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Retiring with a million-pound pension and the luxury lifestyle it offers may seem like the stuff of dreams. But it could be closer than you think.
However, this is unlikely to happen by accident. Follow these important tips (and invest a good amount of time) and retiring from frequent vacations, treating your loved ones, and enjoying the good things could be possible.
1. Start early
It’s never too late to start saving for retirement, and even a few years of saving money can have a tangible impact on your future lifestyle. However, the sooner you start, the less you will need to save to reach £1 million before retirement. This is because the contributions you make to your pension have more time to grow and benefit from the power of compound interest.
In fact, early contributions are so valuable that someone who starts saving at age 21 and then stops at age 30 could end up with a larger pension pot when they retire than someone who starts saving the same amount at age 30. years and doesn’t stop doing it. until his retirement.
If you start saving when you are 20, you would have to pay £460 a month over your entire working life to reach £1 million when you retire at 65, according to calculations by wealth manager Investec Wealth & Investment. That’s the equivalent of £15 a day.
This assumes that you save into a workplace pension using a salary sacrifice scheme and that your fund benefits from investment growth of 3.8 per cent a year net of charges and that your contributions increase by 2.6 per cent each year .
Salary sacrifice is a common pension option offered by employers to make your pension savings more tax efficient. You agree to reduce your salary and your employer pays the difference into your pension, meaning you benefit from lower National Insurance contributions as well as tax relief.
Wait until you’re 30 to start saving and you’ll need to save £775 a month to reach £1 million; at age 40 it increases to £1,400 a month.
Hopefully, by age 50 you’ll have some pension savings saved up. Getting to £1 million from scratch would be difficult even for the highest earners. You would have to save £3,450 a month. To get to a million, you would really need to make lump sum contributions to try to reach it.
Faye Church, chartered senior financial planner at Investec Wealth & Investment, says if you make larger contributions you need to make sure they are within the annual allowance, which limits the amount you can put into your pension each year and benefit from tax. relief of £60,000 a year (previously £40,000 until this tax year).
He adds: “60-year-olds would struggle to reach a £1 million pension by the time they turn 65 if they have no other provision, due to the annual allowance and the short term.” If you haven’t used your annual allowance in the previous three years, you can make a one-off contribution equal to four years’ worth – a total of £180,000. After that, you would have four more years in which you could make contributions of £60,000 , which would take him to £420,000 at the age of 65.
2. Get free money
The figures above for how much you need to save each month to reach £1million include tax relief and contributions from your employer. That means that, once you subtract these benefits, the amount you personally have to save each month could be considerably less.
Take for example someone in their 20s, who is a basic rate taxpayer and has an employer who matches their pension contributions. To save £460 a month, they would only have to contribute £184. That’s just over £6 a day. His employer would contribute half (£230) and the Government would top up his contribution by 20 per cent through pension tax relief. With the salary sacrifice, they would have to pay £152.
Similarly, someone in their 30s who is a higher rate taxpayer and whose employer matches their pension contributions would only have to pay £254.50 a month for £775 to be added to their pension, using salary sacrifice .
3. Ride the waves
These figures – and indeed most pension projections – assume that you will be employed throughout your working years and that your income will increase steadily during that time. That may be the case, but there’s a good chance your work life will seem a lot more hectic, with time off for caring responsibilities, health, retraining or layoffs alongside other periods of higher earning power or even the occasional windfall.
The key is riding the waves. When you work for an employer with a generous pension plan, increase your contributions if you can. If you receive a lump sum of cash, such as an inheritance, bonus or redundancy payment, invest some of it into your pension. That way you’re more likely to stay on track to reach £1 million, even if there are times when you can’t pay as much as you’d like.
And what would you get for £1 million?
A pension of £1 million could allow you to earn an after-tax income of £40,375 if you are a basic rate taxpayer and £33,250 if you are a higher rate taxpayer. This would last until age 95, according to Investec Wealth & Investment calculations. This assumes that his remaining fund grows by 3.8 per cent a year after contributions and that he receives the full state pension.
The income is just below what pension industry standards suggest a single person would need for a comfortable retirement. A single person needs £43,100 for a comfortable retirement, according to the Pensions and Life Savings Association. This would allow him to enjoy a two-week four-star holiday in Europe each year, three long weekend breaks in the UK, £70 a week for food and a new car every five years.
I retired at 55 thanks to my £1 million savings pot.
‘Loving every second’: Ian Dunsire
Ian Dunsire, 74, retired almost 20 years ago, aged 55, and says he has “loved every second of it”. He volunteers as a signalman on the Ffestiniog railway near his home in Wales, as a manager of his local wildlife fund, owns a small property and hopes to celebrate his birthday in June with his wife, Barbara, in a cruise through Alaska.
And Ian, right, says it’s all thanks to his £1m self-invested personal pension (Sipp). “I started saving in the early 90s and saved £10,000 a year for most of my working life,” he says. ‘There were times when that was harder to do and meant giving up things like the occasional holiday or a fancier car. But I knew that one day it would help us.”
Ian had worked in a demanding consulting role that involved a lot of travel. Barbara, had an accounting business. Although they enjoyed the work, they were excited to leave it at the same time to do other things they love.
Ian now withdraws £2,500 each month from his pension, which he holds on investment platform AJ Bell, but says its value continues to rise thanks to investment returns. He maintains a balanced portfolio, with a variety of sectors and geographies so as not to suffer too much volatility. Ian’s advice? ‘Go for it! He starts as soon as possible and then continues saving every month. Also put in any other money you get. Every time I received a bonus I diverted it directly to my pension. It’s worth it.
‘I have seen friends stop working at retirement age and not enjoy it because they get sick or tired. I’m very happy that I was able to retire early thanks to my Sipp.’
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