How to build a £20,000 SIPP from scratch – starting with just £50 a month

Finding spare cash for retirement can be difficult when the bills leave little room to save.

But paying just £50 a month into a pension could be enough to build a £20,000 pot in around 16 years, with tax relief and investment growth helping it along.

Increase that to £100 a month and the target could be reached in roughly a decade. Those figures depend on investment performance, but show what starting small could achieve over time.

How quickly you get there will depend on investment performance and the fees you pay. You usually can’t access pension savings before age 55, rising to 57 from 6 April 2028 - but with care costs on the increase, it’s vital to plan retirement savings too.

What is a SIPP?

A self-invested personal pension, or SIPP, is a pension you open yourself, choosing a provider and how your savings are invested.

Some platforms offer ready-made portfolios for those who would prefer help with investment decisions; others allow you to manage them individually or create a mix you can add to equally each month.

You can have one alongside a workplace pension, making it an option for topping up retirement savings - as well as being vital for self-employed people without an employer paying in.

Zohaib Mir, financial planner at EQ Investors, noted: “£20,000 won't fund a retirement. But it's a milestone worth taking seriously - proof a habit has taken hold, with decades of compounding still ahead.”

How much do you need to pay in?

Basic-rate pension tax relief gives eligible contributions a boost. Pay £50 into a SIPP and the provider claims another £12.50 from HMRC, bringing the total to £62.50.

Although the relief is described as 20 per cent, that’s calculated on the total contribution. It therefore adds 25 per cent to the amount leaving your bank account.

The below table assumes annual investment growth of six per cent before fees and basic-rate tax relief. Charges would increase the time needed to reach £20,000, making important to choose the right platform which doesn’t overcharge you on fees.

These are illustrations, rather than forecasts of course. Actual returns will fluctuate, tax relief takes time to arrive and, importantly, inflation will reduce what £20,000 can buy a decade or more from now.

Sarah Coles, head of personal finance at AJ Bell, says: “Building a pension pot can feel daunting, but the key is to get started with whatever you can afford, as soon as you can afford to do so - and then to keep going.”

Claiming tax relief owed

For someone eligible for 40 per cent tax relief on the full contribution, paying £100 into a SIPP brings a £25 top-up inside the pension and another £25 of relief to claim from HMRC.

That leaves £125 invested at an effective personal cost of £75. The additional relief does not automatically enter the pension and needs to be claimed.

The amount claimable depends on how much income is taxed at the relevant rate.

Scotland has different income tax bands, while pension contributions are also subject to earnings and allowance rules.

Pension priorities and choosing investments

Before opening a SIPP, check whether your workplace pension offers extra employer contributions if you pay in more. Making full use of any matching scheme could give your retirement savings a head start - it’s effectively free money for you.

Mir also highlights the importance of accessible emergency savings and tackling expensive debt before committing extra money to a pension. Money needed for an unexpected bill should not be locked away for retirement - but the need to save for your later years is real and shouldn’t be underestimated.

Opening the account is only one part of the job - you’ll need to choose where your money then goes.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says: “If you are in a personal pension you may find your contributions remain in cash until you make a decision as to where they will be invested.”

For beginners, Mir favours spreading investments widely. “A single multi-asset or globally diversified fund is often the right place to start,” he says.

A global share fund spreads money across companies and countries, while a multi-asset fund can include bonds alongside shares. Choose a balance suited to how long you have until retirement and how much investment risk you can accept.

Keep charges under control

Compare the platform fee, investment fund charges and dealing costs. Check for minimum fees, too, as well as FX fees where applicable.

Mir says: “A flat platform fee that looks negligible on a large portfolio can take a real chunk out of £5,000.”

An illustrative £60 annual platform fee alone would consume 1.2 per cent of a £5,000 pot, before fund charges. Some platforms may offer fee-free accounts, on the other hand. Check which suits your needs best, especially if starting out.

Once everything is set up, choose an affordable regular payment amount and review it when your income changes. Reaching £20,000 is a useful first target to keep in mind.

Then, simply continuing to contribute gives those savings even more time to grow.

When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.

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