A million-pound pension can provide you with financial freedom in retirement, but it may not deliver the millionaire lifestyle you think.
Having access to a £1 million can conjure images of an extravagant lifestyle, from chartering yachts to hitting designer shops. While having a £1 million pension can mean you can indulge in things you love or tick off items on a bucket list, you still need to think long-term.
Could you save £1 million in your pension?
It can seem like a huge challenge to save £1 million in your pension, but it can be easier to achieve than you think.
Often, you’ll be paying into a pension for decades. As a result, the amount you’re contributing to your pension can add up. On top of this, your employer will usually contribute on your behalf, and you will also receive tax relief. The money going into your pension will typically be invested over the long term, which can help your retirement savings grow. So, while you may think a £1 million pension is out of reach, you could be closer than you expect.
Keep in mind that the Lifetime Allowance limits how much you can tax-efficiently save into a pension in total. For the 2022/23 tax year, the Lifetime Allowance is £1,073,100, this is the total value of your pension, so it may include contributions from yourself, employers, and other third parties, tax relief, and investment returns.
If you exceed the Lifetime Allowance, you could face additional charges when you access your savings. So, it’s important to keep the limit in mind and track how the value of your pension changes.
The retirement income a £1 million pension could deliver
The income delivered by a £1 million pension will depend on a variety of factors, including:
- The age you retire and your life-expectancy
- Whether you want to take a tax-free lump sum from your pension.
How you access your pension can also have a significant impact. According to research from Fidelity, a £1 million income used to purchase an annuity could provide an income from £22,623 to £53,714 for a healthy man aged over 65. That’s a huge difference that demonstrates why it’s important to consider your options and what’s important to you.
An annuity is something you buy that will then deliver a regular income for the rest of your life. It can help create financial certainty in retirement. When purchasing an annuity, you will have to make several decisions, including if you want the annuity to provide an income for your partner if you pass away, and whether you want it to increase in line with inflation to maintain your spending power.
The below table highlights how the decisions you make with a £1 million pension can affect your income.
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