2050 Britain could have hundreds of thousands of millionaires if more people sign up to pensions saving schemes. Impossible? In fact, all it takes is £300 per month.

If a couple aged 25 both start saving £300 per month, then by the time they reach the official retirement age of 68, they will have a fund of over £1 million between them and will be able to draw a lifetime income of over £55,000. This assumes they increase their contributions in line with increases in their earnings, and that they get a return of 6% a year on the investments in their pension plan.

According to Fidelity, there are already several hundred thousand people in this age group who will reach millionairedom if they keep up their current plans. Of course, it’s true that a million doesn’t buy what it used to.

In fact, recent studies show that the maximum annual income you can safely draw from a lump sum starting in your sixties if you want to draw an inflation-proof income for the rest of your life is just 4%. That means a million in your pension fund would generate just £40,000 a year.

You must choose growth investments

But other research from the Office of National Statistics (ONS) shows that the vast majority of people aren’t ready to become millionaires. Over two-thirds of those surveyed said that starting their own personal pension linked to the stock market was too risky.

Think like that and there’s no chance you will end up comfortably off. In fact, it’s only assets that can grow in value faster than inflation, like shares and property, that are worth considering for your retirement savings, whether that saving is in a pension plan, an ISA or other ways.

The ONS survey also showed that almost half of 55-64 year-olds said they wouldn’t have enough for a comfortable retirement. The trouble is that if you leave it that late, you simply can’t save enough to make up the shortfall.

You have to start young, because then compound interest has the time it needs to work its magic.

Compound interest can make you rich

Here’s a simple example. Say you are going to save £200 per month for 40 years towards your retirement. Let’s assume you earn a return of 5% a year. That will accumulate a capital sum of £305,000. (This is less than in the examples cited earlier because this time I assume no increase in the contributions).

Now assume you wait two years before starting saving. The capital value from the same monthly contribution will now be £272,000. So by deferring two years and not saving £4,800 you have cut £33,000 off your pension pot.

My view is that financial incentives for basic rate taxpayers to save in a pension aren’t good enough - they are actually worth only about 6-7% overall by the time you factor in the tax you’ll pay when you withdraw income in retirement. And the whole system of tax relief is unnecessarily complicated. A sensible government would alter it to a simpler ‘matching’ system where for every £1 you put in a pension plan, it would add 50p.

The new Personal Accounts pension scheme that will start in 2012 and is designed for people who aren’t already in an employer pension scheme is closer to this matching system but suffers from a fatal flaw: the overall contribution rate will be only 8% of earnings above about £5,000 a year, whereas a realistic minimum for 20-30 year-olds is 10% of all your earnings.

Choose your own investments

Despite the ONS survey I cited earlier, there is a boom going on in personal pensions, with thousands of people setting up their own SIPP or Self Invested Personal Pension every month.

This is a plan under your own control where you choose the investments. There are several very low-cost plans such as HL Vantage, sippdealextra, Fidelity and Alliance Trust, where you can invest in your choice of thousands of funds as well as shares listed on the UK and foreign share markets.

If that sounds a bit daunting, set up such a plan and then invest alongside Lord Jacob Rothschild or the City’s Cayzer family. Both have family investment companies - Rothschild Capital Partners and Caledonia Investments - that you can buy into in the knowledge that extraordinarily capable and wealthy people have tens of millions of their own money invested alongside yours.

A £400 per month pension savings plan

If you are setting up a plan to accumulate capital from monthly savings, use a low-cost SIPP and from the start create a set of funds that gives you a stake in very different types of investment. Here’s my suggestion for a £400 per month contribution in a set of top-quality funds with highly capable managers and excellent track records.

A £400 per month pension saving plan

Important risk warning - please read

The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.

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