If you’ve got to 50 years of age and have no pension savings, there’s no need to panic. While it may seem as if you’re running out of time to save for the future, it’s not the end of the world.
A simple trick
According to my calculations, if you don’t have any savings at 50, you can still build a pension pot worth £1m before you quit the rat race. There’s one simple trick that will help you get there, and that’s investing.
But investing your money alone won’t solve all of your problems. Investing is only part of the solution. Making the most of all the tax-free pension wrappers available, such as the SIPP and ISA, is another component. And so is compound interest.
Tax relief
If you haven’t started saving for retirement at 50, the first thing you should do is open a SIPP. If you’re a UK resident under the age of 75, you can add money to a SIPP and receive tax relief, even if you don’t work or pay tax.
However, there are limits to how much you can contribute and still receive tax relief. It’s £3,600, or as much as you earn each year, whichever is greater, although the maximum is £40,000 from both you and your employer. Still, this should be more than enough for most people to build a substantial savings pot.
Building your pension
A saver putting away £40,000 a year would only need to contribute £32,000. The government will then top this contribution up with a tax bonus of 20%, or £8,000.
From a standing start, these contributions alone would be enough to accumulate a pension pot worth £600,000 over the space of 15 years. According to my calculations, this would allow someone who started saving aged 50, with a target age of 65, to retire on £24,000 a year.
If the same saver invested this money, they would be able to achieve much better returns. At a rate of return of 3% per annum, roughly equivalent to the yield on a low-cost bond fund, contributions of £32,000 a year, or £40,000 including the government tax bonus, would grow into a pot worth £758,500 according to my numbers.
The real profits start to appear when this money is invested in stocks. For example, over the past decade, the FTSE 100 has achieved an average annual return of around 7% for investors. At this rate of return, the investor putting away £40,000 a year would see their money grow to be worth just over £1m at the time of retirement.
The bottom line
So there we have it. If you haven’t achieved any pension savings by the time you’re 50, it’s relatively straightforward to build a substantial pension pot in the time you have left before retirement.
All you need to do is make the most of the tax benefits available with a SIPP, make sure you save every month, and invest your hard-earned money.
