How much do you need in a SIPP to generate a nice second income of £2,000 a month?
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I love my Self-Investment Pension (SIPP). When I retire I expect to appreciate it even more, because it is set to generate the majority of my daily income after I stop working.
A SIPP is attractive because HMRC treats investor contributions tax-free. I direct most of my SIPP towards dividend payments FTSE 100 stocks, they give me both income and growth. So how much does an investor need to target a fixed retirement income of, say, £2,000 a month?
That adds up to £24,000 a year. Under the so-called 4% rule, which suggests that an investor who withdraws that percentage of his pot each year will keep the principal, he would need £600,000.
Income from 100 FTSE shares
I think it is possible to generate 5.5% per annum from the spread of the high yielding FTSE 100 as well FTSE 250 shares. That would reduce the target pot to just £435,000.
That’s still a rough draft, and it takes time to build. It happens, but there is no time to lose. Take a 30-year-old who already has £20,000 set aside. If they invest £200 a month and their income grows at an average of 7% a year, their total pot could reach £570,000 by retirement. Thanks to SIPP tax relief, that £200 monthly contribution only costs a 40% taxpayer £120 (£160 for a 20% taxpayer).
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.
Lloyds Banking Group is back
One stock that would fit well into an income oriented SIPP in my opinion is this Lloyds Banking Group (LSE: LLOY). After a torturous decade following the financial crisis, the FTSE 100 bank is repositioning itself as a revenue and capital-raising machine, this time with stricter rules and stronger safeguards.
Lloyds’ share price has enjoyed a phenomenal performance, rising 78% in the past year and 150% in five. I would expect it to go slow from here. Recently, bank profits have been boosted by higher interest rates, which has widened interest rates, the gap between what banks pay to savers and what they charge borrowers. With sliding standards that kicker should fade.
On the other hand, lower rates could also revive the housing market, which will boost Lloyds, as it is the UK’s largest mortgage lender through its Halifax subsidiary. It will face a lot of competition though.
Lloyds recently increased its interim profit by an inflation-busting 15%. The trailing yield has fallen to a low of 3.3%, due to the rise in stocks, but income should rise over time. Lloyds shares are also more expensive than they were, and the price-to-earnings ratio rises to 15.4.
Spread the risk around
My SIPP consists of a spread of around 15 different FTSE shares, providing both income and growth potential. I certainly think that Lloyds should be considered part of the spread of companies, even if the next few years are unlikely to show the latter. Diversification is the key, so is getting caught early. A little effort today can create high and rising income for years to come.
