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How to retire with a £1 million pension

When saving for your future, few options are as effective as a pension. For some, this is just a part of your paycheck, a passive investment in your future that builds as you earn. Others, though, see the pension as a vital ticket to a comfortable retirement and have a goal in mind to reach before they retire. 

This guide will examine how much you need to live a comfortable life after work, why people strive to reach the £1 million mark, and how much it takes to reach it. 

How much do I need for retirement? 

You might be decades away from seriously thinking about your retirement or you may be thinking about retiring early, but getting a picture of how much you want to save by the time you do leave work can be useful. Even at a young age, having an idea of how much you want to spend in your retirement can make all the difference. 

The Moneyfarm Pension Calculator takes basic information like your current financial situation, your age and your desired pension income to lay out how much you need to be saving to keep on track. The general rule is that you’ll need between half and two-thirds of your final salary to enjoy a comfortable standard of living during retirement.

Research from Which found that, on average, retired individuals living a comfortable retirement spent £19,000 each year. For a luxurious retirement, they spent £30,000 each year. This increases to £25,000 and £40,000 respectively for couples. 

The current lifetime pension allowance is £1,073,100. Up until this point, pensions are a tax-efficient way to save for retirement. Past this mark, they start to become inefficient – this is why we suggest that higher earners aim for a pension pot below this upper limit. 

How much does a £1 million pension give you per year?

Let’s say, for argument’s sake, you want a pension pot of £1 million by the time you retire. Depending on how much you want to take out every year, this sizable pot can last for anywhere between 40 and 15 years, depending also of course on when you retire

You could, for example, take a £250,000 lump sum at 68 and then take a yearly annual income of £36,000 until the age of 93. That’s an annual income above the national average and, remember, you only need between half and two-thirds of your final salary to be comfortable. 

Alternatively, you can spread the £1 million out over the course of your retirement. Here’s how long £1 million will last with a range of drawdown amounts

£50,000     –     33 years

£60,000     –     25 years

£70,000           19 years

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How to get to the £1 million mark

There are a few different ways you can build a pension pot worth £1 million. You may have come into some inheritance, or sold an asset you’ve been sitting on for a while – lump sums are, naturally, a great way to get started or bolster an existing pension pot. 

From here, it’s all about consistent saving. This is where sound financial planning comes in, too. If you want to retire with £1 million in pension savings, the amount you have to put away per month will be dictated by both when you start and the quality of the returns on your investments. 

For the purposes of the example above, we’ve assumed a 6% rate of return on a SIPP – a reasonable return for our higher risk level accounts. As you can see, the amount you need to invest monthly to target a pot of £1 million can differ hugely depending on when you get started. 

Anyone who seriously begins investing for their retirement at 20 years old will need to save £359.42 per month. Compare that with the £1,427.86 it takes monthly to reach £1 million when you start saving at 40 and the benefits of starting early come into sharper relief. 

Naturally, you may want to increase your personal pension contributions as your salary improves throughout the course of your career. Or, indeed, you may find yourself with a lump sum of cash that can help you on your way. These are all things to consider, but having a broad idea of how much it takes to reach £1 million can be helpful in your planning. Again, try using the Moneyfarm Pension Calculator to assess your own financial situation and see what you need to do to reach your goals. 

When saving for the future, there’s no time like the present

As with all investing for the future, the key is to start saving as early as possible. Make sure you’ve cleared any existing debts, have some money put aside for a rainy day, and have chosen the investment product that best suits your goals. Once all that’s taken care of, the best time to start investing is right now. 

The earlier you start investing, the more you’ll take advantage of the miracle that is compound interest. Put simply, this is the idea that any returns you make from investing will then begin to generate their own returns in what is, in theory, a snowball effect. Missing out on years of compound interest can have a profound effect on your overall savings by the time you come to access your money. 

The chart above maps the performance of three hypothetical investment accounts over a 30 year period. One (pink) is invested for the full 30 years, another (yellow) is invested for 25 years, and the other (blue) is invested for just 20 years. The difference in the eventual returns on the three accounts is stark. Couple this with regular top ups generating their own returns and you can see why starting early is in your best interest. 

To get started with a Moneyfarm SIPP, or to see how a Moneyfarm ISA could support you in saving for the future, take a look at our full pension page, our pension transfer service or read our guide. We’ll match you with an investment portfolio that suits your goals and your timeframe, meaning you can get back to focusing on what really matters now. 

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