Most people know the State Pension isn’t big enough to live on comfortably. We all need to generate other sources of income from private pensions, savings, and the stock market. The more the merrier, frankly.
An overlooked but brilliant way to build retirement wealth is a Self-Invested Personal Pension, or SIPP. It’s been overshadowed by Stocks and Shares ISAs, but offers compelling tax breaks of its own.
While all ISA withdrawals are free of tax, the SIPP scores by offering pensions tax relief right at the beginning, when you pay money in. Each £100 that goes into a SIPP only costs a 20% basic rate taxpayer £80, while a 40% taxpayer only puts up £60. All investment growth comes on top of that early booster.
These are stunning tax breaks
Better still, you can also take 25% of your retirement pot free of tax, up to a maximum of £268,275. Further withdrawals will be added to your total earnings for that year, and subject to income tax. It’s still a great all-round deal.
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.
But how much would you need in yours to generate income of £12,547 a year?
The bigger the yield on your investments, the smaller the pot required, as this list shows.
- 4% – £313,675
- 5% – £250,940
- 6% – £209,117
These look meaty sums, but remember, we’re not touching the capital. if you start investing early they’re more achievable than they seem.
Someone who tucked away £250 a month for 30 years would end up with £367,038. This assumes their portfolio grows at 8% a year on average, including reinvested dividends. That beats every one of the numbers I’ve listed above. And that £250 only costs £150 if claiming higher rate tax relief. That’s just £1,800 a year.
At The Twelfth Magpie, we favour investing in a SIPP or ISA, or both, by building a balanced portfolio of FTSE 100 and FTSE 250 shares.
Why I love this FTSE 100 stock
I added wealth manager M&G (LSE: MNG) to my own SIPP three years ago and it’s been a terrific investment. I simply couldn’t resist the dividend yield, which was nudging 10%. But I’ve had plenty of growth too, with the shares up 69% in the last three years. With dividends reinvested, I’ve already doubled my money.
I should issue a word of warning. There’s no guarantee recent performance will continue. I suspect the shares may naturally slow from here. They look a little expensive, with a trailing price-to-earnings ratio of 28. That well above the FTSE 100 average of around 16.
The trailing dividend yield has retreated to 5.7%, due to the rising share price, but that’s still a pretty handy rate of income. The board plans to increase shareholder payouts by a modest 2% a year. There are risks. As a fund manager, M&G faces stiff competition from low-cost passive funds. A stock market correction would hit fund inflows and assets under management, which would shrink fee income and profits.
With those provisos, I still think M&G is worth considering as part of a balanced portfolio of shares. Whether in a SIPP, ISA, or both. It’s up to you.
Should you invest £5,000 in M&g Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if M&g Plc made the list?
Harvey Jones owns shares in M&G.
