Sometimes I thinks the Self-Invested Personal Pension (SIPP) doesn’t get the glory it deserves. Investors tend to focus on the Stocks and Shares ISA instead. Yet the SIPP can be just as tax efficient and, better still, its tax breaks nicely complement those on the ISA. So how do they work?
You get upfront tax relief on SIPP contributions, which you don’t get with an ISA. And you can take 25% of your pot free of tax when you retire. After that, further withdrawals are taxable. But if you mix and match them with Stocks and Shares ISA withdrawals, which are tax-free, you have a handy way of limiting your overall exposure to HMRC.
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 wealth for the future?
Let’s say an investor’s targeting a second income of £575 a month from their SIPP, which works out as £6,900 a year. The amount required depends on the yield generated by the portfolio:
- At a 4% yield, an investor would need £172,500 invested.
- At 5%, the required total falls to £138,000.
- Push the yield to 6% and the figure drops again to £115,000.
Higher dividend yields can carry higher risks. That’s why I prefer to focus on building a diversified portfolio rather than chasing the biggest payout available. Many FTSE 100 shares currently yield between 4% and 6%, making those targets look achievable over time. It’s possible to get 7% or 8%.
Is this housebuilder worth considering?
One dividend income stock I’d consider today is FTSE 100 housebuilder Persimmon (LSE: PSN). Like the rest of its sector, the shares have struggled lately. They’ve fallen 25% in the last year and are down 65% over five years. That’s a brutal decline by any standards.
Higher interest rates, stretched affordability and the end of government-backed Help to Buy scheme in 2023 hit the sector hard. The post-Grenfell cladding crisis added another layer of costs just as demand weakened, while the cost of labour and materials have climbed too.
Yet Persimmon remains profitable. Revenues climbed 17% to £3.8bn last year, while completions rose 12% to 11,905 homes. Average selling prices increased 4% to £278,203.
Analysts expect profits to improve again this year, although much depends on the wider economy and the direction of mortgage rates. The shares now trade on a price-to-earnings ratio of 10.5, which doesn’t look demanding to me.
Can the dividends keep flowing?
As well as share price recovery prospects, Persimmon offers an attractive 5.7% dividend yield. However, the full-year payout has been stuck at 60p a share for four years. That probably won’t improve while the housing market remains this fragile. And of course if inflation and mortgage rates continue to climb, property demand could fall.
On the other hand, Persimmon specialises in lower-cost homes and manufactures many of its own building materials. That gives it a cost advantage when conditions are tough. At some point, housing markets recover. They always have in the past.
Personally, I wouldn’t expect Persimmon shares to suddenly soar. But for investors seeking a combination of recovery potential and a generous yield, this is a stock worth considering. I’d be tempted, but I already have a sizeable stake in housebuilder Taylor Wimpey.
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 owns shares in Taylor Wimpey.
