This is a short post for those who are not interested in pensions, or investing, or financial freedom. The ones who go through life spending their earnings and not giving any thought to retirement.
If you would like to retire with a bit more comfort that just your State Pension, follow these steps:
- Open a SIPP account at InvestEngine.
- Set up a monthly direct debit in there.
- Set it to buy a fund. (Here I must tread carefully. I must not tell you what to buy, but I can point out that the FI community likes passive global equities funds where you simply try to own the whole stock market, such as Invesco FTSE All-World FWRG.)
- The monthly amount depends on your age now, see table below:
Age Amount per month
40 £92
41 £100
42 £108
43 £118
44 £128
45 £140
46 £153
47 £167
48 £183
49 £201
50 £222
51 £244
52 £270
53 £301
54 £335
55 £376
56 £424
57 £481
58 £550
59 £636
60 £743
61 £882
62 £1,068
63 £1,332
64 £1,725
65 £2,388
66 £3,708
67 £7,682*
* this is above the contribution limit.
For clarity, these are the amounts to contribute based upon when you're starting. You just give that figure a little uplift each year to account for inflation. So if you're starting at 40, pay in £92pm and next year nudge it up to £95 or so. You don't have to increase it by going down this list - that would be brutal. These later figures are for the late starters who must catch up.
This isn't guaranteed, it may fall short, but it is your best chance.
That's it, you can go.
Oh, you want to know why? Oh okay then. I'll explain. But if you really are bored with this stuff you can skip this bit.
This is based on you having spending of £16k per year in retirement, meaning an after-tax top-up of £4k over your State Pension.
(These figures are in today's spending power. The actual numbers may change with inflation but this plan should give you the same spending power as £16k in 2025 money.)
Why £16k? Well, a full State Pension is about £12k, and that gives a bit of a meagre existence. Assuming that you are living slightly more cheaply as a couple, £16k should be the boost needed to give you a reasonable standard of living. It is probably enough to add a car to your lifestyle, plus the odd holiday and some meals out.
I've done a separate post about what a £16k retirement looks like.
The calculations
Figuring out the income tax on the pension withdrawal for the annual top-up:
£16,000 - £12,030 State Pension = £3,970 to top up.
Taxfree personal allowance is £12,570. Anything above that will be taxed at 20%, excepting 25% of any personal pension withdrawal which is taxfree.
If you draw £4,550 from your personal pension, 25% is taxfree: £1,137.50.
The 75% taxable portion of the withdrawal is £3,412.50.
£12,570 - £12,030 = £540 remaining personal allowance.
3,412.50 - 540 = £2,872.50 to be taxed at 20% = £574.50 tax.
4550 + 12030 = £16,580 - £574.50 tax = £16,005.50. Close enough!
Scaling this up to get a target
I went onto FIREcalc.com and put in a spending figure of £4550, 32 years (ie from age 68 to 100) and by trial and error found that a pot of £119,000 gives a 95% chance of success.
I figure a 95% success rate is about right to strike for. It would take another £17k to reach a 100% success rate, and I figured that this is pretty unlikely, given that few of us will live to 100, and by that point we're likely to have released equity from our home or reduced our leisure spending.
Then I worked backwards to see how much you'd need to invest monthly, from a variety of start ages, to reach this target. I did this using a Compound interest calculator, and some trial-and-error.
Notes
- This assumes you get your State Pension on your 68th birthday. I know they're using a sliding scale of birth dates and adjusting pension dates upwards, so this is a rough guide for everyone rather than exact for you.
- The monthly amount is net - it gets scaled up with some government money.
- I'm assuming you have no other personal pension. If you do, you'll be able to reduce these figures somewhat, but look at your funds and fees to make sure it's performing.
- You may get a shortfall, you may get an excess.
- You need "relevant earnings" to match these pension contributions, such as salary, but excluding rents.
- That InvestEngine link is a referral link. If you use it, you apparently get a freebie and so do I.
Want to read more of my ideas? I have a new book out - Build Your Retirement, 5 ways to improve your wealth in retirement. Or other books here.
Or you may prefer my FIRE series for beginners.
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