Any investor can, in my opinion, invest within a Self-Invested Personal Pension (SIPP) and create a very valuable stream of passive income. One way to do this is by buying cheap UK shares. I suggest doing this within a SIPP because the government contributes money towards helping you reach your goals, so it’ll happen quicker. The amount the government provides depends on what rate of tax you pay.
Despite many shares recovering since the stock market crash earlier this year, there are still many cheap UK shares for investors. Concerns over Brexit and the FTSE 100’s reliance on older industries like banking and oil explain why UK shares are cheap. Especially versus, for example, US shares. Here I pick two cheap UK shares I’d potentially buy.
No 1 UK cheap share
BAE Systems (LSE: BA) will remain a reliable dividend payer well into the future. This is why it makes an ideal SIPP investment for creating passive income. The defence group is well established with governments around the world and has opportunities to expand further into selling digital and cyber capabilities. With a UK Defence Review coming up this is likely to become all the more important in the future.
The shares have a P/E below 12, which indicates they are good value. At the same time, the dividend yield is a decent 4.4% which can help produce income. I think the shares will grow in value over the coming years as well as produce reliable income. Even in a challenging economy like the one we’ve seen this year.
No 2 UK cheap share
Shares in asset manager and insurer Legal & General (LSE: LGEN) have been hit hard this year. The share price is down over 40% in 2020. This is more to do with concerns over the economy and Legal & General’s involvement in the finance industry rather than anything fundamentally wrong with the company.
I think this has made the share too cheap to ignore on a P/E of below seven. The shares are also attractive from an income perspective providing a yield of over 9%. This has risen as the share price has fallen. Typically, before the pandemic, the yield was nearer 6%.
Again, I think the dividend will be saved by management which resisted pressure from UK regulators to cut the payout to shareholders in response to Covid-19.
There are also opportunities to keep growing the business. It was an early adopter of passive funds which have grown in popularity. It also does a lot of work with annuities and pensions, a growing market both in the UK and the US.
I have a lot of confidence the business is well run, cheap and can provide investors with a passive income that will grow and be secure. For these reasons, I’d happily add it to my SIPP and watch the money roll in year after year.