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With dividend taxes rising and ISA allowances falling, the Self-Invested Personal Pension (SIPP) is becoming increasingly important. Offering a blend of tax advantages and free government cash, investors have an excellent chance to build a decent passive income.<\/p>\n
Naturally, opinions will differ on what constitutes a \u2018decent\u2019 income in retirement. But I believe Pensions UK research is a good starting point \u2014 this implies a single person needs \u00a343,900 a year (excluding tax) to retire in comfort.<\/p>\n
That works out at roughly \u00a33,658 a month. So how large would your SIPP have to be to generate that?<\/p>\n
Tax questions<\/p>\n
Unlike with a Stocks and Shares ISA, SIPP investors need to consider tax costs when calculating future passive income. While shielding holders from capital gains and dividend taxes, they don\u2019t provide protection from income tax on withdrawals.<\/p>\n
This doesn\u2019t make them unattractive investment products, mind. The tax relief (which ranges from 20% to 45%) on contributions can \u2014 when factoring in the compounding benefits over time \u2014 supercharge the size of one\u2019s pot to more than offset tax costs.<\/p>\n
But payments to HMRC nonetheless need to be factored into the equation. Investors can take 25% as a tax-free lump sum, with the remainder charged depending on one\u2019s tax band.<\/p>\n
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.<\/p>\n
SIPP size<\/p>\n
Taking into account all of this, someone seeking a \u00a343,900 annual (or \u00a33,658 monthly) net income would need a gross SIPP income of \u00a362,718 a year.<\/p>\n
But how large would our investor\u2019s portfolio need to be to generate this sum? It depends on what they plan to do with it \u2014 withdrawing a set percentage each year, purchasing an annuity, or buying dividend<\/a> shares are all popular strategies.<\/p>\n