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When building retirement wealth in a SIPP, the government throws in a free 25% top-up on every penny invested for the average person. That’s a powerful advantage, especially since this retirement account also allows a portfolio to grow entirely free of capital gains and dividend taxes.
But how big does a SIPP need to be to enjoy a decent retirement?
According to the Pensions and Lifetime Savings Association, those seeking a moderate lifestyle need £31,700 a year, or roughly £2,641 per month.
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.
Running the numbers
Under the 4% withdrawal rule, generating £31,700 annually in retirement requires a pot worth £792,500.
That might sound enormous. But for a 40-year-old contributing just £500 a month to a SIPP, it’s far more achievable than what most might think.
After 20% tax relief, that £500 becomes £625 of investable capital. And when drip-feeding this money, the stock market’s long-term average return of 8% per year, a portfolio would reach the target threshold within roughly 28 years.
But we’re ignoring one crucial factor here. Inflation. £31,700 might be enough for today, but 28 years from now, pensioners will likely need considerably more. And this is where stock picking offers a solution.
The power of compounding
Rather than investing in an index fund, investors can opt to buy shares in individual companies directly. And with some smart stock picks, the results can be truly game-changing.
Perhaps a perfect example of this over the last 20 years is Halma (LSE:HLMA). This is a FTSE 100 safety, health, and environmental technology group. And it’s also one of the most consistent compounders in the history of the London Stock Exchange.
To demonstrate, since April 2006, Halma shares have delivered a staggering 3,465% total return.
That’s the equivalent of earning 19.6% per year. And anyone who’s been investing the same £625 each month at this rate now has a SIPP worth £1,830,203.74, well over double the £792,500 target a full eight years ahead of schedule.
Still worth considering?
Even with immense growth under its belt, Halma’s outlook is still remarkably strong, in my opinion.
Its most recent half-year results were record-breaking. Revenue jumped 14.3% and adjusted profit before tax surged 29.3% to £270.5m. And if that wasn’t enough, management subsequently upgraded its full-year guidance comfortably ahead of analyst expectations.
What’s more, the business itself focuses on defensive and large recession-resistant niches like safety systems, water quality monitoring, and medical devices â something that could fit in nicely with a retirement-focused portfolio.
However, that doesn’t mean Halma is guaranteed to continue outperforming. A big part of the group’s growth strategy centres on executing bolt-on acquisitions, which come with significant execution and integration risks, especially if the company falls into the trap of overpaying.
The impact of a botched takeover could be even more profound given the stock’s premium valuation. Halma’s track record of excellence hasn’t gone unnoticed. And if growth disappoints, its share price could be vulnerable to a tumble.
Having said that, Halma has earned its hefty price tag through decades of consistent execution. That’s why, for investors looking to make the most of their SIPP, it remains one of the most compelling long-term compounders worth considering to my mind.
The post How much do you need in a SIPP to target a £2,641 monthly passive income? appeared first on The Motley Fool UK.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Halma Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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