The following is a transcript of our monthly podcast, The Pension Confident Podcast. Listen to episode 43 or scroll on to read the conversation.
Takeaways from this episode
If you start at age 25, monthly pension contributions of £680 could grow to £1 million over 40 years.
If you start at age 25 and increase your monthly contributions each year by 3%, your payments could be as low as £430.
Based on the 4% withdrawal rate, a pension pot worth £1 million could give you £40,000 per year in retirement.
£40,000 per year in retirement is seen as just below a comfortable standard of living for a single person, according to Pensions UK.
Starting early gives you the best chance of saving £1 million in your pension as you’ll benefit from compound interest, tax relief from the government, employer contributions and potential investment growth.
PHILIPPA: Welcome back. Now, how does £1 million in your pension pot sound to you? Unachievable? Well, not necessarily. Aiming high, it’s always a great mindset when it comes to your pension. So keep listening because we’re going to hear exactly how some people do it.
I’m Philippa Lamb, and if you haven’t subscribed to the podcast yet, why not click right now? You’ll never miss an episode that way.
Now, as always, I have expert guests here to help me including long-term friend of the podcast, Faith Archer. She’s a Financial Expert and Founder of Much More With Less, and importantly for this episode, A whizz with numbers. Damien Fahy, also back on the podcast, Founder of Money to the Masses, a website helping millions of us take good care of our finances, and from PensionBee, brand new VP Personal Finance, Maike Currie. Welcome, everyone.
FAITH: Hello.
DAMIEN: Hello.
MAIKE: Hi there.
PHILIPPA: Now, here’s the usual disclaimer before we start. Please do remember, anything discussed on the podcast shouldn’t be regarded as financial advice or legal advice, and when investing your capital is at risk.
Now, I want to kick this off around the table by asking everyone, without naming names, do you know anyone who has £1 million in their pension pot?
FAITH: Yes.
PHILIPPA: More than one person?
FAITH: One in particular I’m thinking about. They were talking about how their pension pot was running into problems with the lifetime allowance.
PHILIPPA: So you knew how much they had?
FAITH: Absolutely.
PHILIPPA: I do know one. It’s not me. How about you two?
DAMIEN: Someone personally I know is somebody who talks a lot about money. And that’s the only reason I know that they’ve got more than £1 million in their pension pot.
PHILIPPA: Because they’ve told you?
DAMIEN: Because they regularly talk about it. And they want some guidance on my view on what’s happening in the world. So it’s really for their benefit that I know.
MAIKE: I know quite a few high earners, fund managers and the like, also in large part because they mentioned that they had the challenge with the lifetime allowance, but also a few ordinary people that have made that mark.
PHILIPPA: And PensionBee customers, Maike. Presumably, some of them have very big pension pots?
MAIKE: Well, interestingly enough, and taking into consideration that we now have almost 300,000 customers, just over the 285,000 mark, there aren’t that many pension millionaires in our customer base. If I had to put a figure on it, it’s in the double digits.
PHILIPPA: OK, so there’s some?
MAIKE: There’s some. Far more with pension pots over £500,000.
Monthly payments needed to grow a £1 million pension
PHILIPPA: But Faith, just to be clear, to get £1 million in your pension pot doesn’t mean you’ll have to contribute £1 million yourself?
FAITH: No, it doesn’t. One of the most important things with pension planning is that you’ve potentially got time on your side. The earlier you can start, the more [that] smaller contributions are going to add up. I think if you want to go for the £1 million mark, you’re probably going to have to save into your pension pretty aggressively starting as early as you can and hope for a following win from the stock market that the growth is going to take you through.
PHILIPPA: Yeah, OK. Well, should we put some numbers on it? I mean, if you were doing, as you say, and starting at, say, age 25, what sort of money would we be talking about in monthly contributions?
FAITH: OK, so let’s put some assumptions out there. You’re 25. We’re going to assume that growth is 5% a year after fees, and you’re running straight through - 40 years to 65. If you’d probably need to pay £680 a month for that 40 years to hit the £1 million. However, I think most people, if you’re starting at 25, you’re not expected to have the same salary all the way through.
PHILIPPA: Of course, yeah.
