With many top dividend stocks carrying sky-high yields, it could be possible to live off just the income in a SIPP. Yet targeting a lasting and reliable passive income from dividend shares requires discipline and a well-rounded investment strategy

The question is, how much does one need to invest in a pension to live off the income?

Key caveats

Down the years, London’s stock market has proven a goldmine for individuals seeking a second income. Just last quarter, UK shares paid dividends totalling £16.4bn, according to Computershare. That comprised both ordinary dividends and blowout special dividends.

However, investors need to remember that building the sort of passive income to live off typically takes time and patience. Most of us don’t have an enormous lump sum to invest straight away. Investors usually drip-feed money into the stock market to grow their portfolios over time.

In fact, it might not be good to draw any income at all in the early days. Perhaps not even for decades. Spending dividends instead of reinvesting them can significantly hinder the compounding process. The potential result? A much-smaller income-generating portfolio in retirement.

How much income will I need?

Guessing how much passive income I’ll need when I retire is tough to estimate. My goals in later life might change, as could my financial circumstances. Uncertainty over future costs — both for living and social care — provides another curveball.

So I’ll use projections from Pensions UK to give me an idea. They estimate the average single-person household needs £43,900 a year, and the two-person household £60,600 (working out at £30,300 each). I’ll err on the side of caution and go for the higher amount to make my calculations.

I’ll also strip out the State Pension from my thinking, given uncertainty over the level of future benefits, not to mention at what age I’ll be able to claim. Based on all this, how much will I need in my SIPP?

The answer: £627,143

If I eventually invest my portfolio in 7%-yielding shares for income, I’ll need a SIPP worth £627,143. That’s a pretty big chunk of cash, which leads me to my next question: is this a realistic target for me?

I think so. If I can achieve an average annual return of 9%, I can hit this target by investing in £500 a month for around 26 years. I’m confident the steps I’m taking, like building a diversified portfolio focused on blue-chip global stocks, put me on course for this goal.

One share I’ve recently bought for my SIPP is Aviva (LSE:AV.). In fact, I’ve topped up my holdings several times since opening a position in 2023.

Why, you might ask? To me it’s simple. Aviva’s leading position in the growing financial services market bodes well for long-term growth. It’s also well diversified by product type and operates in different regions, giving it strength across the economic cycle. Finally, its capital-light model means it generates enormous amounts of cash, which it can use for dividends and share buybacks or to invest for further growth.

Could it experience near-term problems as consumer spending weakens? It’s possible. But I’m more focused on the bigger picture, and I think Aviva shares will supercharge the returns I make from my SIPP.