If you’ve ever wondered whether a state pension will be large enough to support your lifestyle in retirement, you’re not at all alone.

This is one of the reasons why millions of people have a Self-Invested Personal Pension (SIPP), separate from the state pension.

To illustrate how this can help boost your retirement earnings, let’s go over the process of taking out a SIPP, plus some of the pros and cons, for someone who wants to target an extra £1,000 a month in retirement.

Think about passive income

There are different ways in which a SIPP can help boost someone’s finances alongside the State Pension.

For example, they may decide to sell some property and use that capital. Up to a certain limit of the total value, this can currently be done tax-free from 55 onwards, although this age is likely to rise in the future.

Please note that tax treatment depends on each client’s individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, and does not constitute, any form of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

To simplify things, in this example I want to think about the case of a person who wants to take income Of their SIPP but do not touch capital.

A target of £1k per month means £12k per year.

Let’s say someone wants to make an average return of 4% on their SIPP. This is higher than the current FTSE 100 index A return of 3.1% but still achievable in my view, sticking to proven blue chip companies and a fairly conservative approach to risk management.

This would require a SIPP of £300,000.

Building SIPP value

How long will it take to achieve such a SIPP?

Let’s say someone pays £500 every month. Thanks to the tax break that will give them £625 to invest as a basic income tax payer, or even more if they are a higher or additional rate income tax payer.

In fact, this tax relief is a huge advantage that helped convince me to take up the SIPP.

By investing in this way and accumulating at 5% per annum, it would take 23 years for the SIPP to reach the valuation you mentioned of £300k. Investing more can speed things up.

The CAGR consists of dividends plus any capital gains (although minus any capital losses), so I think 5% is realistic.

One share to consider

One share I think is worth considering is City of London Investment Fund (London Stock Exchange: CTY). As it happens, it’s yielding exactly 4% right now.

In fact, the fund’s dividend track record is excellent, having increased its dividend per share annually for decades.

This does not guarantee that things will continue this way. Dividends are never guaranteed, although it is clear that the fund managers aim to keep the growth coming.

By sticking mostly to medium and large UK listed companies that have been around for a while, the trust has a fairly conservative risk profile. This helps it benefit from the tens of billions of pounds paid annually by FTSE 100 companies alone.

There is danger in such an approach too. By tying the fund’s performance so strongly to the UK, a decline in UK economic performance could harm its portfolio valuation and thus its share price.

However, over time, I expect that the performance of this investment fund may not be as exciting but will hopefully be broadly in line with the performance of the FTSE 100.