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Many people put money into a SIPP with the intention of using it to pay for their retirement.
But how big would that have to be?
Much of the answer depends on a person’s spending patterns. We have to start somewhere. A useful resource is the Retirement Living Standards published by the Pensions and Lifetime Savings Association.
It shows what retirement costs can look like”minimum“,”modest”, or “comfort” retirement. A “comfort” A single person’s retirement needs about £43,900 a year.
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Working backwards from the pension policy
Now, after a certain point, someone can withdraw money from their SIPP.
But, to keep things simple, let’s assume they want a SIPP that produces £43,900 a year in interest income.
Let’s imagine a dividend yield of 4%. That may not sound ambitious but it is actually more than it is now FTSE 100 3.1% yield. When it comes to receiving an income from a SIPP, people’s risk tolerance may be lower than their younger working life.
To reach that target, the SIPP will need to be short of £1.1m.
Building up the value of the pension
While aiming to grow a SIPP without receiving income from it, the investor has some advantages.
First, there is tax relief.
For high rate taxpayers it can go up to 40% and additional rate taxpayers can get even 45% (they have already paid too much tax in the first place).
But in this example we will use a basic tax discount of 20%. That means, for every £1,000 you want to put into your SIPP, your cash contribution only needs to be £800.
The second advantage is the long-term horizon. That can help compound the amount over time and allow regular contributions to be compounded.
Also, the much higher risk tolerance I mentioned above for a young person who is not yet reliant on their SIPP for living expenses means I think a 6% annual compounded growth target while building a SIPP and not receiving income from it is reasonable.
That could come from dividends and any capital gains, but gains are never guaranteed and stocks can go up and down.
Here’s how much it takes!
The longer the donation period, the smaller the required donations.
Let’s use 30 years to illustrate. To reach the above goal, monthly contributions of £1,093 will be required.
Thanks to tax relief, that would be a monthly cash contribution of £875.
One share in my SIPP
One share I hold in my SIPP Pets at Home (LSE: PETS).
It currently yields 5.9% water.
But in the last five years the share price has fallen by 47%. That means the current price-to-earnings ratio is 13. I think investors should consider this share.
Falling represents other ongoing risks. The company has done a poor job of developing its product range. If it doesn’t get that right, sales can drop.
But its retail arm is well established and has a popular loyalty program. In addition, the company’s line of veterinary practices is profitable and growing at a good clip.
The pet care market is huge and I expect it to stay that way. With its strong market position, that’s great for pets at home.