FAITH: If you can get pay rises and make sure that you increase your pension contributions as your pay goes up. That same 25-year-old, if we were assuming that they’ve got pay rises, so they’re increasing their pension contributions by 3% a year for the 40 years, and you got the same 5% growth after fees, their contributions might be - you could start as low as £430 a month, and it’d generate the £1 million by 65.
PHILIPPA: Obviously, if you start later, it’s going to cost you more in monthly contributions. But then, I guess, if you start later, chances are you might have a bit of pension already saved up.
FAITH: Absolutely. I mean, if you were going to start at 30 with no pension saved up, then rather than the £680 with the flat contributions at [age] 25, then you’re looking at £900. You delay for another 10 years, until you’re 40, then it’s getting pretty hefty, like £1,700. So earlier you can start and if you’ve already built up pension saving, so you’re not starting from zero, but you’re taking a more aggressive approach. The figures won’t be quite so painful.
How to make your child a millionaire
PHILIPPA: Damien, I know you’ve done a lot of work around this with parents helping their kids to get going on this. Actually, the first thing I’m thinking of is - [if] anyone is listening to this with kids or grandkids, tell them to listen to the podcast and encourage them to start now. But what do you say to parents who want to help out?
DAMIEN: Well, the thing is, it’s about the time in the market. So if you have that ability to compound over time, it does a lot of the heavy lifting for you as the figures that Faith has just said demonstrate. And we did a piece about how to make your child a millionaire because we all get to a stage where in life you start to look at this £1 million number. And if you started early or you started for your children, they have a much greater chance of becoming a millionaire on much lower numbers.
We looked at the numbers and crunched them. Let’s say, for example, you had somebody who was five years old. When we did this example, we were looking at putting it into a Junior ISA. If you assume growth rates that are slightly more punchy, let’s 8%, which is the higher of the Financial Conduct Authority’s (FCA) guidelines and the numbers in which they’ll allow people to project with.
PHILIPPA: OK, so it’s optimistic.
DAMIEN: It’s optimistic, but if you’re investing for a very long time, we’re talking about somebody from age 5 to 65. You can get to the point where for that person, if they have £56 a month put into a Junior ISA to start with, which when they get to 18, it’ll become a Stocks and Shares ISA, which they take control of themselves as adults, then that amount of money will grow to £1 million over time.
PHILIPPA: That’s a flat contribution that doesn’t go up?
DAMIEN: That’s a flat contribution that doesn’t go up. And so you can see by starting early, you have something to compound because that’s the thing about compounding. If you have nothing, it doesn’t compound to anything. So you have to have some money.
So the key thing is if you start early for your children, I now do this. So I have Junior ISAs for both of my children, and we put in a small amount and they compound over time. That’s the hope. And they’ll hopefully take the baton, we teach them, and they’ll continue this into the future. But the thing is, you can work it with pensions as well because there are things called Junior Self-Invested Personal Pensions (SIPPs). So there are pensions you can contribute to for children, so they don’t get access to the money at age 18, which is an incredible thing because it means you can start them onto a pension very early.
PHILIPPA: And they can’t blow the money when they leave home?
DAMIEN: They can’t blow the money. But the other thing I just want to add on that - if you increase the contributions each year by, let’s say, 5%, then that £1 million becomes a much bigger number. So it ends up being closer to £2 million. Each year, you’re just incrementally increasing the amount you put in each month. And that means you can therefore combat inflation. Because if you have a pot of a million in the future, so that child who I originally just started putting in £56 a month for, it compounded to £1 million by age 65. In reality, it’d only be worth around about £500,000 in today’s money. So that’s why it’s important to keep increasing the amount that you put in.
PHILIPPA: Yeah, but it’s quite an eye on it. I mean, that’s a relatively small amount, isn’t it? £56 a month, did you say?
DAMIEN: Yes.
PHILIPPA: Yeah. I mean, that feels quite doable, doesn’t it?
DAMIEN: And when they get older, don’t forget that a lot of the heavy lifting will be done by them when it comes to their own pension contributions. So that’s the thing. The numbers that we’ve already mentioned are really big when you start later. And unfortunately, most of us start focusing on our pensions when we’re in our 40s.
