How to Set a SIPP Retirement Income Target That Matches the State Pension

The new State Pension pays £12,547 a year, and setting a SIPP retirement income target of the same figure is one of the more useful ways to frame what a private pension actually needs to deliver. Most investors know the State Pension alone will not stretch far. Fewer sit down and work out precisely what pot size their SIPP requires to close the gap.

What pot size do you actually need?

The maths is straightforward once you fix the yield assumption. The table below shows the required pot at three different income-generating yields, assuming capital is left intact throughout.

These are not trivial sums, but they become more manageable when viewed through the lens of time and tax relief. Someone contributing £250 a month over 30 years, with an average annual portfolio return of 8% including reinvested dividends, would accumulate £367,038. That clears the 4% threshold with room to spare.

The after-tax cost of that £250 monthly contribution is the part many investors underestimate. A basic-rate taxpayer contributes only £80 for every £100 going into a SIPP, thanks to pension tax relief applied at source. A higher-rate taxpayer contributes £60. On the £250-a-month figure, a 40% taxpayer’s effective outlay is just £150 a month, or £1,800 a year.

The other structural advantage is the 25% tax-free lump sum, available up to a maximum of £268,275. Further withdrawals sit on top of other income and are taxed accordingly, but the overall package remains one of the most efficient savings wrappers available. Tax treatment depends on individual circumstances and may be subject to change.

M&G as a SIPP holding: the case and the caveats

Wealth manager M&G (LSE: MNG) illustrates how a single dividend-paying stock can contribute to a SIPP retirement income target, while also demonstrating the complexity that lies beneath the headline yield. The shares have risen 69% over the past three years and the trailing dividend yield sits at 5.7%, with the board committed to a 2% annual increase in payouts.

The 2024 full-year numbers, however, carried a sting. M&G’s 2024 results showed adjusted operating profit before tax of £837 million, up 5% year-on-year. But the IFRS loss after tax came in at £347 million, compared with a £309 million profit in 2023, hit by short-term fluctuations in investment returns and mismatches under IFRS 17. Net flows from open business swung to negative £1.9 billion for the year, having been positive £1.7 billion in 2023.

The 2025 figures tell a materially different story. M&G’s full-year 2025 results showed adjusted operating profit essentially flat at £838 million, but the IFRS result swung to a profit of £314 million. Net flows from open business recovered sharply to positive £7.8 billion, and assets under management and administration (AUMA) grew to £375.9 billion from £345.9 billion at the end of 2024. Broker Panmure Liberum described the 2025 figures as ‘materially better than consensus expectations’.

The half-year 2025 results had already pointed in this direction, with AUMA at £354.6 billion at 30 June 2025 and net inflows from open business of £2.1 billion in the period, compared with £1.1 billion of net outflows in the equivalent period of 2024. The Shareholder Solvency II coverage ratio stood at 242% by the end of 2025, up from 223% at the end of 2024, providing a degree of balance-sheet reassurance for income investors monitoring dividend sustainability.

The total dividend for 2025 was 20.5 pence per share, up 2% on the 20.1 pence paid for 2024. On the valuation side, the trailing price-to-earnings ratio stands at 28, which is well above the FTSE 100 average of around 16. That premium limits the margin of safety for new buyers, and a market correction would put pressure on both fund inflows and fee income.

M&G faces structural competitive pressure from low-cost passive funds, and the 2024 IFRS loss, while partly technical in origin, is a reminder that the headline operating profit does not tell the full story. For investors building a SIPP around income-generating FTSE 100 shares, the 5.7% yield and the 2025 flow recovery are constructive; the valuation and net-flow volatility in 2024 argue for holding it as one component of a diversified portfolio rather than a concentrated bet.

The next test is whether M&G can sustain its target of 5% or more average annual growth in adjusted operating profit through to the end of 2027 while flow momentum holds. If both conditions are met, the income thesis remains intact.