Image source: Getty Images
A Self-Invested Personal Pension (SIPP) is one of the most flexible ways to build retirement savings, especially since the government helps out by adding tax relief. Each £100 that goes into the pot only costs a basic-rate taxpayer £80, and that falls to £60 for a higher-rate 40% taxpayer. That turbo charges the process of building a sizeable pot.
But how much is enough to fund a comfortable retirement? £100,000 is a nice round figure. Will that do it? My figures are only rough guides, but they do show how much passive income can be generated if someone starts investing early and sticks with the process.
Self-Invested Personal Pension planning
Building a six-figure sum takes time. Someone who went flat out and invested £600 a month could do it in a decade, assuming an average total return of 7% a year. Remember, that £600 will be reduced by tax relief. If they could only set aside £100 a month, it would take them 28 years to hit the £100k mark, again, assuming 7% a year.
Once the target’s reached, the classic rule of thumb is the 4% ‘safe withdrawal’ rate. This states that if an investors takes that percentage each year, their pot should never run dry. On £100,000, that works out as £4,000 a year, or £333 a month. That’s a modest second income, but not exactly stellar.
There are ways to increase it though. By buying a spread of FTSE 100 shares with an average 6% yield and drawing all the income, the same £100,000 could generate income of £6,000 a year, or £500 a month. Our investor could generate even more income, if they drew down some of their capital too. The decision partly depends on whether they want to leave any inheritance.
Mondi now yields 6%
I think it makes sense to hold a spread of 15-20 different companies across sectors, blending growth and income. FTSE 100-listed paper and packaging group Mondi (LSE: MNDI) currently offers a trailing yield of around 6%, which lines up neatly with the higher-yield calculation above.
Trading has been tough as the cost-of-living crisis hit online shopping, a big driver of demand for its paper products, while inflation pushes up costs. Full-year 2024 profits plunged almost 45% to €378m, despite revenues rising slightly to €7.41bn. 2025 is proving a struggle too, with first-half profits falling almost 20% to €247m.
Even so, Mondi’s demonstrated resilience, with order books improving and higher prices passed onto customers. The shares are down 28% over the past year, which may deter some investors but excite contrarians. With a price-to-earnings ratio of 14.9, the valuation looks reasonable.
However, given today’s bumpy economy, I don’t think it’s one to consider. I’d urge caution to those who are considering this stock right now. The recovery may take a while yet. The plus side is that those who do take the plunge can reinvest that generous dividend while waiting for better days.
Income for the long run
No single company will deliver a perfect outcome, so diversification’s key. A carefully-chosen mix of shares can balance the risks and rewards,
So a £100,000 SIPP has the potential to generate between £333 and £500 a month in second income, with the capital untouched. Ideally, though, investors should aim for more.
