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Building a long-term passive income plan for retirement is a path many British investors find appealing. The State Pension alone may not deliver that comfortable lifestyle, and interest rates on many standard savings accounts are weak. So a Self-Invested Personal Pension (SIPP) funded with dividend-paying shares is often part of the strategy.
Because a SIPP comes with tax relief (20%-45%, depending on income), it helps compounding growth of the portfolio. That makes regular contributions more effective – even modest ones. Let me walk through how an investor might aim for a goal like £30,000 of passive income a year via a SIPP, and how an investor might pick a company to include (with caution) in such a plan.
How much capital’s needed?
Suppose an investor builds a portfolio of relatively dependable dividend shares, targeting an average yield of 7%. That’s ambitious but not unrealistic for a blend of higher-yielding names. To produce £30,000 a year in dividends, the capital required would be calculated as:
Required capital = £30,000 ÷ 0.07 = £428,570.
That’s a significant amount. Most people don’t have that readily available, which is why consistent contributions are essential. If someone were to put £300 a month into a SIPP and reinvest the dividends, it could take around 30 years to reach that target (with dividends reinvested and moderate capital appreciation).
That’s a long journey, but it’s within reach even for an investor beginning in their mid-30s.
Higher monthly contributions, such as £400 or £500, could reduce the timeline considerably. Of course, market conditions, dividend growth and potential cuts can all impact how long it actually takes.
Picking dividend shares
Dividend stocks aren’t all equal. It’s rarely a good idea to simply buy the shares with the highest yields. Investors should carefully check each company’s balance sheet, cash flow and long-term earnings potential to judge whether the dividend can be maintained.
Take Legal & General (LSE: LGEN) as an example. This insurer has been a favourite for income seekers for decades and currently offers a dividend yield well above the market average, often in the region of 8%. Its long history of consistent payouts makes it a popular choice.
In its half-year results, the company reported a 9% rise in earnings per share to 10.94p, suggesting its near-term growth targets are on track.
Strong demand in the pension risk transfer market’s also been a boon for its profitability.
But there are risks to weigh. Earnings in some areas have come under pressure, and the firm’s solvency ratio, which measures financial resilience, has slipped compared with the previous year. Dividend coverage has also been stretched, raising the possibility that cash reserves might need to be tapped if earnings falter.
While a recovery seems to be gathering pace, nothing’s guaranteed, and the possibility of a future dividend cut shouldn’t be dismissed.
Final thoughts
To aim for £30,000 a year in passive income through a SIPP, an investor needs significant capital, patience, and discipline. Regular contributions, reinvestment of dividends, and long-term compounding are key. Just as important, diversification and careful scrutiny of each dividend stock is vital.
I think it’s a realistic goal to consider, provided the risks of relying on high-yield companies are acknowledged and managed sensibly.
