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If you are serious about generating income, you need to consider opening an ISA or SIPP. These popular investment and retirement products provide additional financial leverage to build a portfolio and earn income from it.
Both a Stocks and Shares ISA and SIPP protect users from tax deductions. Investors can purchase a variety of assets, allowing them to capture multiple opportunities for wealth creation while simultaneously managing risk.
Want to know how much you’ll need from one of these to get a retirement income of £33,000? Read on.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Tax benefits
By shielding individuals from income tax on withdrawals, ISAs allow investors to earn a significant second income with a smaller portfolio. This can reduce the time they need to reach their income goals, as well as reduce the size of contributions required over time.
In addition, protection from capital gains and dividend taxes can accelerate long-term portfolio growth. This works by giving investors more money to invest, speeding up the compounding process and helping them reach their goal much faster.
SIPPs also help individuals avoid capital gains and dividend taxes, although income tax is charged on withdrawals. However, tax relief for donations can exceed this tax liability (as I will show shortly).
By increasing contributions, consolidating actions into a large capital base, which in a period of decades can significantly exceed any withdrawal taxes.
So how much do you need?
With an ISA, calculating how much you’ll need to get an annual income of £33k can be simple. If you’re looking to diversify your portfolio into 8% dividends in retirement, you’ll need a nest egg worth less than £413,000. Since withdrawals are tax-free, every penny goes straight into your pocket.
With a SIPP, the value stays at around £485,000. This assumes that the State Pension is already using a tax-free Personal Allowance, meaning 75% of withdrawals are taxed at the basic rate (25% of each SIPP withdrawal is tax-free). To get away with that £33k total, you’d need a net income of around £39,000.
But here’s the thing: the cost to you of building the portfolio will be between £78,000 and £104,000, as tax relief (ranging from 20% to 40%) ensures that your total contributions are lower than those of an ISA investor. That’s based on an annual stock market return of 9% over 25 years.
Creating a SIPP
But how can that 9% return to investors be achieved? The answer is ‘a lot’ in my opinion, I think investors are building a diversified portfolio of stocks.
I HSBC S&P 500 ETF (LSE:HSPX) is the exchange traded fund I bought my own pension to target that return. By successfully holding hundreds of IS stocks, I have been able to gain exposure to various international companies in various industries. This provides stable returns by balancing growth and profits throughout the economic cycle, and helps me manage risk.
A focus on US stocks may lead the fund to underperform if broader interest in Wall Street stocks weakens. However, this does not stop it from delivering the best returns yet – over the past ten years, it has delivered an annual return of 15%. This is due to its large concentration of high-performing technology stocks, which make up a third of the fund.
On balance, it is a top asset for ISA and SIPP investors to consider.
