'How do I turn my £270,000 pension into £2mn?'

It is hard to predict how much you might need in your pension, but aiming high is always the best way, especially if you can afford to tuck money away while you're earning. Add the right balance of investments, and you can prepare for a comfortable retirement while meeting your day-to-day needs.

Ian, 35, wants to know if he and his wife, Harriet, also 35, can retire in 30 years with a £2mn pot. “We are both putting significant contributions into our workplace pensions on the premise that salary sacrifice is the most cost-effective way to save for the long term,” he explains. “We save £2,700 a month by combining our and our employers' contributions.” 

Ian earns £50,000 a year and Harriet £80,000, but Ian contributes 25 per cent of his salary to his workplace pension, well beyond his employer’s 6 per cent match. Over the past 10 years, the pair have built a combined pension of £272,000, with Harriet accounting for £175,000. “We would like to make a 6 per cent return each year until we retire,” he says. At 65, the couple plan to put their pensions into drawdown and withdraw 4 per cent annually.

Ian has picked his funds, while his wife’s pot is invested in her workplace pension’s global shares strategy. His strategy has around a third of the pot in Vanguard Lifestrategy 100% Equity (GB00B41XG308) and his monthly contributions go straight into that. In addition, he has a selection of UK and global equity funds, and one India strategy.

“I have several active satellite funds focused on areas I believe will grow in the future, including technology, India and the UK market which I believe (or hope) is undervalued,” he explains. He is curious as to whether he has struck the right balance or if he has overcommitted to any geographical area or theme. He also wonders whether he should branch out into private equity or emerging markets.

Aside from this, Ian is worried that the couple are not using their Isas enough to avoid paying tax when they retire. “I worry that the pension tax-free lump sum limit [currently £268,275] won't be increased in line with inflation, and in 30 years this could be negligible in real terms,” he says. “Should I use my stocks and shares Isa to shield a greater proportion of my retirement pot from tax?” He has only £400 invested in an Isa, while Harriet has £10,000 in a cash Isa.

As a start, the couple have opened Lifetime Isas (Lisas) to supplement their pensions. Ian has invested £35,000 into his, with the contributions going into a low-cost global ex-UK index tracker, while Harriet has invested £1,000. By 65, they hope the Lisas will be worth £150,000 each.

Ian considers himself to have a high investment risk tolerance and is prepared to lose up to "40 per cent in a year so I can remain 100 per cent invested in stocks”.

The couple also own their home, worth £570,000 with an outstanding mortgage of £255,000, which will be paid off in 10 years as they overpay their mortgage by £1,000 a month. Ian and Harriet have a four-year-old son who they would like to support through university. “As we hope to live off the income generated by our pensions, we hope to leave him what is left as an inheritance,” Ian adds.

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES

Zoe Gillespie, investment manager at RBC Brewin Dolphin, says:

The first question we need to answer is whether you and Harriet can realistically reach your £2mn retirement pot goal by 65. It is a bit of an ask, but with a starting point of around £272,000, a reasonable level of contributions from your combined salaries, and a good time horizon, it is certainly achievable. 

Broadly speaking, the advantage of an Isa over a pension is its accessibility. But, in terms of building up the ambitious sum described, contributing to a pension is the best option. The tax relief provided, either by salary sacrifice as you use, or by the 20 per cent top-up the government provides on personal pensions, can add up over time. 

Investment growth is going to be key. You're aiming for 6 per cent per year and, while future returns may differ, historically the stock market has delivered in excess of that – although before fees are paid.

The Vanguard LifeStrategy 100% Equity fund is a good core holding and has delivered the kind of returns you are looking for over the past five years and is up around 50 per cent. The fund also has a relatively low ongoing charge of 0.22 per cent. 

There are a couple of things to note about the LifeStrategy fund, though, as it is essentially a combination of other Vanguard funds and exchange traded funds (ETFs). It is quite heavily skewed towards the UK, which represents more than 25 per cent of its exposure. Although you favour the UK, you might have too much in one market when you factor in the holdings in Fidelity Special Situations and Royal London Sustainable Leaders Trust. 

While you enjoy selecting active funds, consider the value they add to your portfolio. It is a good idea to have a mix of funds, but not at the risk of duplication. Standard Chartered, for instance, features in the top 10 holdings in your Fidelity and Royal London funds and will also be in the Vanguard FTSE All Share and FTSE 100 ETFs, which make up a substantial part of the LifeStrategy fund. 

You favour India – a market that has done well recently – but we generally don’t recommend single-country exposure for emerging markets. Instead, take a regional approach. Invesco Asian (GB00B8N44Q86) covers all bases through a blended set of investments and has been among the top quartile of performers in its category over the past five years. 

The portfolio is lacking exposure to small- and mid-cap stocks – these can be good sources of growth. The Abrdn Global Smaller Companies fund provides some of that but has performed poorly in recent years. An alternative could be Artemis US Smaller Companies (GB00BMMV5766), which has done far better and would help balance your outsized UK exposure. 

You mention private equity, which is a much higher risk and generally more expensive asset class to invest in. That said, private equity group 3i (III), an investment trust, has performed strongly over the past few years and is generally considered among the FTSE 100’s top companies.

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Lucie Spencer, financial planning director at Evelyn Partners, says:

Given your current pension savings and contributions, you are on track to exceed their £2mn pot target. Provided you keep putting £2,700 into your pension pot monthly for the next 30 years, at an assumed growth rate of 6 per cent net of fees, your pot would be worth roughly £4.35mn in nominal terms by 2054. However, accounting for inflation, assumed at 2 per cent a year, the pot would be worth about £2.8mn in today’s terms.

There is no way of knowing what the tax-free pension lump sum will be in 2054, or even whether it will still exist, but current tax relief on your pension contributions will benefit from many years of investment returns. This makes pension saving beneficial even if there is a tax to pay on access.

Your savings are currently locked in for at least a couple of decades, so it's worth remembering that Isas can be valuable in providing a flexible tax-free income in retirement and are accessible in a way that pension savings are not, although you do have cash as well. You won't be able to touch your Lisas until you are 60.

You could look at using some of the remaining £16,000 of the annual Isa allowances, but until you have paid off your mortgage, I don't think you have any leeway in your budget to do this, so it would mean cutting back on monthly pension contributions.

But even at a pension contribution rate of £1,600 a month, rather than the current £2,700, making the same assumptions as above, your combined pots would be on course to top £2mn in real terms by 2054. That is by no means to say you should reduce contributions, but it illustrates that you do have a bit of leeway.

You should also complete expression of wishes form for your pensions, providing your beneficiaries with options around how they receive and use the funds when you pass away.

You are taking a relatively high level of risk with a 100 per cent stock allocation in search of long-term returns. As you are early in the accumulation stage of pension saving, this is not necessarily a bad strategy. However, you might want to reassess this as you and Harriet draw closer to retirement.

You are hoping to support your son with his university costs, so investigate Junior Isas. Each child has a Jisa allowance of £9,000 per year, which they can then draw down from in the future, tax-free. As you have a young son and are both relatively high earners, I would also recommend you look to ensure you have income protection in place.