How much retirement income can you take from a £1 million pension?
PHILIPPA: Maike, this £1 million, it sounds great. And as Damien has said, you have to think about what is that really going to do for you when you’re older? Because we’re projecting decades ahead into the future. It sounds like a lot, but if you had £1 million in your pension pot right now, what would that give you in the way of annual income when you retired?
MAIKE: Well, if we base it on the standard 4% drawdown rate, that’s going to give you £40,000 a year. Now, whether £40,000 is enough will differ from one person to the next, all depending on whether you’ve paid down the mortgage, what your standard of living is, what’s important to you, do you have dependents? All those things will play a role. But really, if you think about £1 million, it sounds like a lot. But then an annual income of £40,000, when you’ve still got a mortgage to pay, you might still have dependents. That’s not that much money.
PHILIPPA: Yeah, I’m afraid that’s true, isn’t it? So, Faith, can you explain just how we got to that £40,000?
FAITH: It’s based on a handy rule of thumb, the 4% rule, which is known as - I’m slightly putting inverted commas around this - the ‘safe’ withdrawal rate.
The idea is that if you withdraw 4% from your pension pot, and in year one, the next year, it’s 4% plus inflation, and you keep doing that, your money won’t run out over a 30-year retirement. It’s based on the Trinity Study in the 1990s that looked back over American stock market performance, did it with lots of different withdrawal rates, and it came out and said, “right, OK, 4%, you’re going to be OK”.
PHILIPPA: And it’s really important, isn’t it? Particularly with longer lives.
FAITH: Absolutely.
PHILIPPA: So, Maike, we’re talking about a £1 million pot. We’re talking about an income of 40,000 a year. What lifestyle would that give you?
MAIKE: Well, of course, it’s a difficult one to answer because there’s no ‘one size fits all’. But a good benchmark, which is often referred to is the Pensions UK, which sets three different retirement lifestyles: minimum, moderate, and comfortable, which gives people a general indication of what lifestyle they may be on track for in retirement.
Now, the cash amounts for each standard are regularly updated. This is after tax, and it’s also important to bear in mind that this assumes that you own your own home.
PHILIPPA: OK.
MAIKE: Right. So for a single person, you’ll need £13,400 per year for a minimum retirement. £31,700 a year for a moderate retirement, and £43,900 per year for a comfortable retirement. So my deduction from that is if you’re a single person and you want a comfortable retirement, you’ve got no dependents, you already need to pass that £1 million pension mark.
PHILIPPA: What about if we include the new State Pension? That helps a bit.
MAIKE: Yes, it does. But the one thing we need to bear in mind with the State Pension is it all depends on how many years of National Insurance contributions you pay. To get the full new State Pension, you need 35 years of National Insurance contributions. And the reality is, especially for women, at some stage in our careers, we’ll take a career break, and that might impact how many years of National Insurance we pay. So relying on that full new State Pension, not a lot of us will get the full new State Pension. That’s a fact.
PHILIPPA: But you can make up the numbers, can’t you? You can look up where your record is online and make up the numbers or some of them.
DAMIEN: So you can go online and you can get the State Pension forecast. So [for] people listening to this, it’s a good useful piece of admin to do, to go and check your State Pension to see if there are any gaps. If there are, then you do have the ability to fill some of those gaps.
FAITH: It’s also worth saying that if you make sure that you register, you claim Child Benefit. If you have a career break because you’re having children, you’re not working, then you can get credits towards your National Insurance contributions if you’re looking after children under the age of 11. So all isn’t lost in State Pension terms, if you take time off to raise children.
PHILIPPA: Yeah, but always worth thinking about, isn’t it? Because when you’re raising kids, life’s busy. These are the things that slip through the gaps, aren’t they?
Then, of course, we come to inflation, don’t we? As I’ve said before, we’re talking about decades in the future. We’re talking about big numbers. Damien, talk to us about inflation. If we’re saying a million now gives us £40,000, if we think about it in 10, 20, 30 years time, it’s not sounding like a big income, is it?
