How to build a £1m pension pot

How much do you need for a decent retirement? What must you put away each month to ensure your future financial security?

Here we look at how to start planning your later years, what you need to be investing to build a decent pension pot, and the key issues to consider.

How much will you need to retire?

The first step is deciding what type of lifestyle you want in retirement. Will you be satisfied with something low-key in the same house you’ve lived in for 40 years? Or is the dream to move abroad and spend afternoons walking barefoot on sun-drenched beaches and evenings sipping champagne watching the sunset?

Whatever your goals and ambitions, write everything down and work out exactly how much you’re likely to need to bankroll your future.

Then you need to establish how to make this a reality. Needless to say, the income generated from your retirement planning will dictate how much financial freedom you will eventually enjoy.

The Pensions and Lifetime Savings Association’s ‘Retirement Living Standards’ analysis, which is based on independent research by Loughborough University, discovered the amounts needed for different retirement scenarios.

The study revealed that a minimum of £12,800 for a single person (£19,900 for a couple) would cover all the basic needs plus a little bit left over for fun. Meanwhile, those bringing in £23,300-a-year (£34,000 for a couple) could enjoy a moderate lifestyle with more financial security and flexibility.

However, those with annual incomes of £37,300 (£54,500 for a couple) would have a greater degree of financial freedom and luxuries such as three weeks in Europe every year.

How much should I pay into a pension?

Typically, you won’t need as much in retirement as you need when you are working, because you’re less likely to face costs such as commuting and paying the mortgage, according to an analysis by Aviva.

“Most people’s expectations are based on their income and lifestyle before retirement, so a general rule is to aim for an income of around two thirds of what you earned at work,” it stated.

The earlier you can start saving the better, because you can enjoy the benefits of compounding and your investments have longer to grow. One rule of thumb is putting away half your age as a percentage of your salary. Therefore, in your 30s it would be least 15 per cent, rising to 20 per cent after your 40th birthday.

That won’t be possible for everybody, however and will depend on your personal circumstances and a variety of other factors such as when you’re planning to give up work, and the risk you’re prepared to take with investments.

Can you build a £1m pension pot?

How about the almost mythical £1m pension pot? Is this a realistic aim? What must you do – and when – to accumulate such a sum by the time you give up work?

Whether such a figure is in reach will depend on how many years you have before retirement and the performance of your chosen investments. Those who have made the sensible choice of starting a pension at the age of 25-years-old have a better chance of success, according to an analysis by Fidelity.

“If their savings achieved an annualised return of 5% over 40 years, it would require they contribute £660 every month in order for their pot to grow to £1,007,173 by the time they reach 65,” it stated.

So, what would a £1m pot be in terms of income? According to Fidelity, rates on annuities have been improving, so this should result in a tidy sum. “A healthy 65 year-old with £1,000,000 of pension savings could currently turn that into annual income of around £49,330, with that rising by 3% a year,” it added.

Are people saving enough?

The short answer is no. Many Britons are putting retirement plans on hold amid worries the rising cost of living will leave them financially stretched, according to a survey from Unbiased.

The study found that 61% believe the current financial backdrop means they’ll have to work for longer, while more than 70% believe it will be hard to retire before the age of 66.

However, more people have been saving in private pensions, including occupational and personal schemes, since the introduction of auto-enrolment in 2012, according to official figures. “Between April 2018 and March 2020, 57% of people aged 16 years to state pension age were contributing to a private pension compared with 43% between July 2010 and June 2012,” it stated*.

Emergency! What to do if you haven’t saved enough?

Of course, there are many reasons why people haven’t accumulated the pension savings they need to help ensure a carefree retirement. If they’re struggling to pay the monthly bills, then tucking money away for the future is unlikely to be high up their list of priorities. Similarly, couples that have been through punishing divorces may find life post-split financially challenging and their resources heavily depleted.

Others, of course, may have simply overlooked longer-term saving. Whatever the reason, how can people make the best of a bad situation?

The key is to act now in order to give the money you are able to put away the most time to grow. And the first step is seeing if you can start saving more. Maybe you can free up some extra cash by cutting expenses elsewhere and diverting them into your retirement fund. You’ll also need to examine the investments needed to generate the
returns.

Be diversified

There’s no doubt that diversification is crucial. No-one knows for sure whether an investment will soar or plummet, so it’s vital that you broaden your exposure.

Regardless of how attractive a particular area may seem, resist the temptation to put everything into it as you could lose the lot should it fail to perform as expected. Have a spread of asset class and geographical exposures so if one area suffers a bad period, then the whole portfolio won’t be totally derailed.

Review your decisions

It’s also vital to regularly review your pension plans. Revisit your investment decisions every year at the very least and don’t fall into the trap of putting money away and forgetting about.

If you do, then there’s a very good chance of coming back to your pension fund in 10 years’ time and realising there’s a massive shortfall with your investments not having performed as expected.

Reviewing your decisions is also important to consider changing circumstances. For example, have you more spare cash that can be invested or are your costs likely to rise over the coming months?

*Source: Office for National Statistics, 17 June 2022

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