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Planning for a comfortable retirement requires careful preparation. And a Self-Invested Personal Pension (SIPP) can be a powerful tool to achieve it. SIPPs offer flexibility, tax advantages, and the ability to control our investments. But just how much do we need in your SIPP to retire without money worries?
How much is needed?
A comfortable retirement typically involves having enough income to enjoy leisure activities, travel, dining out, home improvements, and other lifestyle expenses without financial stress. According to the Pensions and Lifetime Savings Association (PLSA), the annual income required for such a lifestyle is:
- £43,100 for a single person
- £59,000 for a couple
What does this mean for my SIPP?
First, the State Pension should be factored into retirement planning. For the 2025/26 tax year, the full new State Pension is set at £230.25 per week, which equates to £11,973 annually. If eligible for this full amount, it can be subtracted from the target annual income when calculating how much is needed in a SIPP. In our example, that would mean the SIPP would need to provide £31,127 annually to hit the comfortable retirement income of £43,100 per year (as suggested by the PLSA).
Using the 4% withdrawal rule, this means approximately £780,000 is needed in the SIPP to generate the remaining income. Couples eligible for two full State Pensions would reduce their combined target by £23,946 annually.
The only issue is, I’m not retiring for 35 years. To have the same purchasing power as £780,000 today, approximately £1,851,540 would be needed in 35 years. That’s assuming an average annual inflation rate of 2.5%.
Building the pension pot
Of course, for millions of us, the issue is building that £1.85m pension pot. However, with time, consistency, and a wise investment strategy, it’s very possible. One way of achieving it would be investing £500 (including government contribution) in a SIPP monthly and achieving an annualised growth rate of 10%. This would result in £1.89m in 35 years. However, not everyone achieves a 10% return. Poor investment decisions typically lose money.
An investment to consider for building a substantial pension pot is the Scottish Mortgage Investment Trust (LSE:SMT). Managed by Baillie Gifford, the investment trust focuses on high-growth companies in innovative sectors like technology and healthcare. Its portfolio includes industry leaders such as Amazon and Nvidia, alongside emerging private companies like SpaceX, offering exposure to trends like artificial intelligence and renewable energy. It also has holdings in luxury sectors, including stocks like Ferrari and Kering, providing additional diversification.
Historically, Scottish Mortgage has delivered strong long-term returns, making it suitable for investors seeking significant growth over decades. In fact, the shares are up three fold over the decade, despite the recent downward turn.
However, the investment comes with notable risks. It employs gearing, which amplifies both gains and losses. Moreover, its focus on growth stocks means it is sensitive to market changes. Likewise, some investors will be wary that its private holdings may be illiquid.
Despite these risks, Scottish Mortgage can play a valuable role in a diversified portfolio for those with a long-term horizon. Its track record and focus on innovation make it an attractive choice for investors aiming to grow their pension pot over time. It’s an investment I continue to top up on, while acknowledging its higher risk profile.
