Important information - investment values and income from investments can go down as well as up, so you may get back less than you invest.
Q. I’m 32 and earn £50,000 per year. I only have about £55,000 in my pension currently and want to grow that to £1m by age 60. What do I need to do to achieve that?
A. It’s great that you’re already setting retirement goals relatively early in your career. At this point, you have almost three decades to benefit from potential investment growth – which could do a lot of the heavy lifting.
Let’s look at the numbers. Using our financial modelling tool, I estimate that total contributions equivalent to around 13% of your salary would need to go into your pension each year from now until age 60 to reach your goal of having a £1m pension pot.
Importantly, that £1m is the projected cash value of the pot at age 60 – not £1m in today's money.
If you’re self-employed, you’ll have to contribute the entire 13% yourself. If you’re an eligible employee who is automatically enrolled, your employer will normally have to contribute at least 3% of your qualifying earnings, although many employers contribute more or match additional contributions.
Crucially, qualifying earnings doesn’t mean your total salary. So, if your pension contributions are based on qualifying earnings, you may need to contribute a higher percentage to ensure the equivalent of 13% of your total salary is going into your pension.
These numbers assume:
- Inflation is 2.5% per year
- Your earnings grow smoothly with inflation
- Your investments return 6.61% a year on average
- You pay fees of 0.41% on your pension
Overall, your goal looks achievable, particularly if your earnings rise faster than inflation over time.
However, the more important question is: what do you want this £1m pension pot for? What kind of lifestyle do you need it to buy you in retirement?
The number alone is somewhat meaningless unless you know what that money can do for you.
And while £1m sounds like a huge sum today, nearly three decades of inflation mean £1m at age 60 will buy considerably less than £1m does now.
Let’s say you retire at 60 with your £1m pension and want to enjoy a “moderate” lifestyle in retirement. According to trade body Pensions UK, this includes around £59 a week on groceries, a three-year-old small car replaced every seven years, a fortnight 3* all-inclusive holiday in the Mediterranean and a long weekend off-peak break in the UK. For a single-person household, the total cost is estimated to be £32,700 a year in today's money.
The figures assume you own your home outright, so anyone still paying rent or a mortgage would need to budget for that on top.
If you wanted to enjoy an equivalent level of lifestyle, I calculate that you could exhaust your £1m pension pot by around age 82 – even after assuming you receive the full State Pension from age 68.
Figures from the Office for National Statistics suggest that a 32-year-old man has an average life expectancy of 84, while a woman of the same age is expected to live to 88. Respectively, they have a 42% and 55% chance of living to 90. There’s therefore a significant risk of you outliving your savings – and by some margin.
Under our modelled scenario, increasing total pension contributions to around 19% of your salary could allow you to sustain that lifestyle much longer. At this level of contributions, you could reach 60 with a pension worth almost £1.4m. Even in this scenario, we estimate that you could exhaust your private pension savings by around age 95, although you would continue receiving State Pension income under our assumptions.
Of course, many people will not be spending as much at age 90 as they would at age 60, so it may be possible to taper down your spending with time to ensure it lasts longer.
However, it’s important to stress these projections assume smooth average investment returns. In reality, markets will rise and fall, and a major downturn early in retirement could have a particularly significant impact on how long your pot lasts. What’s more, they don’t factor in major later-life expenses, like needing to pay for care.
When working out how much you want to have in your pension by 60, I would first think about:
- when you want to retire
- what kind of lifestyle you want to enjoy after that (and how that will change over time)
- whether your plan can withstand shocks like a market crash, inflation jump or care costs
- how long you may need your money to last
I would also suggest considering whether saving into an ISA as well as your pension could be sensible. Pensions can be an extremely tax-efficient way of saving for retirement, thanks in particular to pension tax relief and, for employees, employer contributions. But the trade-off is that you can’t usually access this money until the ‘Normal Minimum Pension Age’. This is currently 55 for most people, rising to 57 from April 2028. Whereas, with an ISA, you can withdraw the money at any time.
They also work differently from a tax perspective. With a pension, you generally benefit from tax relief on contributions: withdrawals can be partly tax-free but may otherwise be subject to income tax. With an ISA, you pay in with money that’s already been taxed but withdrawals are free of UK income tax.
Having savings spread across both pensions and ISAs could potentially give you more flexibility and options when you come to retire.
A £1m pension is an ambitious but potentially achievable target. The more important goal, though, is building a retirement plan that can provide the lifestyle you want for as long as you might need it.
Please remember this is not financial advice. If you’re unsure about what’s right for you, you should speak to a qualified financial adviser.
The government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.
Our team of retirement specialists can also provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
This article was originally published in City AM.
Got a burning question you want to ask? Why not drop us a line. Click here to ask your question.
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. SIPP eligibility and tax treatment depends on individual circumstances and tax rules may change. You cannot normally access money in a pension until age 55 (57 from 2028). If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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