How to Become a Pension Millionaire

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The Path to a £1 Million Pension

Becoming a ‘pension millionaire’ might seem like a pipe dream, particularly in view of the cost-of-living pressures many people are facing. But it may be more attainable than some people think when you combine regular and cost-efficient investing with time in the market and tax relief. The path is not easy but with the right mindset and approach, it is possible. This article explores the steps and strategies that you can follow to achieve this coveted goal.

Why a million? The ‘Lifetime Allowance’ was previously set at £1,073,100, meaning if your pension savings exceed this allowance, you would incur significant tax penalties on the excess amount. So a million pound pension was often seen as the ultimate (tax-efficient) goal to aim for.

In April of this year, the government announced that the ‘Lifetime Allowance’ was to be scrapped, but it remains unclear whether a future government may reintroduce a similar limit. Either way, the aim of a million pounds in a pension is a challenging target, but potentially in reach for those who are committed to achieving it.

 

Begin Early for a Million-Pound Retirement

To accumulate over £1 million for your retirement, starting your savings journey early is essential, especially if you have a comfortable income. Delaying your savings beyond the age of 25, perhaps due to priorities like homeownership or starting a family, will necessitate significantly higher contributions (and earnings) to reach the same goal.

 

Make the Most of Automatic Enrolment

If you’re an eligible employee earning at least £10,000 annually, you’ll likely be subject to automatic enrolment. Your employer is required to enrol you in a workplace pension scheme, contributing a minimum of 3% of your monthly band earnings to your pension pot. Additionally, you must contribute 5%. Consider checking with your employer if they’re willing to match your contributions, which can result in extra money for your pension. Employers benefit from tax advantages, and this could potentially boost your retirement savings by hundreds or even thousands of pounds annually.

 

Maximise Tax Relief

Some individuals may benefit from having a personal pension in addition to a workplace pension. Basic rate taxpayers receive government tax relief on their personal pension contributions. For every 80p you contribute, the government adds 20p, effectively turning your contribution into a pound. It is important to note that there is an annual pension contribution allowance of £60,000, but this is more than sufficient for most pension savers. Higher rate taxayers can capitalise on more significant tax relief making pension contributions even more tax-efficient.

 

Leverage the State Pension

Complement your personal and workplace pension savings with your State Pension. To qualify for the Basic State Pension, you need to have paid National Insurance Contributions (NICs) for at least 10 years, but the full Basic State Pension typically requires 30 qualifying years of contributions. To receive the full New State Pension amount you’ll need 35 years of NICs. If required, you can fill gaps in your National Insurance record to make yourself eligible for higher payments later on.

 

Understand the Power of Compound Growth

Maximize your pension’s potential by leveraging compound growth. Your pension grows through compound interest, accumulating earnings on both your savings and any prior growth. While you may be tempted to access your pension at 55 when allowed, leaving it to grow can provide more years for compound growth to work its magic.

 

Optimise Your Investment Strategy

Your pension is not merely a savings plan; it’s an investment. Pension providers invest your funds in various assets like stocks, bonds, cash and property. Understanding your pension’s investment strategy and your risk tolerance is crucial for maximising its growth potential. Ensure you align your investments with your long-term retirement goals.

 

Our Top Tips to Become a Pension Millionaire

Achieving pension millionaire status may not be within reach for everyone, but if you’re determined to give it a shot, it’s essential to embrace prudent saving strategies and adopt sound investment practices. Here are our top tips:

1. Start paying into your pension as soon as you can. The sooner you start saving, the more time you’ll have to reach your retirement goals.

2. Maximise your employer’s pension contributions. Find out the maximum your employer will pay into your workplace pension and take advantage of this opportunity.

3. Consider using the ‘carry forward’ rule. This allows you to make additional pension contributions using an unused allowance from previous years.

4. Avoid dipping into your pension unless you really need it. You can usually access your pension at age 55 (rising to 57 in 2028), and you’re allowed to withdraw up to 25% tax-free. While some use this for immediate expenses, it’s often advisable to leave your pension untouched until your actual retirement if financially feasible.

5. Track down old pension pots and consolidate them into one easy-to-use account. Don’t lose track of forgotten pensions; claim them and bring them together.

6. Stay on top of your pension if you take a career break. Continue making contributions during career breaks to ensure your retirement savings don’t suffer.

7. Regularly increase how much you pay into your pension, if possible. Gradually increasing contributions can significantly impact your retirement fund over time.

8. Use a low-cost pension. Pension charges can have a big bearing on your eventual retirement fund so keep charges as low as possible.

9. Regularly review your pensions. It’s crucial to ensure your pensions remain suitable for your needs. Over time this may change so it’s important to regularly review your pensions, how much you are contributing at the options available to you.

 

What Lifestyle Could a Million Pound Pension Provide?

The income generated by a £1 million pension hinges on several factors, including:

• The age you retire
• Your life expectancy
• Whether you take a tax-free lump-sum from your pension
• How you take an income from your pension

 

How you access your pension can have substantial implications. Figures from MoneyHelper^† reveals that for a £1 million pension used to purchase an annuity, the resulting income for a healthy male aged 65 can range from £44,031 to £48,724 depending on the annuity options selected. This difference underscores the importance of carefully evaluating your options and aligning them with your priorities.

Flexi-access drawdown is an alternative method to access your pension. It allows you to withdraw funds as needed while keeping the remainder invested. It provides flexibility, but you must exercise caution to ensure sustainability. Overdrawing can deplete your pension during your lifetime. Historically, it’s been advised not to withdraw more than 4% of your pension annually to ensure sustainability. For a £1 million pension, this would translate to an annual income of £40,000. While the 4% rule offers a general guideline, it’s vital to assess your specific financial circumstances. Longer retirements may necessitate a lower withdrawal rate, and investment performance can impact your pension’s value. Continually evaluate your financial situation and adapt your withdrawal strategy to maintain financial security throughout retirement. Using this method to draw a pension income means accepting added risk and uncertainty as your pension fund remains invested. That said, there are two big advantages to using drawdown; it provides the flexibility to vary your income over time and any remaining pension fund can be passed on to your family or other beneficiaries following your death.

 

In Summary

The path to achieving a £1 million pension may appear ambitious, given the current cost-of-living challenges. However, it becomes more attainable when you combine disciplined and cost-effective investing with the benefits of time in the market and tax relief. The journey is demanding, but with the right mindset and approach, it is feasible for many.

This article has outlined the key steps to achieve this goal: start early, maximise employer contributions, consider the “carry forward” rule, avoid early withdrawals, consolidate old pension pots, stay consistent during career breaks, gradually increase contributions, use a low-cost pension, and regularly review your pensions to ensure they align with your evolving needs.

Ultimately, achieving pension millionaire status requires diligent financial planning and a commitment to long-term pension saving. With dedication and disciplined financial management, the goal of a million pound pension could be within reach.

 

 

If you would like to talk about any of the issues in this article or need more general help with your finances, please get in touch with us.

 

 

† Source: MoneyHelper. Figures correct at date of publication. Figures are indicative only and should not be relied upon as individual circumstances may vary. Figures shown are for a healthy, non-smoker male, aged 65 increasing in line with RPI, paid monthly in advance. Figures compare a single life with no guarantee period to a joint life (50% spouses pension) with a 10-year guarantee period.

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