Having a small Self-Invested Personal Pension (SIPP) or other types of retirement savings seems to be a common problem. At age 55, the average pension savings sits at £37,600, according to the latest data from the Office for National Statistics. And while that’s certainly better than nothing, following the 4% rule, it only translates to a retirement income of £1,504 a year.
That’s not great. But the good news is that even at 55, it’s still not too late to meaningfully grow this pension pot by 65. So if I were in my mid-50s with a small SIPP, here are the moves I’d make immediately.
Ramp up savings
The first step is to ramp up my monthly contributions. By living more frugally for a few years, a more luxurious lifestyle can be unlocked in the long run. Yet, leveraging a SIPP also opens the door to tasty tax relief.
Don’t forget all deposits made in this pension investing vehicle provide a tax refund depending on an individual’s income tax bracket. So if I were paying the 20% basic rate, all deposits are now eligible for 20% relief. And that can make an enormous difference.
Let’s say I’m able to ramp up my monthly contributions to £1,000. After tax relief, that grows to £1,250. And after 10 years of consistently topping up each month, that alone would grow a £37,600 SIPP to £187,600.
Already that’s a massive improvement, but this is only the beginning. Now, let’s introduce some compounding returns. Assuming my SIPP portfolio can match the FTSE 100’s average 8% annualised return, the potential long-term value of my pension, after a decade, would actually reach £312,141. In terms of retirement income, that’s £12,486 – eight times more than what I would have earned with just £37,600 in the bank.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Investing for maximum growth
It would be lovely to have over 300 grand in a SIPP generating passive income. However, this possibility depends on the stock market continuing to deliver 8% annualised returns over the next decade. And that’s sadly far from guaranteed.
As such, if returns end up falling short of expectations, my SIPP might be far smaller than expected when retirement comes knocking. Fortunately, stock picking might provide the answer. There’s no denying this strategy comes with increased risk and demands greater effort as well as discipline. But it also opens the door to market-beating returns.
Take Ashtead (LSE:AHT) as an example. Today, the firm is known as one of the largest equipment rental companies in the Western world, dominating in the UK and coming in at a close second in the US and Canada. But 10 years ago, the firm was still trying to expand its market share.
Investors who saw the growth potential early and held on through thick and thin earned a stunning 454% since October 2014. That’s the equivalent of a 20.6% annualised return, almost triple what the FTSE 100 has historically offered. And at this rate, my pension pot could have grown to a staggering £778,488!
Today, Ashtead’s facing fiercer competition as a result of industry consolidation, making it much harder to maintain its historical momentum. But there are plenty of other businesses primed to deliver Ashtead-like returns that opportunistic SIPP investors can capitalise on. It’s just a question of finding them.
