Many people rely on the State Pension in retirement to give them a regular income. At present, the official pensionable age is 65, but it’s set to hit 66 for both men and women by October 2020.
Under the current rules, it will increase again between 2026 and 2028 to 67 for both men and women. Another increase is planned for between 2044 and 2046, although with 27 years to go until this new rule comes into force, the government still has plenty of time to change the policy.
If you can’t wait to retire until you are in your mid-to-late 60s, then a private pension can help you do so early. At the time of writing, a saver can start to draw money out of their personal SIPP from age 55, 10 years before the official State Pension age.
Making the most of your private pension
SIPP’s are a great way to save for the future because they have a whole host of tax benefits. For a start, any money deposited into a SIPP attracts tax relief at the depositor’s marginal tax rate. Any money you invest in your SIPP will also be topped up by 20% by the taxman.
Higher or additional-rate taxpayers can claim back a further 20% or 25%, respectively. Contribution limits do apply, and you can only usually claim tax relief up to a total annual contribution of £40,000. Still, the benefit available is much better than nothing.
On top of this, money withdrawn from a SIPP also attracts favourable tax benefits. The first 25% of your withdrawals are tax-free, but any further ones attract tax at your marginal tax rate. Limiting withdrawals to a level below the nil-rate band will help ensure you don’t have to pay any additional tax.
Building the pot
So, how much will you need to put away to be able to achieve a comfortable retirement with a private pension? The answer will depend on what sort of lifestyle you want to live when you retire and at what age you plan to retire. For the purposes of this article, I’m going to assume £500,000 will be enough to achieve a comfortable retirement, excluding any State Pension income.
To hit this target, my numbers show a saver will have to put away roughly £850 a month, or £10,200 a year, over 20 years. That’s assuming the money is invested in a low-cost FTSE 100 tracker fund and there are no savings to begin with.
Thanks to the tax benefits of using a SIPP, the actual monthly contribution required will be much lower than the £850 a month target. I calculate just £680 a month would be enough, with the government adding a further £170 a month in tax relief.
With 30 years of saving, I calculate it would take contributions of just £350 a month, or £280 excluding the tax benefit, to build a pension pot worth £500,000, assuming the money is invested in an FTSE 100 fund returning 8% per annum.
