Many people use a workplace pension scheme to invest for retirement, but I think a Self-Invested Personal Pension (SIPP) can be a more attractive option. One key advantage of a SIPP is that investors have greater flexibility regarding their investment choices. This allows them to build a portfolio tailored to their risk appetite and specific objectives.
According to the ONS, the average UK salary is currently £36,972 a year. Here’s how an investor can try to secure a passive income flow that matches that figure from dividend shares held within a SIPP.
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.
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Earning £37k in annual dividends
Investments inside a SIPP don’t attract capital gains tax or taxes on dividends. Consequently, investors can buy and sell shares without worrying about what they might owe in taxes.
Moreover, investors get a helping hand from the government via tax relief. For a basic rate taxpayer, that’s 20%. Essentially, this means someone investing £100 in a SIPP will receive a £25 reclaim automatically from HMRC, resulting in a £125 contribution!
Aiming for nearly £37,000 in annual dividends is no mean feat, but it’s achievable. If the average dividend yield across an investor’s portfolio was 5%, they’d need £739,440 in stocks to turn this dream into reality.
Crunching the numbers
The amount individuals need to invest to hit this target varies considerably depending on their timeframe and portfolio growth rate. To illustrate this, the table below shows the monthly contributions required with 6% annualised growth, accounting for 20% tax relief.
| Time period | Required monthly contribution |
|---|---|
| 20 years | £1,275 |
| 30 years | £587 |
| 40 years | £296 |
At 8% growth, the numbers are as follows:
| Time period | Required monthly contribution |
|---|---|
| 20 years | £999 |
| 30 years | £395 |
| 40 years | £169 |
At 10% growth, here’s how much investors need to contribute:
| Time period | Required monthly contribution |
|---|---|
| 20 years | £773 |
| 30 years | £260 |
| 40 years | £93 |
Choosing the right shares and getting started as early as possible is crucial to building a healthy SIPP for the lowest possible contributions. That’s because compound returns can do the heavy lifting over longer periods.
Granted, investing in stocks isn’t a guaranteed way to build wealth. A poorly constructed portfolio may result in slower growth or even the destruction of capital. In addition, dividends aren’t assured since companies can cut or suspend shareholder distributions.
An income stock to consider
Nonetheless, buying the right mix of dividend shares can be a golden ticket to a comfortable retirement. One worth considering is FTSE 100 tobacco stock Imperial Brands (LSE:IMB), which offers a 5.6% dividend yield.
Arguably, cigarette manufacturing is a sunset industry. With a dwindling consumer base and government health initiatives designed to eliminate smoking entirely, Imperial Brands faces its fair share of challenges.
However, trading at a forward price-to-earnings (P/E) ratio of just 8.8, the share’s risks are reflected in its low valuation. The business has a long history of reliable profits and strong cash flow generation, which shouldn’t be dismissed lightly.
The latest full-year results show the company’s moving along nicely. A 4.6% expansion in underlying profit to £3.9bn and a 4.5% dividend boost to 153.42p per share are encouraging signs.
With a growing range of alternative nicotine products, such as vapes, I think Imperial Brands shares could still have a bright future.
