A Self-Invested Personal Pension, or SIPP, is a terrific way to build a wealth for your retirement.
You get upfront tax relief on your contributions, which instantly boosts their value, and means your wealth grows from a much higher base. You can also take 25% of your pot as tax-free cash from age 55 (rising to 57 from 2028). Thereafter, all withdrawals are taxable.
SIPP tax breaks combine nicely with a Stocks and Shares ISA. There’s no upfront tax relief with an ISA, but all returns are free of capital gains tax, income tax and dividend tax for life. Holding both a SIPP and ISA let you manage withdrawals to keep your overall tax bill to a minimum.
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.
How can I build tax-free wealth?
Let’s say an investor targets an eye-catching income of £3,333 a month in retirement, which works out as £39,996 a year. How much would they need in the SIPP? The answer depends on the yield on their underlying investments.
- 4% – £999,900
- 5% – £799,920
- 6% – £666,600
Those may look like daunting sums. However, we’re talking about a pretty big passive income here, similar to the average annual wage from a full-time job. Any state pension is on top. Even smaller retirement pots will still generate a generous second income stream.
At The Twelfth Magpie, we’re keen on stocks that offer both share price growth and dividend income. Today, around 25 stocks on the FTSE 100 yield 4% or more, with some yielding as much as 6%, 7% or even 8%.
House builder Persimmon (LSE: PSN) catches the eye for its generous 5.5% yield. A word of warning though. It isn’t for everyone.
The housebuilding sector has had a tough run, as rising interest and mortgage rates hit affordability and squeeze demand. Higher inflation has also pushed up the cost of building materials and labour, while post-Grenfell fire safety cladding scandal has cost them hundreds of millions in compensation.
Should you take a chance on Persimmon?
As a result the Persimmon share price has plunged 18% over the last 12 months, and a quite staggering 65% over five years.
Things looked set to improve at the start of the year as inflation eased off, but the Iran war changed that. Mortgage rates are rising again. UK planning rules make building costly and tricky too.
So why would I suggest anybody considers Persimmon today? As a result of its troubles it’s incredibly cheap, with a price-to-earnings ratio of just 10.8. So the shares could recover at speed when the economy picks up. Plus of course there’s the income. However, I should point out that the total dividend has been frozen at 60p per share for the last four years, and that may continue for a while longer. There’s even a chance of a cut unless the housing market revives.
Much depends on what happens in Iran, but for brave investors were willing to take up the challenge, I think Persimmon is worth considering both for dividend income and long-term growth. I’ll be watching this one closely. If it doesn’t grab you, there are plenty more passive income opportunities on the FTSE 100 today.
Should you invest £5,000 in Persimmon 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 Persimmon Plc made the list?
Harvey Jones does not hold any positions in the companies mentioned.