DAMIEN: It’s not. And that’s the thing with inflation that people have to work out. So a good rule of thumb is that if you ever want to know how long it’ll take your money to double in value, then what you do is you take an interest rate and you divide it into the number 70. So, we call it the rule of 70. It’s technically the rule of 72, but the numbers are easier if it’s 70. So I’m going to be very simple and use a 10% rate of return. You wouldn’t think I’ve got a maths degree. I’ll stick to the simple example. So that’d take you seven years for your money to double.
But conversely, you can use that same rule to work out how long it’ll take your money to halve in value. If you start having a very high rate of inflation, then if you divide that number into 70, you can work out how many years it’ll take for your money to actually halve. When we talk about halving, and what people need to realise, that means that you aren’t going to be able to buy as much with your money in the future.
PHILIPPA: This is buying power, isn’t it?
DAMIEN: It’s buying power.
How can you save £1 million in your pension?
PHILIPPA: It seems to me [that] we started off thinking £1 million was a crazy number, a huge number. We’ve now got to a place where we’re thinking you definitely want to aim at it, if you can. Faith, shall we talk a bit about how to make those contributions a little less painful for people?
FAITH: Well, I think we’ve made the point about starting as early as you can and that even small contributions, if you do it for long enough, are going to make a difference. But fundamentally, if you can increase those contributions over time, perhaps thinking, for example, of paying a percentage of your income into your pension rather than a flat sum of money. I think also taking advantage of any of the ‘free money’ that gets added on top of pensions because you’re bribed to save for your retirement.
PHILIPPA: Yes, the government bribes us. Tell us about that.
FAITH: That’s how I think about it.
MAIKE: That’s a great bribe.
PHILIPPA: It’s a legal bribe.
FAITH: With pensions, currently, if you pay money into a pension, you aren’t allowed to withdraw it until you reach the age of 55, that’s rising to 57 from 2028. In exchange, the government is willing to give you tax relief on top of your contributions.
PHILIPPA: This is a good thing and always a really important thing to think about. If we think about that 25-year-old and the contributions you talked about earlier, can we apply that calculation to this?
FAITH: Yeah, absolutely. If you’ve got the 25-year-old, so their growth is at 5% a year, they’re increasing their contribution by 3% a year, and so they need to start out at £430. Now, if you’re a basic rate taxpayer, then the government, for every £80 you put in, you’re going to get £20 added immediately in tax relief. So that’s a really nice boost. The other addition you can get is if you’re an employee, then your boss will add money into your pension.
PHILIPPA: Yes. I want to talk about workplace pensions in a bit.
FAITH: If you’ve got a generous enough employer that they’re doing [employer] matching, they’ll match your contributions, then for a £430 total pension contribution, if you put in £172, it gets topped up with another £43 in tax relief, and then your employer matches it. Suddenly, the employer is putting in £215, suddenly that £430, the bit that’s coming from you is just £172 that’s then topped up with tax relief and then topped up with the employer contribution.
PHILIPPA: Which feels a bit less painful, doesn’t it? Obviously, as you say, you’re talking about a basic rate taxpayer there - 25% - but you could be on a higher rate?
FAITH: Absolutely. If you’re a higher rate taxpayer, then you’re going to get more tax relief. So whether you’re paying high rate or additional rate tax, you put the same £80 in, you’ll get the £20 added immediately in basic rate tax relief. But then if you’re a high rate taxpayer, you can then claim back additional tax relief on your tax return, another £20. If you’re an additional rate taxpayer, you claim another £25. That £80 as an additional rate taxpayer, that £80 you put in, you’ve got £20 immediately added, £25 back on your tax return, it’s costing you a lot less than you originally thought.
PHILIPPA: Yeah. And the key point there is you do have to claim it. It doesn’t come to you automatically.
FAITH: Yeah.
PHILIPPA: Maike, you can check this on the PensionBee Pension Tax Relief Calculator, can’t you?
MAIKE: Absolutely. So PensionBee has a brilliant calculator on its website, and you can play around with the numbers.
