Financial planning / Pensions

How to become a pension millionaire

Retirement is a time when most of us can aim for a more relaxed pace of life and enjoy some long-held plans and dreams. But it’s been pretty impossible to escape the effect of higher inflation in the last 12 months, and its impact will ripple on for some time to come – perhaps into your retirement years. So with increasing costs is it likely that you’ll need a pension pot of at least a million for your retirement? Jack Lear, our Financial Planning Manager in the UK, takes a look at why many more of us need to plan to become pension millionaires.

The amount you need in your pension pot is dependent on a number of factors, not least your lifestyle and personal circumstances, including whether you’ll still have a mortgage or other costs to manage. You may want to use your retirement to travel or enjoy particular leisure activities and might need to factor in healthcare costs too.

The latest Retirement Living Standards report suggests that a comfortable lifestyle post career will cost GBP37,300 a year, a total of more than GBP1 million over 27 years. So if you retire at 65, and live into your early 90’s, the stark reality is that you’ll need to be a pension millionaire. Whilst this might seem rather daunting, it’s certainly possible to achieve. So how can you build pension pot which exceeds GBP1 million?

  1. Plan ahead – and start early

The reality with any financial plan is that it’s easier to achieve the earlier you begin. Compound interest can be a real friend here and adding small amounts to your pension pot over a longer period tends to be more effective that putting in large lump sums later in life.

Saving just under GBP500 a month when you’re 25 will deliver a pension pot of over GBP£1 million, based on a 6% return over 40 years. Based on the same returns, if you delay starting your pension until you’re 45 the monthly figure you need to save jumps significantly to over GBP1,400 a month.

  1. Make the most of tax breaks

Pensions, as opposed to other long-term savings options like ISAs, offer tax relief. The amount you receive is based on the rate of tax you pay – for example when making a personal pension contribution a basic rate tax payer needs GBP80 to create a pension contribution of £100, but those paying higher rate need only GBP60. The effect of this bonus can be significant, super-charging your pension savings.

  1. Actively invest your pension

Simply saving money into a pension over a number of years is unlikely to offer you the returns to need to become a pension millionaire. So one of the main ways in which your pension could grow is through investment. It’s important to explore your own attitude to risk with your financial adviser – but for many people stocks and shares are worth factoring into your portfolio, offering you greater potential to grow your pension pot over time.

  1. Maximise your workplace scheme

Since the advent of auto-enrolment, workplace pensions are now the norm in the UK. And with many employers matching your contributions this can be a powerful way to build retirement savings. Take a close look at what your employer can offer – options including salary sacrifice can be a great way to boost your pension pot. You may be able to take advantage of your employer contributing saved National Insurance contributions too.

  1. Remember your state pension

As well as your own pensions and investments the UK offers a state pension which can make a substantial contribution to your retirement income. Think back to that GBP37,300 which might be needed each year to live a comfortable lifestyle. In 2023/24 the state pension will deliver GBP10,600 for a single person – a sizeable chunk of that required income. So remember the impact the state pension could have on your income, and how important it is to make sure your National Insurance contributions are being made. If you took a career break, or paused your NI contributions, you should be able to make up any shortfall before you retire. Until 5 April 2025 there’s an opportunity to backdate NI contributions to cover gaps from April 2006 to April 2017.

Although becoming a pension millionaire might seem like a challenging task, a few key steps can help to ensure that you are on the right path towards achieving that milestone. To discuss any aspect of your own pension planning please contact your nearest office.