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A Self-Invested Personal Pension (SIPP) is a powerful tool for building a comfortable retirement. The government encourages pension saving through generous tax relief, topping up contributions. For example, £100 put into a SIPP only costs a basic-rate payer £80, falling to £60 for a higher-rate taxpayer.
On top of that, investments grow free of capital gains and dividend tax, while 25% can be taken tax-free from age 55. Any withdrawals above that will be added to taxable income though.
Building a pension pot
Let’s say an investor’s targeting retirement income of £2,500 a month, or £30,000 a year. The classic 4% ‘safe withdrawal rate’ states investors can draw that percentage without dipping into their capital. That gives a rough target pot of £750,000.
This is ambitious, but tax relief, reinvested dividends, and long-term growth can make it achievable. Investing £900 a month with an average 7% annual return would hit that sum in roughly 25 years. For a higher-rate taxpayer, that contribution costs just £540 after tax relief. Even if investors fall short, they should still end up with a handy pot of money.
BP shares are recovering
My own SIPP contains around 15 FTSE 100 stocks, mixing price growth potential with steady dividends. I’m keeping a close eye on the performance of a recent purchase, oil giant BP (LSE: BP).
The company’s had a bumpy few years as it tries to navigate the pressure to respond against the need to maximise revenue from fossil fuels. After a nervous foray into renewables, it’s back to oil and gas. Its recently been boosted by its biggest discovery in 25 years, a major hydrocarbon find off the coast of Brazil.
I thought that would have given the shares a major boost, but the response was cautious. Possibly, investors are trying to navigate climate change politics as well.
The BP share price climbed steadily since April when Donald Trump announced his 90-day tariff pause. It’s up a modest 5% over one year but a more impressive 80% over five. Dividends are on top of that. Anyone considering this stock must understand there’s been plenty of volatility in between. There could be plenty more to come.
BP’s forward price-to-earnings ratio’s a reasonable 14.3 for 2025 and is forecast to drop to 11 by 2026. It’s recovered its status as a top income stock. The forward dividend yield’s generous at 5.63% and forecast to hit 5.84% in 2026.
Compounding FTSE 100 stocks
Q2 results published on 5 August showed underlying replacement cost profit of $2.35bn, above analyst forecasts of $1.81bn. The board continues share buybacks at $750m a quarter. Net debt’s still high at around $30bn, but the board has plans to start reducing that, largely through disposals.
Despite all the uncertainty, I think BP’s worth considering as part of a balanced portfolio. However, investors looking to build a six-figure SIPP should look to spread their money across a range of sectors, regions and company sizes.
While working, they should also reinvest all dividends for growth, and let the miracle of long-term compounding do the heavy lifting.
