How to build a £100k UK Pension Portfolio in 5 years – Ad | This is a paid partnership with PensionBee
We recently asked our communities on YouTube and Instagram what their total pension pots were, and the results confirmed something we’d always feared – Most people aren’t contributing enough into their pensions.
Although we already expected this to be the case, we were not quite prepared for the results that we received.
Of the 937 people who voted on our community tab on YouTube, 51% had pension pots of less than £10,000.
As you can see below, around 69% of the people who voted had a pension pot of less than £25,000.
We knew the demographics of our audience and wanted to cross-check the data on Instagram, so we posted the same question.
More than 2,000 people joined us for that conversation, and the results were similar to the one above.
We dug a bit into the data for the people with less than £10,000 invested and found that around 54% of people were aged below 35 and the remaining 46% aged above 35.
These results are shocking and say so much about the struggles people have with prioritising their future retirement.
The above results aren’t too dissimilar to what PensionBee found out when they recently surveyed 2,000 UK Citizens in March 2021.
They found that the average pension pot size for Gen X, Millennials, and Gen Z were £33,547, £22,049, and £21,765 respectively.
I know how hard it is to try to save into your pension in addition to managing life’s other priorities.
The struggle is real and more so now that we’ve all been living through a pandemic, which has worsened most people’s retirement plans.
It’s harder to contribute to a pension if you live in an expensive city like London, with a relatively higher cost of living.
It’s also a big struggle if you have a family or you’re in a situation where you’re the sole breadwinner and your partner isn’t working.
Finally, I’m aware of people who are self-employed or even those who are immigrants to the country who are starting from scratch to save into pensions and feel weighed down by the fact that they’re starting too late.
With any of these potential setbacks though, saving into your pension for your retirement goals requires a number of ingredients:
Today, I want to put myself in the shoes of a millennial with an average pension pot size and brainstorm some thoughts on how to possibly build a £100,000 pension in 5 years.
To begin, I’ll make some important assumptions:
- Age – 37 years old.
- Pot size – Assume a current pot size is £22,049 – Picking the figure from the PensionBee report.
- Current contribution – 5% of gross income and 3% from employer – total 8%. My employer matches up to 10%.
- Income – I’ll assume an income of £38,000 – Being the average London salary.
- Asset Allocation – 100% Equities (Global with a US bias)
- Investment Returns – 8% per annum on average.
Given the above assumptions, here is how I would go about growing a £100K portfolio.
GROWING YOUR UK PENSION POT IN 5 YEARS
Scenario 1 – 0% Contributions Per Annum
If I just left my £22,049 in an environment where it is invested in the stock market and generates an average return of 8% per year, then the rule of 72 tells me that it will take roughly 9 years to double my money to around £44,098.
I.e. 72 divided by 8 = 9 years.
However, I only have 5 years to raise £100K, not 9 years.
Scenario 2 – 8% Contributions Per Annum
Now let’s assume I just invested a total of 8% gross contribution (5% from me and 3% from my employer) i.e. 8% of £38K = £3,040 per annum or £253.33 per month).
If I earned an average return on my investment of 8% per year for 5 years, I’d end up with £50,669.17 after 5 years.
This tells us 3 things:
i) Our pensions pots are sensitive to increased monthly contributions,
ii) Compounding works better the more time we have on our hands,
iii) We won’t hit our goal of £100K on that level of contribution.
Most people typically don’t pause to do the numbers for their personal circumstances using a simple Pension Calculator.
In addition to that, most people don’t explore the benefits of using matched employer contributions (where available) to meet their goals.
I mean, why would you? Especially if you have no set goal that you’re working towards exactly.
You’d most likely want to live for today because you don't have the motivational drive to achieve your goals.
Now, imagine I convinced you to make certain changes to your lifestyle today, whilst also taking up the option of matched employer contributions, how might that change your financial life?
Scenario 3 – 15% contributions From Me and 10% from my employer. Total 25%
In this example, I’ve decided to take more of the free money from my employer by increasing my own contribution.
My employer has agreed to match me up to 10% from the current 3% that they put in. So, I’m gaining an extra 7%.
However, rather than just increase my contribution by 7% too, I want to go beyond this and do an additional 10% from my gross income from my original 5%, to make 15%.
My game plan here is to move home and move to the outskirts of London so that I can save a bit more money or rent.
This works well because I’m now able to work at least 3 days per week from home.
In this scenario where I have a whopping 25% of my gross income (i.e. 25% of £38K = £9,500 per annum or £791.67 per month) now going into my pension per year at 8% annual returns, what does that do to my pension pot?
You’d be amazed to know that this leads to a whopping £89,938 in 5 years from now, again, assuming that I started at £22,049.
That leaves us £10,062 short.
Being able to pay up to 15% of your gross salary into your pension requires discipline.
By this I mean, taking an honest look at your lifestyle and starting from scratch, with the goal of making savings where necessary.
It will require a reassessment of true ‘needs’ vs ‘wants’ in your life.
For example, your rent, electricity, gas, food and so on are true ‘needs’ in your life.
An international holiday, buying take away on autopilot, and getting an Uber here and there are examples of ‘wants’.
Most of us never make the connection between our focus on ‘wants’ and our lack of adequate preparation for our financial futures.
The other important discipline is to actually decide on a non-negotiable percentage that you Pay Yourself First.
Countless experts swear by the importance of paying yourself first, with 10% usually considered to be a good starting point.
