Can you build a £1 million pension?

A million pounds may not afford the lavish lifestyle it used to, but amassing a seven-figure sum in your pension could still give you an attractive standard of living in retirement.

How you get to the £1 million depends on your starting point. Some of the main factors will be your age, how much you have already amassed in your pension, the amount you are able or willing to contribute and the level of return you get on investments held within your pension.

How could you get there?

A pensions calculator offers a useful way of understanding where you are and where you are trying to get to. Once you have a handle of your situation, you can decide if it makes sense to direct more of your cash to your retirement savings or are willing to take on more risk to reach your goals.

Let’s say you’re 30 and you’ve managed to put £75,000 in your pension already. You earn an annual salary of £50,000 and you put 10% of your monthly earnings into your retirement pot via salary sacrifice, with your employer making a 5% contribution.

By the time you hit 65, you would have accumulated more than £800,000, assuming a growth rate for your investments of 5%, an inflation rate of 2%, earnings inflation of 3% and annual charges of 0.6%.

To boost your pot further, you might opt to increase your investment risk. Particularly in your 30s and 40s, there’s more room to take on risk for a possible better return, given your retirement is further away giving the market more time to recover from a drop. You could get to the £1 million mark in today’s money with room to spare, allowing you to retire at 59, assuming you were prepared to get by without the state pension for a longer period.

Retiring at 65 would enable you to hit £1.5 million, assuming the same 8% growth rate and factors as above, although you wouldn’t be able to take 25% of this as tax-free cash given the Lump Sum Allowance of £268,275.

What if you’re older?

In your mid-40s, retirement is probably starting to feel a bit closer at hand. If you’d already put away £300,000 in your pension and had a starting salary of £65,000, then making the same assumptions as the previous example and adopting the same starting growth rate of 5%, you would hit £800,000 by age 65.

Working an extra five years could get you to the £1 million mark. Alternatively, you could take on more risk to achieve an 8% growth rate, which would take you comfortably over £1 million. A potential compromise would be to make additional contributions of £2,000 a year and put your retirement off until 68, which would get you to seven figures.

What £1 million could get you

With £1 million in retirement savings, you would be able to bank £250,000 of tax-free cash and, based on an initial withdrawal rate of 4%, achieve an annual sum of £30,000 before tax.

Supplement it with the current state pension, assuming you were happy to retire at the state pension age, and you would be able to get more than the £32,700 which Pensions UK defines as the cost of a moderate lifestyle in retirement, even once income tax is factored in.

This level of income allows for a fortnight’s holiday in the Mediterranean, the running of a small second-hand car and some treats and luxuries like occasional takeaways and dinners out alongside the essentials.

If you were part of a couple who both had amassed million-pound pots, once you had both taken your tax-free cash you would have a combined post-tax income of £73,104, factoring in £30,000 per year from your pension (again based on that 4% initial withdrawal rate) and the state pension. This would take you into the comfortable lifestyle threshold, allowing for fancier and more frequent holidays and higher spending on food and takeaways. In both examples, if you didn’t want to spend all or any of your tax-free cash immediately, you could use it to supplement your retirement income.

Potentially putting some of it in an ISA (bearing in mind the annual allowance of £20,000) or taking it in stages rather than all in one go can help optimise the amount protected from tax and could mean your savings last longer.

It is important to note that all of Pensions UK’s figures assume you own your home outright.

Options at retirement

Many people will look to dial down risk with their investments as they near retirement age, particularly if they are looking to use their pot to buy an annuity which gives them a guaranteed income in later life. But if you are expecting to go into drawdown, you may well want to still achieve some growth in your investments too. This can also help protect against inflation: if you are planning to take the same amount of income each year, keep in mind that what that will afford you at 65 is likely to be much greater than what it would afford you at 85.

One approach could be to use a three-bucket strategy.

This could involve putting living expenses for the next two years in a first bucket with a focus on cash or cash-like investments such as money market funds.

• Read: How to make the most of tax-free pension cash

Then bucket two could be made up of income-generating investments that you would be happy to hold for between three and seven years that you can use to replenish bucket one. Bucket three could be left to grow, with a timeframe which allows for the ups and downs of the market.

Everyone is different and not all of us will hit seven figures in our pension, but by taking some time to look at your options and work out what’s realistic for you, you stand yourself in good stead to at least get close to the retirement you want.