Having a small SIPP (Self-Invested Personal Pension), or other types of pensions, at 55 is quite common. Today, around 40% of over-55s across the UK have less than £50k in their pension accounts.
The good news is that at 55, it’s not too late to build up a large amount of pension savings if investors act quickly. With that in mind, here are two moves I’d make immediately if I was in my mid-50s and had a low amount of savings in my SIPP.
If my goal was to build my SIPP retirement savings in a hurry, the first thing I’d do is start making regular contributions into my account. Naturally, these would increase my pension pot quickly.
But there’s more to it than this. The beauty of a SIPP is that contributions typically receive tax relief. This is essentially a reward from the government for saving for retirement.
The amount of tax relief available depends on the saver’s tax band. However, for basic-rate taxpayers, it’s 20%.
With this rate of relief, if I was to contribute £800, the government would add another £200, taking my total contribution to £1,000. This means regular contributions can add quickly.
For example, if I was to put £1,000 a month into my SIPP, that would come to £15,000 when tax relief was included.
If I was starting with £50,000 in my SIPP at 55, I could have over £80,000 within two years.
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 growth
The next thing I’d do is get my money working for me by investing it, by putting it into financial assets such as stocks and bonds in an effort to generate higher returns than are available on cash savings.
Now if I was 55, I could actually have quite a bit of time until retirement (10+ years). So given this time horizon, I’d invest a decent amount of my capital in shares.
In the short term, shares can be volatile. Yet over periods of five or 10 years, they tend to provide strong returns.
For example, over the 10-year period to the end of August, the MSCI World Index (a global stock market index) returned about 9.9% a year. That’s a much higher return than cash savings generated over that timeframe.
The thing is, to achieve these kinds of returns from the stock market, investors need to own a diversified portfolio of shares.
So what I’d do is set about building a rock-solid share portfolio in my SIPP by investing in a mix of low-cost investment funds and individual shares.
It’s worth pointing out that investing in individual shares is riskier than investing in funds. However, on the plus side, the returns can be higher.
Just look at Apple shares (US-listed stocks can be bought within a SIPP). Over the last five years, they’ve risen more than 200%. There are not many funds that have achieved that kind of return over that period.
I’m confident this strategy would deliver good results over the long term. Ultimately, by making regular contributions, and investing my money (properly), I should be able to grow my SIPP significantly in the lead up to retirement.