How much do I need to save to retire with £1 million?

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Please Note: Information in this blog was current at the time of publishing, but may no longer be up-to-date with current legislation. Please visit our blog for the latest pension articles.

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In the 2015 Budget, the chancellor George Osborne announced a reduction in the lifetime allowance from £1.25 million to £1 million. So how much money do you need to save to retire with £1 million in your pension?

As with all savings, the earlier you save the more you should have at the end, and it will also allow you to put smaller amounts away as they will have longer to grow. However, when projecting so far into the future it’s also important to consider charges and how well the fund performs. This post uses the following assumptions:

  • Annual charges totalling 2%
  • Target retirement age is 70
  • A contribution will be made every month

If a person starts contributing to their pension from the age of 20, they will have 50 years to generate a pension fund of £1 million. The table below shows how much they would need to save each month depending on the level of growth the fund achieves and how much each contribution is worth after tax relief:

Growth %:

3%

5%

7%

10%

Contribution amount:

£1,027.35

£574.38

£298.53

£100.19

Total after tax relief:

£1,284.19

£717.98

£373.17

£125.24

 

 

This highlights the difference growth can make – contributions to a fund growing at 10% can be 10 times lower than if the fund is growing at 3%.

If a person began saving from the age of 30, the monthly contributions would need to be higher but are easier to achieve if the fund performs well:

Growth %:

3%

5%

7%

10%

Contribution amount:

£1,355.05

£861.72

£522.06

£227.64

Total after tax relief:

£1,693.82

£1,077.15

£652.58

£284.55

 

If pension saving is delayed until the age of 40 there is considerable increase in the amount of money that needs to be saved to achieve a fund of £1 million, as there are now only 30 years to do so:

 

Growth %:

3%

5%

7%

10%

Contribution amount:

£1,904.86

£1,369.41

£957.25

£533.23

Total after tax relief:

£2,381.08

£1,711.76

£1,196.56

£666.54

 

Finally, delaying saving until the age of 55 – currently the age at which people can access their private pensions – requires huge contributions:

 

Growth %:

3%

5%

7%

10%

Contribution amount:

£4,117.86

£3,515.86

£2,980.60

£2,296.57

Total after tax relief:

£5,147.32

£4,394.83

£3,725.75

£2,870.72

The pension freedoms remove the limits on how much money can be withdrawn through income drawdown, but many people will still choose an annuity for the security of an income for life. A 70 year old man retiring with a £1 million fund today could receive a standard annuity of £43,548 a year. This reduces to £39,537 with a joint life policy that provides half the income to his spouse when he dies, or £36,106 if his wife receives the same level of income when he dies.   

What do you think about the reduction in the lifetime allowance? Let us know with a comment below.

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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new

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