How much do you need in a SIPP to aim for a passive income of £7,777 a year

Harvey Jones shows how investors can use a SIPP to fund a comfortable retirement, supplementing it with an ISA to balance their tax bills.

Posted by Harvey Jones

Published 12 August

Two elderly people relaxing in the summer sunshine Box Hill near Dorking Surrey England
Image source: Getty Images

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I love my SIPP. The Self-Invested Personal Pension, to use its full name, has a terrific upfront advantage. Investors get tax relief on their contributions.

This means that every £100 that goes into SIPP only costs a basic rate taxpayer £80. That falls to £60 for a higher rate taxpayer (they have to claim the extra £20 via their tax return).

Because pension tax relief is paid right at the start, all subsequent growth is generated on that higher sum. Basically, you’re off to a flier.

When it’s time to start drawing the money in retirement, 25% can be taken entirely free of tax, what’s called the pension commencement lump sum.

Investing tax-free for retirement

In contrast to a Stocks and Shares ISA, further SIPP income withdrawals are taxable. But if you earn enough to claim 40% or 45% pensions tax relief while working, but pay just 20% income tax in retirement, you’re winning again.

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.

At The Twelfth Magpie, we encourage investors to build wealth by creating a balanced portfolio of FTSE 100 and FTSE 250 shares. So how much would you need in your SIPP to generate income of £7,777 a year? 

The answer depends on the dividend yield on your shares.

  • With a 4% yield, you’d need £194,425 invested.
  • At 5%, the required total falls to £155,540.
  • And at 6%, the figure drops to £129,617.

Ideally, I’d recommend investing more than that. When your retirement comes, the bigger your pension the better. Supplementing a SIPP with a Stocks and Shares ISA also makes sense. That would allow you to tax blend taxable SIPP withdrawals with tax-free ISA ones, reducing your overall exposure to HMRC.