Becoming a pension millionaire might seem like a pipe dream, but on paper it may be more attainable than you think.

Combining regular and cost-efficient investing with time in the market and tax relief could produce a sizeable sum of money by the time you retire. For example, our analysis shows that a 25-year-old who contributes less than £100 a month into a low-cost self-invested personal pension (SIPP) and gradually increases their contributions over time could hit the million-pound mark after 40 years.

We’ll expand on that below. In part two, we’ll look at how much income a million pounds might produce in retirement. But, first, it’s important to understand the key role that a pension, including a SIPP, can play in your million-pound quest.

Unlike with an individual savings account (ISA), where you can cash in your investments and take your money out at any time, with a SIPP your money is locked away until at least age 55 (rising to 57 from April 2028). That means there is less chance of being side-tracked.

The government also tops up your pension contributions with tax relief, which means you get an extra £20 paid automatically into your pension for every £80 you invest. If you’re a higher- or additional-rate taxpayer, you can claim back an extra £20 or £25, respectively, via your annual tax return.

So, not only is more money going into your pension in the first place, but there’s the opportunity for it to grow over a longer period of time. That means you can harness the full power of compounding, which is when you earn returns on the money you invest as well as on the returns themselves.

This is ideal if your goal is to retire early¹ or to retire comfortably with a sizeable pension pot.

How much do you need to save?

What does reaching the magic million with a SIPP look like in practice?

To keep it simple, consider a 25-year-old basic-rate taxpayer who wants to hit the one-million-pound mark by the age of 65. How much of their take-home pay would they need to save in a SIPP each month to get there?

The answer, based on current tax rules and assuming an average annual investment return of 5% after costs, is £552 a month or £6,623 a year. If they paid half a percentage point more in costs, though, they would need to save £623 a month to hit the one-million-pound mark. Fees eat into your investment returns, so the higher the fee, the more money you need to contribute to achieve the same overall sum. This underlines why it’s so important to make sure your SIPP is a low-cost SIPP.

Of course, it’s unlikely that many 25-year-olds would be willing or able to forego this much of their current spending power to support their lifestyle 40 years down the line.

That’s why it’s important to consider increasing your contributions gradually, depending on how your career unfolds and your earnings, hopefully, grow. For example, our 25-year-old could have also hit the one-million-pound mark after 40 years by contributing just £87 a month (or £1,047 a year) in a low-cost SIPP to begin with and then increasing this amount by 10% a year².

Crunching the numbers further

But what if you’re older than 25 or want to retire before 65?

The good news is that, in some respects, our simplified example above overstates the million-pound challenge. This is because we didn’t account for any of the additional pension savings that you might get through a workplace pension scheme³. We focused on how you could do it with just a SIPP, which is fine if you’re self-employed but isn’t the position many employees find themselves in. 

So, in the table below, we’ve crunched a few more numbers. In each of the scenarios described, we’ve assumed the investor has a workplace scheme as well as a SIPP and that they benefit from combined (employer and employee) statutory minimum contributions of 8% of their salary into their workplace scheme. In most cases, they have already built up some retirement savings too. 

In each case, how much more would each individual need to contribute each month to their SIPP to get to a million pounds overall?

For the sake of argument, the data below assumes that any additional contributions are made into a SIPP rather than a workplace scheme. We’ve also assumed that the individual’s salary is their only source of income and that it increases by 3% a year. The same income tax bands as exist now are used to calculate the potential tax relief. Again, the investment return after costs is assumed to be 5%.

How much more would you need to contribute to reach £1 million?

Source: Vanguard. Notes: A 5% investment return after costs is assumed along with the minimum auto-enrolment of 8% of your salary between £6,240 and £50,270. *Required gross contributions would exceed annual earnings, which would go against current tax rules.

By glancing across the numbers above you might spot a scenario closer to your own circumstances. If so, you can assess whether building anything like a million-pound pension is feasible or something you could aim for.

Clearly, you’re not going to get there through statutory workplace pension contributions alone, which is where opening a low-cost SIPP can help. Our SIPP, the Vanguard Personal Pension, is covered by our annual account fee of 0.15%, which is capped at a maximum £375 per year. See a full breakdown of our costs.

Just remember to check first if your employer has a policy of paying more into your workplace pension if you increase your personal contributions too. Employer matching should always be taken advantage of before contributing to a SIPP because it can give you an additional leg up. 

So, now you know what it might take to become a pension millionaire. All that’s left is to consider what sort of retirement income such a sum of money would provide and for how long. That is the topic of part two in this series.

¹ The earliest age you can draw from your pension is 55, rising to 57 in 2028.

² By the final year in our example, the person would be paying £53,827 (including basic-rate tax relief) into their pension – or close to the current (2024-25) annual pension allowance of £60,000. Excluding all tax relief, that would equate under current rules to total net contributions of about £43,000 or £32,000, depending on whether they were higher-rate or additional-rate taxpayers at the time, plus tax relief.

³ The minimum contribution for the tax year 2024-25 is 8% of your salary comprising 5% from you (including tax relief) and 3% from your employer on anything you earn over £6,240 up to a limit of £50,270.
 

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