How to build a £1million pension in your 50s
PUBLISHED: 16:23 04 September 2018 | UPDATED: 16:23 04 September 2018
Investment expert Brewin Dolphin, which has an office in Cheltenham, shows you how to build up a significant nest egg, even in your 50s
People in their 50s could be forgiven for thinking they have left it too late to build up a decent pension; conventional wisdom says it takes a lifetime of contributions to build a sufficient fund for retirement.
But thanks to generous allowances and tax relief on pensions, and tax-efficient Individual Savings Accounts (ISAs), a determined saver aged 50 could build up a retirement pot of almost £1m by the age of 67, according to research by Brewin Dolphin.
The strategy requires saving relatively large amounts of money each year, but people in their late 40s and 50s are best placed to afford it; the mortgage is usually paid off and children flown the nest, leaving this age group with more disposable income than at any other time in their lives.
“Of course, you should start saving as early as you can for your retirement, but many people don’t pay adequate attention to their finances until later in life, when the prospect of retirement is looming large” says Liz Alley, divisional director at Brewin Dolphin.
“The good news is that it’s not too late, as long as the government keeps pension contribution limits and tax relief at current levels.”
Currently the maximum you can pay into a pension each year is the lower of relevant earnings or £40,000. This may sound an enormous amount to put aside from your income. But thanks to the way tax relief works, each £100 contribution only costs a higher-rate taxpayer £60. It would therefore cost £27,000 to add £40,000 to your pension pot. A basic-rate taxpayer who is taxed at 20% would need to spend £32,000 to hit the £40,000 target.
Assuming £40,000 is invested each year and achieves investment growth of 4% a year, the pension would grow to almost a million pounds after 17 years; £985,816 to be precise. The figure assumes modest investment growth of 4% per annum.
Somebody earning a gross £70,000 a year takes home £4,052 a month, making it quite feasible to save just over £2,000 a month if there are no child-related costs or mortgage payments. Indeed, if investment growth is just a little higher, at 5%, the pension would grow to £1,085,000, which breaches the lifetime allowance of £1,030,000 – the maximum amount you can accumulate in a pension without triggering a punitive tax charge, so it may be necessary to save less to ensure you do not go over the limit.
However, people should not waste any time in making use of the pension tax breaks because there is constant talk of paring back the tax benefits.
“People need to take advantage of pension tax relief while it is still available,” says Alley. “There are rumours that the government is considering removing higher-rate tax relief and introducing a flat rate at a lower level, which would make pension saving more expensive for higher earners. I would urge everybody to utilise these generous allowances while they are still in place.”
Those with higher earnings could also take advantage of the annual ISA allowance, set at £20,000 for the 2018/19 tax year, which would, if fully utilised over the same period of 17 years, produce a total fund of £492,908, assuming the same annual growth of 4%. The ISA pot is made up of £360,000 in contributions and £133,000 of investment growth.
Although ISAs have grown in popularity in recent years, it is pensions that provide the more generous tax reliefs. The government effectively refunds any tax you have paid on your contributions at your highest rate. Although withdrawals are taxed, pensions are not counted in your estate for inheritance tax purposes so can be passed down to beneficiaries tax free.
Contributions to ISAs on the other hand receive no tax relief although withdrawals are free from income tax.
The value of investments and any income from them can fall and you may get back less than you invested.
Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore you should not rely on this information without seeking professional advice from a qualified tax adviser.
No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact Brewin Dolphin. Visit www.brewin.co.uk or brewin.co.uk/our-offices/cheltenham/.