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No savings at 40? Here’s how I’d double my State Pension with just £3 per day

If you’ve reached 40 without any money put away for retirement, now is the time to start saving for the future. It’s never too late to start.

You could still manage to double your State Pension with contributions of just £3 a day from a standing start at age 40.

Pension tools

The good news is that there are plenty of tools and tax benefits available for investors to take advantage of today to boost their pension prospects.

If you’ve reached 40 years of age without any pension savings, you’re going to need as much help as possible to build a large enough pot to be able to retire in comfort with the time you have left.

A SIPP can help you get there. The great thing about SIPPs is that contributions receive tax relief up to your marginal rate. For basic rate taxpayers, that’s 20%. So, for every £100 you contribute, the government will top up the pot by £25.

Most SIPP providers also allow investors to make regular monthly investments. This is by far the best way to grow your wealth, in my opinion.

Investing for the future

Over the past decade, the FTSE 100, the UK’s leading blue-chip index, has produced an average annual return for investors in the region of 7%.

The FTSE 250, which is made up of smaller, more domestic-focused businesses, has returned around 9% per annum. If you’re willing to take on a bit more risk, some of the UK’s top small-cap funds have returned 12% per annum over the past decade.

Thanks to the power of compound interest, these rates of return will help any investor grow a relatively modest regular investment into a substantial retirement pot.

Double or nothing

At the time of writing, the annual rate of State Pension for an individual with a full National Insurance contribution record is £8,767.20.

According to my calculations, to be able to double this figure in retirement, a saver will need £219,180 saved by the time they decide to quit the rat race.

To hit this level using the FTSE 100, my figures tell me that a saver would need to put away £200 a month, or £250 after tax relief for 26 years assuming an annual rate of return of 7%. That works out at a daily contribution of £8.22. This calculation also assumes a retirement age of 66 (at the time of writing the State Pension age will rise to 66 next year).

If you use the FTSE 250 to invest, saving becomes a little easier. Assuming an annual rate of return of 9%, I calculate contributions of £180 a month including tax relief will be required to build a pension pot worth £218,000 over the space of 26 years. That works out at a daily contribution of £5.92.

And finally, investing in small-cap growth funds could help you hit this target with contributions of just £3 a day. Including tax relief, contributions of only £3 a day would add up to £114 over the space a month, which, assuming an average annual return of 12%, could mean a pension pot worth £232,000 over 26 years.

Don’t think 12% is possible? Well, the Liontrust UK Smaller Companies Fund has produced a 10-year annualised return for investors of 16% by investing in UK small-caps. The Aberforth Smaller Companies Trust Plc’s share price has returned 12.99% annually for the past decade and the Morningstar IT UK Smaller Companies index (an average of all small-cap focused UK investment trusts) has returned 12.8%.

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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.