Do you really need a £1m pension pot?

EXACTLY how much money you need to be able to live a happy life will always be personal. For some it will mean endless travel, for others a house they’re at home in. Some might want the money to eat out at all the latest hotspots, while others will relish the chance to spend time rustling up delicious home-cooked fare chez vous.

What is likely to be the same for each and every one of us though is that we all save into our pensions with the aim of having enough cash in the bank to be able to afford a life that gives us the happiness we want. They also say money can’t buy you happiness, but when it comes to retirement, it really can.

So how does a £1m pension pot sound to you? It’s a number that gets bandied about a lot when it comes to the question of how much you need to retire on. Whether it elicits an “Oh really? That’s good to know” or a “Yeah, right, like that’s going to happen!” from you, figures from the Pensions & Lifetime Savings Association (PLSA) may be of interest.

The £1m figure sounds big, but according to the PLSA this is what it will probably take. To live what it calls a ‘comfortable’ lifestyle you’ll need around £33,600 in retirement and for that you’ll need a pension pot worth at least £840,000 - so not far off the £1m mark at all.¹

And with the money from that sort of pension pot, the PLSA reckons you should be able to afford three weeks’ holiday in Europe every year, plus £1,200 on clothes a year, as well as the budget to do up your kitchen and bathroom every 10-15 years.

There’s also another good reason why the £1m sum tends to rear its head whenever pensions pots are discussed - and that’s because of the lifetime allowance. This is currently set at a shade over a million at £1,073,100.

This lifetime allowance is set by the government and limits the total amount you can build up in pension benefits over your lifetime while still enjoying the full tax benefits. If you go over the allowance you will generally pay a tax charge on the excess when you take a lump sum or income from your pension pot, transfer overseas or reach age 75 with unused pension benefits. Any excess may be subject to tax charges of:

• 25% if taken as income (plus income tax at your marginal rate)
• 55% if taken as a lump sum

This limit applies to the value of all your pension arrangements. This includes:

• final salary (defined benefit) schemes
• personal pensions (also known as defined contribution pensions)
• any pension that has paid you a lump sum or income

However, it does not include your state pension.

If you’re getting close to the pension lifetime allowance, there are things you can do to safeguard your money. These are known as ‘protection’ and they effectively give you your own lifetime allowance, but there are restrictions as well.

For instance:

• Fixed protection 2016 provides you with a lifetime allowance of £1.25m. However you can’t apply for this protection if you made any contributions after 5 April 2016.
• Individual protection 2016 gives you a personalised lifetime allowance that is equal to the value of your pensions on 5 April 2016. To be eligible your pensions will need to have been worth £1m or more. Your protection amount is capped at £1.25m. You can still make contributions to your pension, but you are likely to face tax charges.

Countering the rising cost of living

Of course, what the current situation (and indeed the past two years) has shown us, yet again, is that life does seem to like to throw you the odd curve ball now and again. And they’re not overly-welcome when you’ve diligently saved all your working life and they throw you off track. To be reliant on a pot of cash or a set sum that you’ve calculated will likely see you through retirement, and to then be faced with the realisation that the cost of living could rise - or even double - is alarming to say the least.

While even with the greatest planning in the world you can’t foresee the unforeseeable, you can save and invest as much as you can today, so you know you’ve done as much as you can to prepare for whatever it is that’s around that corner tomorrow.

And one other thing to bear in mind is that, even discounting the current soaring rate of inflation, it’s a dead cert that the cost-of-living will have increased between the time you started saving into your pension and the time you retire.

Because while the power of compounding is the gift that keeps on giving to diligent, long-term savers and investors, its nemesis, inflation, is always there to stick the boot in and take shine off, ever so slightly, at least.

Just look at how the cost of breakfast has increased by 80% - and that was before the latest readings were factored in.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. The minimum age you can normally access your pension savings is currently 55, and is due to rise to 57 on 6 April 2028, unless you have a lower protected pension age. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. 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.