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April is fast approaching, and with it comes a tasty 4.8% bump to the UK State Pension. Retirees will now receive up to £241.30 a week, or £12,548 a year. And while that’s certainly nothing to scoff at, it nonetheless still falls short of what’s needed for a comfortable retirement lifestyle.
The good news is that by making some smart decisions today, investors can use tools like a Self-Invested Personal Pension (SIPP) to change that. And with enough time, drip feeding even as little as £500 a month can potentially unlock an income double what the government provides.
Here’s how.
Building stock market wealth
To double the 2026 State Pension, a portfolio needs to generate a passive income of £25,096. And following the 4% withdrawal rule, that means a SIPP needs to be worth just shy of £630,000.
Needless to say, that’s not something most people have lying around. But by leveraging the power of stock market compounding alongside the tax relief benefits of a SIPP, drip feeding £500 each month is all that’s needed, even for a 40-year-old starting from scratch today.
Let’s say an investor is in the 20% income tax bracket. Whenever £500 is dropped into a SIPP, the government automatically tops up this position to refund any income tax previously paid. And the result is that this £500 is transformed into £625 of investable capital.
Taking that £625 each month and investing it at the stock market’s average total return of 8% a year is what enables a portfolio to steadily compound over time.
After 26 years of consistent saving and investing, a pension pot will surpass the £630,000 threshold. And for stock pickers who manage to beat the market and average an 12% annualised return, this timeline shortens to around 20 years.
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.
Finding market-beaters
Earning a 12% annualised return for two decades is no easy feat. But it’s not as impossible as most believe when investors learn to identify high-quality companies trading at discounted stock prices. And shareholders of Howden Joinery (LSE:HWDN) have learned this first-hand.
Over the last 20 years, the fitted kitchen specialist has leveraged its highly cash-generative business model to steadily expand and outmanoeuvre competitors. The result has been a staggering 1,613% total return since February 2006 – the equivalent of 15.3% a year!
To put that in perspective, anyone who was drip feeding £625 a month at this rate of return for the last two decades doesn’t have £630k today, but rather £976k.
Still worth considering?
Today, Howden’s now a much larger enterprise with a £4.6bn market-cap. Yet, the business continues to expand at an impressive rate.
With the UK housing market starting to heat back up, demand for its fitted kitchens and recently added bedrooms is starting to climb. And its market-dominant position alongside superb financials gives it a serious competitive edge against its rivals – something management is aiming to replicate internationally as well.
Of course, Howden’s still heavily dependent on the currently weak UK economy. And a slower-than-expected cyclical recovery of the housing sector could lead to lacklustre investment performance.
Nevertheless, with an excellent track record of operational execution and capital allocation, I think Howden Joinery is definitely worth a closer look, especially from investors seeking to build an income portfolio that beats the State Pension.