But I actually want to tell you a story because I was 25 once, and I was in a workplace pension, and I was a basic rate taxpayer. And I went back and I checked on that pension. And I looked at the numbers, which was really interesting. The sum total of what I contributed at the time was £3,500, right? My employer at the time contributed £7,000, around double what I was contributing. But with the power of compound interest, and of course, the power of tax relief, which is that ‘free money’ from the government, so if I put in £2,880 as a basic rate taxpayer, the government adds £720. So I looked at that pension, right? Now, bearing in mind, the total contributions were £10,000, give or take in total. That pension, which wasn’t very aggressively invested, which was also a mistake I made when I was younger, I should have taken far more risk -
PHILIPPA: We’ve talked about this on the podcast before, the whole risk profile when you’re young, you can be a bit more -
MAIKE: Absolutely, because you’ve got time on your side. But that pension is now worth almost £60,000. Bearing in mind, I only put in £3,000 of my own money. And that really is the power of starting early. It’s all about time. It’s not about how much you invest, but about when you start. Time is the most powerful ingredient.
And we spoke earlier about the power of making your child a pension millionaire or an ISA millionaire. So it’s really interesting because I wrote a piece for The Times this week, which is the power of Junior Pensions, Junior SIPPs. They’re brilliant because, again, you can put some money into a Junior SIPP for your child, put in £2,880. That’s all you do. The government tops it up with £720. And then you invest it in a relatively aggressive high equity fund. So you get that growth. That investment, by the time your child reaches age 18, you could have around a £115,000 in that Junior SIPP. Then, and here’s the real kicker, you leave it. You don’t put another pence into that pension. Your child reaches age 57, retirement age, and that pot could very well, the numbers that we crunched, shows that that pension pot could be worth over £1.24 million.
So that is - I’m not going to say it’s easy because we know times are hard and budgets are tight - but putting some money away for your child from birth to age 18, and they’ve got the power of time, they’ve got time on their side, you could make them a pension millionaire, even if you can’t make yourself a pension millionaire.
PHILIPPA: Yeah, I mean, Damien is nodding. Yeah, this is what you’re saying, isn’t it? It’s a great story.
DAMIEN: It’s a great story. And to add to that, I think pensions for children is almost something that isn’t spoken about. It’s almost like a secret that people don’t realise there’s a product.
PHILIPPA: I think that’s true.
DAMIEN: But I tell you the people who do know about it, and it’s the people who do have millions in their pension. So pension millionaires do know about it. Because I can go back to when I was working in the city, people who were already maxing out their pension contributions and their ISA allowances were putting money, just as you described, into pensions for their children and their partners if they weren’t working.
PHILIPPA: Were they?
DAMIEN: Because they knew the power of the tax relief, the compounding, and they were actually sheltering some of their wealth as well.
PHILIPPA: But perfectly legally.
DAMIEN: Perfectly legally.
MAIKE: And on the topic of sheltering your wealth, we know that Inheritance Tax is in the headlines. It’s a very thorny issue because we know in two years time, in April 2027, pensions will now be part of your estate for Inheritance Tax purposes. But if you gift money as a grandparent to your child into a Junior Pension, that’s a very good way of reducing your Inheritance Tax liability. Grandparents putting some money into a Junior SIPP it’s a really good way. It’s called gifting.
PHILIPPA: Faith, you talked about workplace pensions earlier. We talked about it a bit, but I’m thinking about our 25-year-old. If that person was younger at 20, you’re not auto-enrolled at 20 into workplace schemes? Is that right?
FAITH: In theory, you have to be 22. That’s when Auto-Enrolment starts. You can potentially ask to join the pension younger than that. At 22, at that point, you’ll be signed up for the pension. You put in 4% of your qualifying earnings. There’s 1% point added from the tax relief, and your employer will add 3%. So it comes to a total of 8%, and it’s paid on ‘qualifying earnings’. So it’s not starting at zero, it’s [your] earnings between £6,240 a year and £50,270 a year.
PHILIPPA: OK. It’s worth saying, that’s the basic arrangement, isn’t it? Some employers may be more generous than that.
FAITH: Absolutely. And it’s completely worth checking whether they are or not.
PHILIPPA: We’ve talked about this in the podcast, and I’ve got to say, I never did that in my 20s. It never crossed my mind. But it’s a really important thing to do, isn’t it? Ask the question. If they’re not saying to you how much they’re going to contribute, ask them.
