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Is a 1 million pension pot enough to retire on?

Pensions / At Retirement Planning

Having a pension pot of £1million sounds lovely, doesn’t it? That truly is a lot of money. We all dream of retiring early and doing the things we have always wanted to do. Surely, a million pounds would allow that to happen?

Well, not necessarily.

Remember that everyone is different. Everyone has different circumstances, wants, needs, requirements.

Imagine if Cristiano Ronaldo was given £1m at age 55 to go and enjoy retirement? It would barely last a day. But of course, to most of us, this would be plenty if used in the right way.

Let’s take a closer look at achieving a pension of one million pounds and how a retirement with that might look.

How can I reach a pension pot of £1million?


There are two key factors to achieving a large pension pot. The first is to save regularly. Nowadays, most employees are auto-enrolled into company pension schemes and contribute this way. That is brilliant because it forces you to save for your future, but also your employer will be contributing too.


However, for most average earners, this alone won’t be enough to achieve a million pound pension pot, unless you are in a final salary pension scheme. For this, you will likely require a separate pension pot. This could be a personal pension or a SIPP, for example.

You can contribute to your separate pension savings plans and still benefit from tax relief. Any pension contributions you make will be ‘grossed up’ so that your pension balance will increase by more than the amount you contributed.


The other key factor to reaching a 1m pension pot is starting early. Too many people think that retirement is so far away they won’t bother saving for it. Spending money now seems too attractive and saving for the future is hard to comprehend.

This means that most of us reach the age of 40 or 50 and suddenly realise we need to start focussing on retirement savings. This is not necessarily too late, but the amount you then need to contribute is far higher because you are playing catch up. Furthermore, you have many less years of investment growth to benefit from before you start drawing benefits from your pot.


Starting your pension pot at age 20 would require around 4 times less monthly contributions to reach a £1million pension compared to starting at age 40. That means if you start putting away money when you are 20, the amounts will be fairly menial and not affect your standard of living. You will also get used to this money being taken off your salary each month so would factor it into your lifestyle. Whilst enjoying the full tax relief on the contributions you make.


The alternative is having a lifestyle that doesn’t involve retirement savings, and then getting the large shock at age 40 that you suddenly need to contribute vast sums each month to end up with sufficient savings.


So there you have your key lessons. Contribute regularly, and start early.

Is £1m a big enough pension pot to retire with?

Answering this question is akin to saying how long a piece of string is. This very much depends on your individual circumstances. To use extreme examples, if you spend £100,000 a year now and plan to carry that on in retirement, then your pot won’t last very long. But if you only spend £10,000 then yes a million should be plenty!


The important point is that you shouldn’t assume just because one million pounds sounds like a lot, that it will be enough. We generally live much longer than we used to so it is worth considering that you could live well into your 90s or beyond.


One solution to this question could be to jot down some rough figures and estimates for how much you might spend, how much other income you have, and various other assets you may hold. This could give you a very vague idea of whether a million pounds is enough to retire with. But do you want to base your retirement and your wealth on a vague idea?


Instead, you should make use of cashflow planning. This is a service that some financial planners, including us, use with their clients to forecast their financial future. Using intelligent software, your entire financial picture can be inputted and then simulated. These simulations factor in all the various aspects such as state pensions, inflation, investment, pension lifetime allowances, growth and tax.


Not only does our cashflow system give you one simulation, but it gives you hundreds. These are based on historic data so that you know these are real-life scenarios from the past. Using these hundreds of scenarios, you are then presented with a chance of success. The chance of success is calculated based on the percentage of scenarios in which you still had money when you died.


Since the question posed cannot be simply answered because everyone is different, then we highly recommend you seek financial advice. This is the only and best way for you to be confident that your pension pot will be enough.

How much income can I take with a £1m pension?


Taking a retirement income from your pension is the very reason you build up that pot. The first stage once you retire is to figure out how much pension income you need, and then look at whether you have enough for this amount.


If you were to retire at age 55 and live to age 95, that is 40 years of retirement. For simplicity, assume you do not invest any of your pension, you could take £25,000 per year as income for 40 years. In reality, you could take more than this because you would have it invested, but there is also inflation to factor in. Of the £25,000 per year annual pension, 25% would be tax-free and the remaining would be taxed as income, so you would be left with less than that.


However, should you work until age 67 and only live until age 87, that is a 20 year retirement. Suddenly, using the same assumptions as before, you can take an income of £40,000 per year before tax.


The difficulty here is that you don’t know how long you will live for. You also don’t know how well your investments will perform. You also don’t know how high inflation will be and to what extent it will eat away at your money.


It is these uncertainties that make the question very difficult to answer with any certainty. That is why cashflow forecasting is useful to give you many different figures that can provide an average. As long as your financial plan and cashflow forecast is revisited each year to account for changes, you can keep on top of your money and make sure you do not run out.

What if I buy an annuity with a £1million pension?


Annuities give guaranteed income for the rest of your life in return for a lump sum at the start. The income you are paid is dependant on interest rates at the time of purchasing your annuity. In recent years, interest rates have been at record lows and therefore annuities have not been very popular. People have found that investing their money and managing their own income is a far better option.


However, that has started to change since interest rates have increased dramatically since the start of 2022. Annuities are suddenly back in the conversation.


The huge benefit of having one is that they are guaranteed forever, and you can even purchase some that will pay your spouse an income after you die. Some can be increased each year with inflation so that the purchasing power of your income is maintained over the long-term.


Purchasing an annuity with a pension pot of £1million at age 55 would give an income of approximately £35,000 per year. If you purchase one at age 65, this would increase to around £45,000 per year.


These are significant amounts considering they will keep paying until you die. Even if you break world records and live to age 150, you will still be receiving your £45,000!


But would you get a higher income if you invest your pension and use pension drawdown? Not likely if you live until age 150, but for most people, that is the question.


To most people, one million pounds is a very significant amount of money. On the face of it, this sounds like enough money to live on in retirement. But once you start factoring in a long life and high spending, this can very quickly dwindle.

The key takeaway here is that you need to decide how you want your retirement to look. When will it start, how much will you spend, are you in good health? These questions will be important to painting that picture.

Once you know the answers, you can come to us and benefit from our cashflow planning service. That will give you peace of mind that your plan is on track and you shouldn’t run out of money. As your financial adviser we are here to help you and ensure you do not outlive your wealth.

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