Becoming a SIPP millionaire might seem like a pipe dream, particularly in view of the cost-of-living pressures many people are facing.

But on paper it may be more attainable than some people think when you combine regular and cost-efficient investing with time in the market and tax relief. A 25-year-old who is willing – and able – to contribute less than £100 a month into a low-cost self-invested pension (SIPP) and to incrementally grow their contributions, for example, has the potential to hit the million-pound mark after 40 years.

We’ll expand on that below. In part 2, we’ll also look at what a million pounds might get you in terms of spending power. But, first, it’s important to understand the key role that a pension, including a self-invested personal pension (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 in until your 50s¹, at the earliest, so there is less chance of being side-tracked.

The government also tops up your SIPP contributions with tax relief, which means you get an extra £20 paid automatically into your pension for every £80 you invest. And that’s just for starters because if you happen to be in a higher tax bracket you can claim back even more through your annual tax return^{2 3}. 

So not only is more money going into your pension in the first place, it can also work harder for you for longer, boosting the amount your retirement wealth can grow through the power of compounding⁴.

This is ideal if your goal is to retire early⁵ or to retire comfortably with a sizeable pension pot.

Simplified, hypothetical scenario

But what might reaching the magic million with a SIPP look like in practice? And what kind of retirement income would it give you?

We examine the second question in more detail in this follow-up article. In this article, we want to focus on the first question.

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

The answer, based on current tax rules and assuming an average annual investment return after costs of 5%, is £552 a month or £6,623 a year. Pay half a percentage point more in costs, though, and it would have to be £623 per month, underlining why it’s so important to make sure your SIPP is a low-cost SIPP.

Of course, it is unlikely that many 25-year-olds would be willing or able to forego so much of their current spending power to support their spending power forty years down the line.

That is why it’s important to increase 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 year⁶.

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 might accrue to a person through their workplace scheme⁷.  We focused only on how you could do it with just a SIPP, which is fine if you are 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 statutory minimum contributions of 8% of 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 pension 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 workplace scheme⁸. We have also assumed that a person’s salary is their only source of income and that it improves by 3% a year, which is line with the average wage growth seen in the UK over the last two decades. 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 auto-enrolment 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. All you need add to that are our fund management costs. See full breakdown.

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. Such contribution matching should always be taken advantage of before contributing to a SIPP as they 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 Aged 55, rising to 57 after 2028.

² If you pay higher-rate income tax (40% or 45%), you can claim additional tax relief on your SIPP contributions. You can claim back an extra £20 or £25, respectively, via your annual tax return, which means it’s possible to pay as little as £55 into your pension to generate a £100 investment. SIPP allowances and pension tax-relief explained.

³ Unlike with an ISA the majority of your withdrawals from a pension are taxable.

⁴ Compounding is like interest on interest and helps to accentuate the growth of your capital.

⁵ The earliest age you can draw from your pension is 55, rising to 57 in 2028.

⁶ 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 (2023-24) 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.

⁷ The minimum contribution as at 2023/24 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.

⁸ Some employers may pay more into your workplace pension scheme if you agree to increase your contributions too. Such contribution matching should always be taken advantage of fully, where available, before contributing to a SIPP.