What’s the secret to becoming a pension millionaire? Well, it turns out they are not the adventurous risk-takers you might imagine.
New research probing the investment choices of people with £1million-plus pension pots found they favour quality actively-managed funds and blue-chip stocks.
They are more likely than less well-off investors to hold individual shares, but they still prefer large and well-established UK businesses.
And when it comes to funds they tend to like proven names and income generators, according to analysis of the 1,500 account-holders at broker Hargreaves Lansdown who have managed to accumulate private pension holdings exceeding the £1million mark.
TOP 10 SHARES AND FUNDS OF PENSION MILLIONAIRES REVEALED BELOW
Pension millionaires: It turns out they are not the big or adventurous risk-takers you might imagine
‘Pension investors definitely favour investing in the stock market, with direct shares accounting for almost half of all assets invested,’ said Nathan Long, senior pension analyst at Hargreaves Lansdown.
‘The other half is invested through funds, although there is a preference for funds that invest in shares rather than fixed interest [see below].’
Hargreaves also looked at investment choices before and after retirement, and discovered little difference when it came to share holdings, but a greater preference for income-seeking funds among those who had stopped work.
What is ‘fixed interest’?
Overall, Hargreaves’ pension millionaires only have 10 per cent of their holdings in tracker funds, which are a cheap and easy way for mainstream investors to get exposure to stock markets.
That could be because wealthier investors are more willing to pay extra for active fund management, and do the legwork necessary to research the best funds for their portfolio.
However, Hargreaves points out that many investment brokers offer best buy fund tables that are easily available to all investors. It runs the well-known Wealth 150 list on its site.
The top investment holdings of pension millionaires overlap a lot with those of Isa millionaires, which were previously revealed by Hargreaves.
However, the firm says only 15 of the 168 Isa millionaires covered in that research were also pension millionaires and therefore included in the latest study as well.
Read more here about the investment choices of those with at least £1million in a stocks and shares Isa.
But note that while it’s always interesting to get an insight into the investments of the wealthy, it’s not advisable to try to copy their holdings. You should always do your own research and decide how a share or fund fits with your existing investment portfolio, strategy and goals.
Read our free guide to becoming a successful investor, written by This is Money’s Editor Simon Lambert.
Top funds held by pension millionaires
Big names: Managers Terry Smith and Neil Woodford are prominent, just as in many mainstream fund bestseller lists. Hargreaves looked at funds held in the run-up to retirement, and those held in drawdown plans which provide an income in old age.
Top shares held by pension millionaires
Blue chips: There is little difference between the stocks held before and after retirement
A £1million pension fund can provide a sustainable income of around £40,000 a year, says Hargreaves.
‘Building a million-pound pension may not guarantee a lifestyle of luxury yachts and fast cars, but it will offer freedom and flexibility through your final working days and the possibility to cascade savings down to the next generation,’ explains Long.
‘Pension millionaires are not big risk takers when it comes to investing their money, instead favouring tried and tested approaches. They tend to seek out quality active managers when investing in funds, often those looking to provide an income stream.
Is your work pension up to scratch?
Six ways to tell if your retirement savings are in a duff investment fund. Read more here.
‘Whilst the pension millionaires tend to be more likely to hold individual shares, they certainly don’t seem to be taking big risks, with large UK businesses that have stood the test of time proving most popular.’
How do YOU become a pension millionaire
You will need to commit some sizeable savings, but there are two key ways to give yourself a fighting chance – start early and improve your investment returns, says Hargreaves.
When it comes to starting early, the table below shows the monthly cost of building a million pound pension by age 68, when starting to save at age 22 after inheriting varying pension pot sizes. The investment return is assumed to be 7 per cent throughout.
‘Whilst building up monies before you are an adult is outside of your control, it goes to show just how valuable setting up a pension for a child can be. Grandparents need struggle with Christmas gift ideas no longer,’ says Long.
Again looking at starting to save at age 22, Hargreaves calculated below how much you would need to contribute each month, to the nearest £5, with differing investment returns, to build a £1million pot.
Hargreaves also offers the following tips:
* ‘Default’ work pension funds tend to be conservatively managed as they have to take a one-size-fits all approach, so consider what others are available in your scheme
* Invest more adventurously or use some of the best fund managers available, or both.
* Check out brokers’ best buy lists and research the top ones available
* Consider paying for financial advice.
Ten steps to building a million pound Isa portfolio
Many of Hargreaves’ tips on building a £1million savings pot hold true for pension investors too. Read more here.
TOP SIPPS FOR DIY PENSION INVESTORS