.

Take Games Workshop (LSE:GAW) as an example. Over the last 27 years, the stocks averaged a total shareholder return of around 15% a year, including dividends. And at this accelerated rate, a £10,000 initial investment would be worth just shy of £700,000! That’s a passive income of £28,000 a year in retirement.

Even today, Games Workshop continues to expand its Warhammer empire at a rapid double-digit pace. The tabletop wargame remains one of the most popular in the world, generating a staggering amount of pricing power and brand loyalty.

The long-term potential of this enterprise still looks promising. But the days of achieving returns that nearly double the market may be behind it. Yet, it goes to demonstrate the potential gains offered by a wise direct investment into stocks.

Of course, Games Workshop’s an exceptional story. There are plenty of seemingly promising businesses that have failed to beat the market, with some even falling to zero. That’s why diversification is paramount. And even if a portfolio ultimately fails to reach 15% average annualised returns (which is pretty challenging in itself), just a few extra percentage points can make an enormous difference over 27 years.