DAMIEN: Ask them. I can tell you a worse story than that. I worked in the Pensions Review for one of the major high street banks. I knew a lot about pensions, and I still wasn’t engaging with my pension at that point. So it just shows you you can be working in pensions and still not engaging with them.
PHILIPPA: We briefly mentioned earlier the question of risk level, risk appetite when you’re young. You don’t necessarily need to be that conservative, do you?
MAIKE: And quite often with employers, they’ll put you into the default pension plan. So it’s really important to look under the bonnet of your pension, your workplace pension, and decide, could I take a bit more risk? Do I need to be in the default? Because often the default also has higher fees, and fees, as we know, has a major impact on your returns over the long term.
PHILIPPA: Faith, we’re talking about employed people here, and it’s well worth remembering, of course, not everyone’s employed. Self-employed people, freelancers, entrepreneurs, they’re not getting those employer’s contributions, are they?
FAITH: They’re not only not getting the employer contributions, but they don’t benefit from Auto-Enrolment either. So if you’re self-employed, you not only don’t have the boss to pay money in, but you don’t have a boss to set up a pension. You have to make the choice yourself. That can be, I think, quite an overwhelming choice. If your business isn’t pensions, what on earth do you pick? And I think my main tip is almost progress, not perfection. Don’t tear your hair out. Far better to pick a pension plan, set up the direct debit, get regular payments going in, knowing that if subsequently you change your mind, you can move the money.
£4 on a coffee vs. £4 in your pension
PHILIPPA: So we’ve been talking about young people and how important it is to start young. Thinking about our 25-year-old again, or even younger, 22, money is almost invariably tight. I mean, unless you’re extremely fortunate, you’re not in a very high paying job at that stage in your career. So where do they find this money? What savings can they make? This is the avocado toast question that, you know, poor Gen Z always get beaten over the head with the ‘wasting money on avocado toast and coffee’. But do we have any thoughts on what they might do to find those few extra pounds a month?
FAITH: I think it’s like anything. The small contributions can add up. And so maybe it’s that £4 a day, £4 every working day, £20 a week, £80 a month. Suddenly, that can add up to a distinctly higher sum by the time you’re hitting 65, 68. You’re suddenly looking at tens of thousands of pounds.
PHILIPPA: So those small discretionary sums we spend every day?
MAIKE: Yes. But I also think a lot of financial guidance on that can be quite patronising because it’s those small items - I love to go to the station and buy my cup of coffee every morning, and I’m not going to stop buying that cup of coffee. It brings me great joy.
Sometimes we need to look at the big ticket items, too. When we’re talking about lump sums, like a bonus or just spending less on something like a big wedding or a big trip abroad, that’s a really good way to give your pension that boost, which is hard when you’re in your 20s. But remember, as we said at the beginning, it’s not how much you’re putting in. It’s about time. You’ve got time on your side.
PHILIPPA: You make a good point, though. As time goes on, we start spending money in bigger chunks on bigger things, cars, rental choices, that sort of thing. Damien, those choices, they can make quite a big difference.
DAMIEN: They can make a difference because no one’s ever got rich, as far as I’ve found out, by not eating avocado on toast or not getting coffee. It’s about making the bigger ticket decisions. Now, one of the biggest ones I made was to not have a car on finance. So I used to have a car on finance. And for most people, that is about £200-£300 a month. And you get caught in that cycle. But I broke that cycle and now I don’t have a car on finance. I just own the car outright. And by doing that, I’ve suddenly got a couple of hundred pounds a month that I didn’t have before that I can then choose to do as I wish, which is being able to put it to one side.
Then on top of that, try and avoid lifestyle creep. So let’s have an example of somebody that gets a pay rise and you think, “I’ve got a pay rise. That’s amazing. I’m going to go and blow it”. Maybe put a portion of that or more of that into saving things, investments or a pension because you’re no worse off. You can be marginally better off if you keep some of that extra money you have a month and you use that on discretionary. We’ve got to have fun. But as long as it’s planned for, then that’s fine.
PHILIPPA: Planned fun?
DAMIEN: Planned fun!
