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There’s no universal rule to dictate how much you should have saved in your pension pot by the time you retire. Your personal circumstances and spending habits are vital factors that partly determine how much you’ll need.
However, many people set their target at £1 million, because of the income it’s possible to take from a fund of this size. If you’d like to achieve this figure by the age of 65, Faye Church, Senior Chartered Financial Planner at Investec Wealth & Investment, has run the numbers to determine how you can get there.
How much retirement income would a £1 million pension deliver?
While a £1 million pension fund may sound like a lot, it would still be very possible to exhaust your fund early by taking a high level of income from it. Financial planners typically work with clients to set an appropriate withdrawal rate based on their priorities.
Everyone’s priorities are different. One individual might want to spend their entire savings within their lifetime, while another might want to preserve their pension to pass on to loved ones.
In the first case, Faye calculates: “If your priority is to generate as much income as possible from your pension, then you could draw £47,500 from your pension each year, exhausting the fund by the time you are 95. Assuming this is made up of a combination of tax-free cash and taxable income, it could give a basic-rate taxpayer approximately £40,000 or a higher-rate taxpayer £33,000 a year.”
On the other hand, she says: “If you want your pension pot to remain around £1 million, you could withdraw £30,000 each year. With the same assumptions, this would provide a basic-rate taxpayer with £25,500 or a higher-rate taxpayer with £21,000.”
For these numbers, we’ve assumed your pension fund continues to grow throughout your retirement at a rate of 3.8%, net of charges. Of course, this is not guaranteed, and a lower or higher return rate would result in different outcomes.
How much do you need to contribute to your pension to accumulate £1 million by age 65?
This will depend on various factors, the most important of which is your age. Faye explains: “It makes sense that the earlier you start saving into a pension, the more chance you have of reaching a £1 million pension pot in retirement.”
We’ve calculated that a medium risk investor in their 20s would need to contribute £460 a month via salary sacrifice to accumulate £1 million (or £525 a month otherwise). Whereas, if you’re currently in your 40s, you’d need to contribute over three times more.
Faye comments: “If you are leaving it until your 40s to start focusing on retirement saving, you are effectively playing catch up. Our figures show that a 40-year-old will need to contribute at least £1,400 a month (gross) into a pension to get to £1 million by 65.”
| Current age | 20s | 30s | 40s |
|---|---|---|---|
| Gross contribution via salary sacrifice | £460 pm | £775 pm | £1,400 pm |
| Gross contribution no salary sacrifice | £525 pm | £885 pm | £1,620 pm |
As you can see, a second important factor is whether or not you contribute via salary sacrifice. Faye notes: “The most effective way of saving into a pension is through your company or workplace pension scheme using salary sacrifice. This not only takes away the hassle of claiming tax relief through your tax return (over and above basic rate), but you also save on your national insurance contributions (NICs). So, you can save just over 15%.”
How will that affect your current income?
The figures in the table above may seem high, but note that these figures show your gross contribution - including the tax relief you receive from the government.
The tables below show the actual cost to you, which will be lower. If you’re a higher-rate taxpayer, you’ll receive more tax relief on your contributions than a basic-rate taxpayer, so the actual cost to you is lower still.
Contributions via salary sacrifice:
| Current age | 20s | 30s | 40s |
|---|---|---|---|
| Gross contribution | £460 pm | £775 pm | £1,400 pm |
| Cost to basic-rate taxpayer | £368 pm | £620 pm | £1,120 pm |
| Cost to higher-rate taxpayer | £276 pm | £465 pm | £840 pm |
Contribution without salary sacrifice:
| Current age | 20s | 30s | 40s |
|---|---|---|---|
| Gross contribution | £525 pm | £885 pm | £1,620 pm |
| Cost to basic-rate taxpayer | £420 pm | £708 pm | £1,296 pm |
| Cost to higher-rate taxpayer | £315 pm | £531 pm | £972 pm |
If you’re in your 40s and you’re a higher-rate taxpayer contributing via salary sacrifice, £840 per month may feel a lot more manageable than £1,400.
How much will this cost you over your working life?
Another note of encouragement we’d give is that the actual amount you need to save over your career to achieve a £1 million pension pot is far lower than £1 million. If fact, someone in their 20s may need to contribute less than half the total amount.
Faye explains: “Saving for retirement as early as your 20s not only means that the regular amount you contribute can be lower, but you also have to contribute less overall. Someone starting pension contributions in their 30s will effectively have to save around 12% more to achieve the £1 million target. Someone starting pension contributions in the 40s will have to save around 22% more.”
This table shows the difference in sums:
| 20s | 30s | 40s | |
|---|---|---|---|
| Lifetime gross pension contributions (via salary sacrifice) | £479,119 | £543,498 | £613,260 |
| Lifetime gross pension contributions (np salary sacrifice) | £546,818 | £620,640 | £709,628 |
Tips to help you build a £1 million pension pot
There are two clear ways to increase the size of your pension pot: start early (and therefore save for longer) and increase your level of contribution. Beyond these self-evident principles, Faye has four other suggestions:
- Take advantage of salary sacrifice. A contribution made via salary sacrifice costs you around 15% less, so you can save more.
- Pay bonuses into your pension through payroll. Rather than paying tax and NIC on the bonus to HMRC, both will be added to your pension.
- Take a higher level of risk in the early years. If you have more than ten years before you plan to access your pension, this long-term time horizon will help to smooth the additional volatility you’re exposed to. However, you should review your risk level annually, ideally with a professional.
- Review your pension performance and charges. If high charges or a small selection of underperforming funds are limiting your growth, this can often be remedied with a pension transfer.
How we can help you
If you’d like personalised advice on how you can build a £1 million pension pot, or would like to know if you are on track to enjoy the retirement you aspire to, get in touch with one of our financial planners for an initial, no-obligation conversation.
Please get in touch if you’d like to speak to one of our financial planners today.
Important information
The contents of this publication do not constitute a personal recommendation or advice and the products and/or services referred to may not be suitable for all investors. It is important to consult a professional adviser before taking any action or making any decisions.
The value of investments and the income derived from them can go down as well as up and you could get back less than you originally invested. Your capital is at risk.
Tax treatment is dependent on individual circumstances. This information is provided in good faith and is based upon our understanding of current tax law and HMRC practice, which may be subject to change in the future.
Investec Wealth & Investment (UK) is a trading name of Investec Wealth & Investment Limited which is a subsidiary of Rathbones Group Plc. Investec Wealth & Investment Limited is authorised and regulated by the Financial Conduct Authority and is registered in England. Registered No. 2122340. Registered Office: 30 Gresham Street. London. EC2V 7QN.