Four ways to save £1 million in pensions, ISAs…and even for your kids

Tom Selby
4 February 2021

Although recent headlines have focused on people looking to make a fast buck riding the Bitcoin boom or cashing in on Reddit-induced spikes in stocks like GameStop, for most people saving and investing remains a get-rich-slow scheme.

You don’t have to risk everything gambling on momentum stocks to become a millionaire. With a bit of careful planning, regular saving in tax-efficient products can deliver a significant pot of money over decades.

As we approach the deadline for using this year’s ISA and pension allowances, AJ Bell takes a look at how long it could take for investors to build a fund worth a cool £1 million.

1.    Pension millionaires  

•    Someone who is able to make the maximum annual SIPP contribution excluding tax relief of £32,000 could build a fund worth £1 million in just 17 years
•    That level of saving will be beyond most people, but someone saving £6,000 a year or £500 a month into their pension – increasing each year by 2% as their salary grows - could have a £1 million pot in 38 years’ time
•    Start saving £300 a month and increasing it by 2% each year and it could take 47 years to reach £1 million

2.    ISA millionaires

•    Someone who is able to max out their ISA subscription of £20,000 each year could be a millionaire in 27 years
•    If they were able to save £1,000 a month – increasing each year by 2% - they could have a £1 million tax-free pot in 31 years or if they saved £500 a month it would take 42 years 

3.    Millionaire couples

•    Couples could achieve the £1 million figure with comparatively modest contributions
•    If each person pays in £3,000 a year or £250 a month into a SIPP (boosted to £3,750 via tax relief), increasing each year by 2%, a couple could have a joint fund of £1 million in 38 years
•    The same couple saving the same amount into an ISA could have a joint fund of £1 million in 42 years

4.    Child millionaires

•    Paying into junior savings products could get your children, grandchildren or great grandchildren on the road to financial security 
•    Paying the maximum £2,880 a year into a Junior SIPP (increased to £3,600 via tax relief) from birth until age 18, with no further contributions, could deliver a fund worth £1 million by age 71
•    Paying the maximum £9,000 a year into a Junior ISA from birth until age 18, with no further contributions, could deliver a fund worth £1 million by age 50

Data tables and assumptions used provided below

Tom Selby, senior analyst at AJ Bell, comments: 

“People who make the most of the tax benefits of pensions and ISAs, while harnessing the power of compound investment growth, can build up serious savings wealth over their lifetimes.

“Financial security doesn’t have to be the preserve of the very richest in society. With a bit of planning and careful budgeting even savers with relatively modest incomes could become pension or ISA millionaires. 

“If you take someone who is 30 years old today, annual SIPP contributions of £6,000 a year – boosted to £7,500 by tax relief and rising each year by 2% as their salary grows – could deliver a retirement pot worth £1 million by age 68. 

“If the same person put their money into an ISA they could hit the £1 million mark by their 72nd birthday, with the entire fund available tax free.

“While this is not going to be realistic for everyone, if you start early and aim to increase what you pay in by a modest amount each year, it could turn into a seriously chunky pot when you reach retirement. 

“If you consider a couple each making annual SIPP contributions of £3,000 – with an extra £750 added via tax relief and contributions again increasing by 2% each year – they could reach a combined fund of £1 million in 38 years. 

“If they made the same payments into an ISA, meanwhile, they could have a tax-free pot worth £1 million in 42 years.”
Getting your kids off to a good start

“For lots of people getting their children, grandchildren or even great-grandchildren into the savings habit will be a priority. Junior SIPPs and Junior ISAs are the vehicles of choice for most people, offering similar tax advantages to their adult counterparts. 

“In fact, if you fund a Junior ISA to the maximum of £9,000 from birth until age 18 and then no more contributions are made, it could be worth £1 million by the time the child reaches their 50th birthday. If you did the same with a Junior SIPP – which has an annual allowance of £2,880 (topped up to £3,600) – it could be worth £1 million by the time they reach 71.

“Clearly such significant contributions won’t be possible for most people, but the key message is that regular saving – however much you can afford – has the potential to deliver serious financial returns in later life.”

Data tables

Assumptions: 

•    4.5% per annum real investment growth post-charges 
o    This is based on the inflation adjusted return from equities over the past 50 years of 5.3% taken from the 2020 Barclays Equity Gilt Study and taking off 0.8% for charges  
•    Annual subscriptions/contributions increase by 2% per year (unless already at the limit)
•    Junior SIPP and JISA contributions maxed out until 18th birthday with no subsequent contributions
 

  1. Pensions
           

Annual SIPP contribution (excluding tax relief)

Annual SIPP contribution (including basic rate tax relief)

Years to save £1 million

 

£32,000

£40,000

17

 

£6,000

£7,500

38

 

£3,600

£4,500

47

 

           
 

 

             
  1. ISAs

Annual ISA subscription

Years to save £1 million

£20,000

27

£12,000

31

£6,000

42

 

Annual SIPP contribution each (excluding tax relief)

Annual SIPP contribution each (including basic rate tax relief)

Years to save £1 million as a couple

£3,000

£3,750

38

 

 

 

  1. Couple

Annual ISA subscription each

Years to save £1 million as a couple

£3,000

42

 

 

 

 

  1. Children

Annual Junior SIPP contribution until age 18 (excluding tax relief)

Annual Junior SIPP contribution until age 18 (including basic rate tax relief)

Years to save £1 million

 

£2,880

£3,600

71

 

 

Annual Junior ISA contribution until age 18

Years to save £1 million

£9,000

50

Tom Selby
Senior Analyst

Tom Selby is a multi-award-winning former financial journalist, specialising in pensions and retirement issues. He spent almost six years at a leading adviser trade magazine, initially as Pensions Reporter before becoming Head of News in 2014. Tom joined AJ Bell as Senior Analyst in April 2016. He has a degree in Economics from Newcastle University.

Contact details

Mobile: 07702 858 234
Email: tom.selby@ajbell.co.uk

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