“There is nothing around me but money, money, money.”— Stephen Richards
In a previous article I wrote about how to make a million quid, the easy way. In this article I’m going to expand on that slightly and give the nuts and bolts of what needs to be done.
First, let me quickly explain what a workplace pension is. As you work, you contribute a portion of your salary, minimum 5%, to your pension so that in the future, when you retire, you can use this money to fund your life once you no longer have a salary coming in from a job. Great!
Secondly, your employer makes a contribution to your pension as well, minimum 3%. Wonderful!
Thirdly, the government give you lovely tax relief on your contributions, so it doesn’t cost you so much. Brilliant!
Now, let’s get on with what needs to be done to be a pension millionaire.
- Get a job – The first thing you need is a job to benefit from a workplace pension. Without a job you can’t benefit from this.
- Get a good job – You want to get a job that pays a lot of money, and, remember, this is the important bit, you want to work for a company that contributes more that the standard 3%. My company contribute an amazing 7%. I have friends that work for companies that contribute 11% and 14%. Free money! I’ve even heard, although it can’t be true, The Bank of England contribute 55%!
- Don’t opt out – When you begin work you are automatically enrolled into your pension and your company will move 5% of your salary into your pension every month. Some idiots, and I have done this so learn from my mistake, opt out of the pension, meaning they get nothing. Don’t do this!
- Increase your contributions – The minimum you can contribute is 5%. As soon as you join the company tell them you want to contribute more that 5%. The more the better. Also, as you start a job you never really know how much you’re going to earn exactly. If you wait for the first couple of months to go by you’ll be used to earning a certain amount and won’t be able to go backwards and have less money a month. So contribute high, right away. Also, you should front load your pension as much as you can. More about that below.
- Contribute bonuses – If you receive any bonuses, commission etc, then contribute all of that to your pension. The reason being is you live without that money anyway, so you can still live without it. Also, the main reason is the tax relief the government give you. If you’re a basic tax rate payer of 20%, and you get a bonus of £100 the government take £20 of that. If you’re a higher rate tax payer of 40% the government will tax £40. But if you put the £100 bonus into your pension then the government don’t take the money and it all goes to your pension! Now increase that bonus to £1,000 or £5,000 or £20,000. On a £20,000 bonus you’ll be paying £8,000 in tax! If you put it in your pension you keep the £8,000!
- Move fund – If you’re not just about to retire, say 5 years off your retirement date, then you should move your pension into a more aggressive fund. This part scares people. But it shouldn’t. This is how your pension works. You contribute, your employer contributes and the government offers tax relief. That money get moved to a pension provider, like Legal and General, as an example. They then put your money into a default fund, which is in the stock market. The fund is made up of lots of companies or things such as government bonds or properties for example. These companies/properties, in the long run, go up in value and provide dividends, which means the money you contributed increases, resulting in you having more money when you retire. Now for the cool part. You can move into a more aggressive fund. By that I mean a fund that is 100% stocks. Stocks, historically, offer the best returns over the long run. So if you’re in a fund that is 100% stocks there is a better chance your money will increase to a quicker and higher rate, which, results in you having more money. This sounds difficult, but actually only takes a small amount of time and research. The fund I’m in has low fees, as fees eat into your money, plus the fund is a 100% stocks index fund, which is globally diversified, meaning it has companies in it all over the world. So if things go back in Japan, and I had all Japanese companies then my pension would temporary decrease. But as I’m globally diversified a problem in Japan does cause me a little blip, but nowhere near as much as if I was all in Japan. Do your research.
- Front load – This is key to becoming a pension millionaire. If you do all of the above, you should think about still increasing everything. So if you get two bonuses a year but only contribute one, then add the second bonus to your pension as well. This is front loading your pension. You are getting as much money in there as soon as possible to allow it the maximum time to grow. When investing in the stock market, time in the stock market is key, not “timing” the stock market. The longer you’re in the pension fund the more time it grows and compounds. If you’re contributing 10%, decide to contribute 20% for an entire year. It might feel hard at the start, but you’ll soon get used to living off less. Plus, the more you contribute the more tax relief you get. Also, by front loading you protect yourself against the future. Let’s say you front load your pension for the first five years of your working life. They you decide to have a child and end up having triplets, you’ll need money, so you might decide to reduce your contributions. But as you’ve front loaded that isn’t so bad. Or, let’s say you front load for 10 years and then decide on a career change that doesn’t pay as well, then you’ve protected yourself as you’ve got a lot of money in the pension from the last ten years. Or, let’s say you go self employed. You no longer have the contributions of you employer, you only have your own contributions and the tax relief. So, squeeze every penny you can as soon as you can. Front load.
- Carry forward – Each year there is an annual allowance of £40,000. So you can only contribute up to £40,000 in your pension per year. But, let’s say you’re a high flying sales person and you get a big bonus which will take you over the £40,000 annual allowance, but you do want to contribute it receive the tax relief. You can use the unused relief from the previous three tax years, starting with the oldest year. So let’s say three years ago, you only contributed £20,000 into your pension, then you could use that unused £20,000 annual allowance and add it to this year’s allowance, resulting in you receiving tax relief! Please note: I am aware that a lot of people won’t have this problem. But the question I ask to you is, why not? Go out earn more money. You work harder than most so you deserve more.
Do the above and when you retire you’ll be a millionaire, easy.