Given the tax efficiency of pensions, it makes sense for it to be the chosen vehicle for preparing for retirement, provided of course that you’ve already got an emergency fund set aside.
Another part of discipline is about understanding who you are and what is most important to you.
If you inspect your life honestly enough, you’ll find that a number of costly financial decisions are likely to have been driven by the actions of other people.
E.g. Your friend has booked a holiday to Ibiza, and you want one too because of the Fear of Missing Out.
Or your next-door neighbour has recently bought a new car or redecorated their home, and you now feel you need to do the same too.
A huge part of the journey towards actually achieving our financial goals is to understand who we are (i.e. self-awareness) and be clear on what our priorities are and why.
You’ll recall from the analysis above that we had £10K left to potentially hit our £100K goal for a pension pot in 5 years.
Oh, and let’s not forget, it’s highly likely that we might not return an average of 8% for 5 years.
We may, in fact, return 6% per year on average, which means that the hole that we need to fill will likely be more than £10K.
In fact, re-running scenario 3 using 6% average annual returns instead of 8% leads to an expected pension pot of £84,373 instead of £89,938. So, a potential shortfall of £15,627 on £100,000.
What if we ran a scenario where my employer was not so generous?
Imagine that I did 15% contributions but my employer only did 5%, giving us a total 20%.
How does that change this?
Scenario 4 – 15% Contributions From Me and 5% From My Employer. Total 20%
20% of £38,000 is £7,600 per annum or £633.33 per month contributions to a pension.
Running those figures on a free compound interest calculator would result in a pension pot of £73,371 after 5 years assuming a £22,049 initial pension pot.
And this is also assuming a lower average annual return of 6% per annum and not 8%.
Again, this leads to a shortfall of £26,629. (i.e. £100,000 less £73,371).
Note: You can run the above scenarios using a retirement calculator, which assumes growth of 5% per year, plus inflation.
In all scenarios so far, we ended up with a shortfall of anything between £10,062 and £26,629 to hit a £100,000 pension pot in 5 years.
This is exactly where creativity comes in when it comes to solving life’s problems.
You see, before I started The Humble Penny, one thing I understood very early on is the link between solving problems, creating value, and making money.
It sounds very simple when you think about it, but most people don’t even get this far.
Given our analysis so far, I now know that if I put my worst-case scenario into action, I’d have an estimated £26,629 shortfall in 5 years.
To keep things even more realistic, I’d round that shortfall up to £30,000 and see that as my new shortfall to fill.
That’s £30,000 that I need to find outside of my day job over 5 years.
On a straight-line basis, that is £500 per month for 5 years.
£500 per month works out to be £125 per week.
In the worst-case scenario, I would aim to get a part-time gig at £20 per hour and do 6.25 hours per week to make that money.
That way, I’d make £125 per week and won’t worry about tax as my goal is to pay the amount into my pension (and I’d get the basic rate tax back).
I see the part-time job as the low-hanging fruit.
If I really wanted to go all out and work smart rather than hard, I’d start a side online business.
I’d focus on creating either a Service-Based Online Business using existing skills e.g. Coaching or Consulting (using your existing skills) with the sole aim of making me at least £500 per month.
Or I’d focus on creating a Content-Based Online Business and out of that create low ticket digital products (priced at around £7 – £19 each) and aim to sell between 25 and 100 per month.
The beauty of the latter is that you do the work once, and your sales then get generated from your marketing efforts using affordable tech e.g. creating evergreen sales funnels, etc.
It also means that you don’t have a cap on your side income possibilities.
I’d ideally earn the income via a limited company (as I’d expect my income to rise over time) so that I can have as much of it paid out to me into my pension via a company scheme as it’s 100% tax-deductible.
In all, your goal would be to average at least £500 per month.
Or £833 per month, if I assume that the first 2 years of the 5 years is my building phase of your side business with no income, and then with a forecast of £833 a month for the remaining 3 years to make up £30,000.
There are also many other things you can explore, such as:
- Negotiating a pay rise of 10 – 20% over 5 years
- Agreeing to a bonus being included in your compensation
- Moving jobs and earning more that way, provided your new employer matches your contributions, etc.
You’re hopefully starting to see where I’m going with all this.
In conclusion, the journey to building a £100,000 pension pot in 5 years is completely possible.
Even a 1% additional contribution to your pension makes a huge difference, and if you can get employer-matched contributions, even better.
You’ll have more clarity of your pension situation if you have it all consolidated into one pot for ease of management.
Although I have used an average London salary of £38,000, you could also apply the same thinking to an average UK salary of £29,000.
Stay realistic with your assumed rates of returns too and remember inflation (which you can counter by increasing your contributions slightly each year).
There are various funds that you can invest into to earn a 6% or 8% average annual return on your investments.
PensionBee, for example, recently published stats on the performance of their funds over the last 5 years to 2020, and they averaged annual returns of between 5% and 10% across their plans.
You can read the publication here
The journey to £100K is made even more possible if you set yourself some milestones on the journey and gamify it.
In all, remember the 3 ingredients you need – Planning, Discipline, and Creativity.
What To Read Next On UK Pensions>>
Will you take on the challenge of building your pension pot to £100K+ in 5 years? Let me know in the comments below
Remember that past performance is not a guide to future performance. The value of your investment can go down as well as up, and you may get back less than you invest. As with all investments, capital is at risk.