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Self-Invested Personal Pensions (SIPPs) are brilliant financial products for building a chunky pension pot and securing an equally chunky passive retirement income.
By delaying tax liabilities and enjoying income tax relief on all deposits, SIPPs enable investors to build a nest egg without taxes disrupting the wealth-building process. With that in mind, let’s explore what it takes to aim for a £10,000 monthly retirement income.
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.
Setting ambitious targets
If the goal is £10,000 a month, or £120,000 a year, then following the 4% withdrawal rule will require a portfolio worth £3m. Obviously, that’s a pretty ambitious goal. But it’s not as impossible as most might believe, especially for younger individuals with a long time horizon.
Let’s assume an investor’s portfolio will match the UK stock market average return of 8% a year. After SIPP tax relief, a £500 deposit is automatically topped up to £625 by the government. And by investing this capital each month at an 8% rate, an investor will grow their nest egg to £3m in around 44 years.
This perfectly demonstrates the power of compounding returns. But sadly, not everyone has just over four decades before retirement comes knocking. And while index funds are an easy solution to mimic overall stock market performance, there’s no guarantee that the future returns will reach 8%. In other words, investors could end up with less than expected.
So how can investors aim to overcome these challenges? This is where stock picking offers a potential solution.
Building wealth faster
Rather than relying on an index fund, investors can focus their capital on only the very best businesses. Admittedly, that’s far easier said than done. But when executed successfully, it can open the door to game-changing, market-beating returns that drastically shorten the journey towards £3m.
Take Diploma (LSE:DPLM) as a good example to consider. The industrial distribution specialist has been one of the best-performing UK shares over the last 20 years, generating a total return of 7,085% including dividends!
That’s the equivalent of earning 23.8% a year. And anyone that’s been drip feeding £625 into these shares each month using a SIPP since September 2005 has just surpassed the £3m threshold in 2025. They’re now able to enjoy a £10,000 monthly passive income, taking less than half the time required when relying on index funds.
At a market-cap of £7.4bn, Diploma’s days of generating near-24% annualised returns are most likely in the rear-view mirror. But the business still holds impressive potential, in my opinion. Diploma continues to deliver resilient organic growth ahead of analyst expectations. And with extra gains stemming from its bolt-on acquisitions, the group’s operating margins and free cash flow generation remain robust in double-digit territory.
Of course, using acquisitions as a growth engine isn’t a risk-free endeavour. Even small-scale buyouts can backfire if performance fails to live up to expectations. That’s because these deals can gobble up a lot of financial resources and leave balance sheets vulnerable, especially when relying on debt to finance the takeover.
But Diploma has demonstrated a knack for identifying value-building opportunities. So despite the risks, it may still be worth a closer look from investors seeking to build long-term retirement income.