PHILIPPA: It doesn’t sound so great, does it? I like a bit of spontaneous fun now and again, but maybe that’s just me.
FAITH: The thing about what Damien said, there’s an American book called The Millionaire Next Door. And the author went out to study all these normal people that had amassed significant assets. I think one of the phrases stuck with me was that they’d had same car, same house, same wife! These consistent things that weren’t expensive, and they’d kept their lifestyle.
PHILIPPA: This is the Warren Buffet argument, isn’t it? The great investment guru. A man who never spent any more than he had to, would it be fair to say?
DAMIEN: He’s a great example to bring up because Warren Buffet was, he’s arguably called the greatest investor of all time. But one of the things that Warren Buffet had is he invested from, I think it was the age of 10 or 11, and he’s now in his 90s. So yes, he was amazing at investing and he put money in investments, but it was actually compounding. If you compound money for 80 years, you’re going to be one of the richest people in the world. So it’s one of the - again, going back to that point, it’s about time.
PHILIPPA: Can we put some numbers around it? Because the PensionBee Pension Calculator will do that, won’t it? You can think, if I put £10,000 in, what would it do for me?
MAIKE: Sure. So let’s assume you’re 20 and you put a £5,000 one-off lump sum into your pension. Now, that could be worth £13,953 by the time you’re 68. £10,000 could be £27,895. £20,000 could be £55,790. So if you’re lucky enough to come into a lump sum, make that work hard. Put it into your pension because you’re also going to get that ‘free money’ from the government in the form of tax relief.
PHILIPPA: Yeah, though it’s important to remember there are limits, aren’t there, on how much you can contribute?
MAIKE: Yes, that’s an interesting one. And that’s one to note. The annual allowance for the current tax year is up to £60,000 to still receive tax relief. But obviously for higher earners, there’s a tapered allowance, which could mean that you could put as little as £10,000 into your pension. And that is why it’s not that easy to build that £1 million pension pot anymore.
FAITH: Also you can’t put more into your pension in any one year than you actually earn in that year.
PHILIPPA: Assuming you inherited a huge amount of money, you couldn’t throw it all at your pension pot?
FAITH: If you earned less than £60,000 in that year, you couldn’t even put the £60,000 in.
PHILIPPA: It’s all about consistent contributions, really, isn’t it? This is the way to get to what we’re talking about.
MAIKE: Absolutely. Set and forget. Set up their regular investment plan and just forget about it.
PHILIPPA: All right. So Maike says, ‘set and forget’, which is a nice maxim to live by. Final tip from you, Faith?
FAITH: I think don’t give up on pensions just because you’re not 20 anymore. Don’t think you’ve missed the boat if you’re in your 40s, if you’re in your 50s, because fundamentally, for every - the £80 you put in, you’re getting that £20 tax relief top up plus extra if you’re a higher or additional rate tax payer. That’s absolutely worth happening. It’s absolutely worth putting contributions in later in life to get that tax relief to help boost your retirement savings.
PHILIPPA: Yeah, that’s an excellent point. Damien?
DAMIEN: I want to be optimistic because even though some of these numbers seem huge, you do have levers to pull, like lowering your charges and things like that, that can make those contributions that you need to build a bigger pension pot that much lower.
PHILIPPA: This is about engaging. The thing we talked about earlier, understand what your pension is doing.
DAMIEN: If you’ve not engaged before, now’s the time to start to engage in your pension.
PHILIPPA: That’s great. Thank you so much, everyone.
FAITH: Thank you.
MAIKE: Thank you.
PHILIPPA: That’s it for this time. If you’re enjoying the series, please do rate and review us because it really helps us reach more listeners like you. If you missed an episode, as I always say, don’t worry, you can catch up anytime on your favourite podcast app, YouTube, or of course, if you’re a PensionBee customer in the PensionBee app.
Next month, we’re going to be talking about the real cost of Buy Now, Pay Later. And later in the month, we’ll be covering the Autumn Budget that we’re all on tenterhooks about, so keep an eye on the feed for both of those.
Here’s a final reminder, anything discussed on the podcast shouldn’t be regarded as financial advice or legal advice. And when investing, of course, your capital is at risk.
Thanks for joining us. See you next time.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
