Ever wonder what the ‘right’ amount is to invest in a Self-Invested Personal Pension (SIPP)? It’s not an easy question to answer. It depends on what you choose to put your money in and the long-term return your investments deliver. The answer also depends on how much you’ll need to retire comfortably in retirement..
New research from AJ Bell has shed some light on how much we Brits need in retirement, though. It makes for fascinating — and at the same time petrifying — reading…
What did it say?
According to the financial platform,
the average taxpayer in retirement doesn’t have enough income for a moderate standard of living, and falls well short of the levels that the average Brit is hoping for.
Why’s that, you ask? AJ Bell data last year showed the average Brit expects to need £39,000 a year to retire comfortably. But according to fresh analysis based on HMRC data, the average taxpayer in 2023/2024 received annual incomes of:
- £26,200 if aged 65 to 69.
- £22,700 if aged 70 to 74.
- £21,800 if aged 75 and above.
But here’s the thing: this data excludes pensioners who are not earning enough to pay income tax. The result? Many retirees could be struggling to survive on even lower incomes.
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.
It’s never too late!
The data underlines why it’s important to build a retirement plan. And the sooner you start the better, allowing your investment gains to generate their own returns over time (known as compounding).
But the power of the SIPP means even those starting late on their investing journey can build a large enough nest egg for a comfortable retirement. This reflects:
- The flexibility to buy higher-performing assets like stocks.
- Tax relief of 20% to 45% that boosts contributions.
- Protection from certain taxes which boosts compound returns.
Let’s say you’re a higher-rate taxpayer who’s able to invest £500 of their own cash a month. Tax relief of 40% bumps that up to £833. And you reinvest any dividends to boost the compounding process that’s already benefitting from capital gains and dividend tax exclusions
If you can achieve an average annual return of 8%, you’ll have a SIPP worth £792,205 after 25 years. This could then throw off £55,454 a year in dividend income if you bought 7%-yielding shares.
What should you buy?
Never mind that £39,000 that AJ Bell says most Brits expect they’d need a year to retire comfortably. That figure beats the £43,900 that Pensions UK has worked out retirees actually need.
Importantly, our figure also excludes any boost from the State Pension.
So what could you buy to start your investing journey? Investment trusts like Scottish Mortgage Investment Trust (LSE:SMT) deliver excellent wealth-building opportunities with reduced risk. The average annual return here is an incredible 18% over the last 10 years.
How does Scottish Mortgage do this? It diversifies investor cash across a wide range of technology companies (50 in total), providing protection in case one or two come under pressure. Key holdings include market leaders like Nvidia and Microsoft.
Could future returns underwhelm if an economic downturn hits? It’s possible. But over the long-term, I’m confident unstoppable trends like AI, robotics and cloud computing mean Scottish Mortgage will keep delivering blockbuster SIPP returns.
Should you invest £5,000 in Scottish Mortgage Investment Trust Plc right now?
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Royston Wild does not hold any positions in the companies mentioned.
