I’m investing £100 a month in a SIPP to target a passive income that beats the State Pension

I’m aiming to supercharge my passive income during retirement by investing in a Self-Invested Personal Pension (SIPP) today. This is a powerful tool to build and grow pension savings. And by starting early, even a tiny sum of £100 a month can go a long way when left to compound over decades. It could even be enough to put the State Pension to shame.

My SIPP income strategy

One of the biggest advantages of using a SIPP is the combination of tax-free profits and tax relief. The latter’s especially powerful since it turns a £100 monthly contribution into £125 of capital to invest.

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.

In my Stocks and Shares ISA, most of my money’s channelled into growth stocks. But in my SIPP, I’m more interested in building a chunky passive income in the long run. And that’s where dividend-growth stocks fit perfectly. These companies don’t usually offer a jaw-dropping yield at first.

However, their ability to continuously increase cash flows means that the subsequent dividend hikes push yields to far more lucrative levels in the long run. So much so that investors can start earning sustainable double-digit yields.

One company that fits the bill is Safestore Holdings (LSE:SAFE), and it’s why I already have it in my SIPP. Owning a self-storage operator certainly doesn’t sound exciting. However, demand for such services has been steadily rising in the UK.

As a result of its low-cost, high-margin operations, management’s on track to deliver 15 years of consecutive dividend hikes, growing at an average annual pace of 13.3%.

Subsequently, those who invested back in 2009 have gone from earning an average yield of around 3% to well over 20% today. And with the firm now seeking to replicate its success in Europe, even more dividend growth could be just around the corner.

Beating the State Pension

I kick-started my SIPP with a £10,000 initial investment a few years ago, implementing my dividend-growth strategy with companies like Safestore. The portfolio’s designed to deliver an average of 10% annualised returns over the long run.

That’s far less aggressive compared to my ISA (which targets 20%). But it’s still ahead of what the FTSE 100 has historically delivered. And when combined with the luxury of a 40-year time horizon as well as a £100 monthly top-up, my SIPP‘s on track to deliver a State Pension-beating retirement income.

If everything goes according to plan, my pension pot could reach as high as £1.5m. And following the 4% withdrawal rule, that’s an income stream of £60,000 a year. By comparison, the State Pension is currently offering just over £11,500.

There are a few caveats here. The State Pension’s likely to change in the long run, making it potentially harder to beat. What’s more, dividend growth stocks aren’t immune to disruption. Safestore’s already suffering from the impact of the ongoing economic woes in the UK, particularly with small-business customers cancelling their contracts to save money.

The firm’s strong balance sheet’s helping offset this decline in demand. However, a prolonged adverse operating environment could result in stunted dividend growth or, potentially, even a cut in extreme cases.

As such, my SIPP could fall short of expectations. Nevertheless, it’s a risk I’m willing to take, given the potential rewards.