If you’ve reached 50 years of age and have nothing saved up for retirement, there is no need to panic. You still have plenty of time left to put money away.
Today I’m going to outline my three retirement saving tips that could help you build a million-pound pension pot from a standing start at 50.
1. Open a SIPP
If you’ve not started a pension by the time you hit 50, you are going to need all the help you can get. So, my first tip is to open a SIPP.
These pension savings wrappers are great because not only do they offer tax relief on contributions, investments in SIPPs can grow free from income and capital gains tax. Although withdrawals might still attract tax depending on your circumstances.
Tax relief on contributions will vary from saver to saver, but most people should be entitled to receive at least 20% on contributions. This means that for every 80p you contribute, the government will add 20p. A contribution limit of £40,000 a year applies.
2. How much do you need?
My next retirement saving tip is to work out how much you need to contribute every month.
This might seem like a silly suggestion, but research shows millions of British savers are not contributing enough to their pensions every month. The best way to make sure you are contributing enough is to work backwards by taking your target pension pot and then figuring out how much will you will need to add every month to hit this target.
According to my calculations, to build a million-pound pension pot from a standing start at age 50 a saver will need to put away £1,600 every month.
3. Invest your money
In the example above, I have made one critical assumption. I have assumed that the money saved will be invested in a low-cost FTSE 100 tracker fund. The great thing about investing your money in such a fund is that you can track the performance of the UK’s leading blue-chip index without any extra effort.
Over the past 10-years, the index has produced an average annual return for investors in a region of 7%, more than enough to turn your monthly contribution of £1,600 into a pension pot of £1m in the space of 20 years. I am also assuming in this example that the £1,600 contribution is topped up by the government by 20% to £2,000.
It would be almost impossible to achieve the same return without using stocks and shares. At present, you would be hard-pressed to find a savings account that offers an annual interest rate of more than 1%, which is just not enough to make a million in the short space of 20 years.
Another added bonus is the fact that more than 70% of the FTSE 100’s profits come from outside the UK. So, if there is a no-deal Brexit, and the UK economy ends up being severely disrupted, you can rest safe in the knowledge that as long as the rest of the world continues to grow, your pension fund will as well.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019