How you could build a million pound pension

Oli West

by , Senior copywriter

at PensionBee

21 Apr 2021 /  

A hand places money into a piggy bank

The average PensionBee customer is projected to retire with between £87,500 and £140,700, depending on their age (1). That compares quite favourably to the UK average of £61,900, but they’re still a way off a million pound pension pot (2).

As the following table shows, achieving a million pound pension pot could net you a staggering annual pension income of £70,000 for 20 years. However, your pension could last a longer or shorter amount of time depending on how much you drawdown each year.

What does a million pound pension pot give you?

Annual pension drawdown amount Years until pension runs out (3)
£50,000 36 years
£60,000 26 years
£70,000 20 years
£80,000 17 years

Reaching the million pound threshold is certainly challenging, but it’s not impossible for the average person.

So, how do you become a pension millionnaire?

1. Start paying into your pension early

Pensions are one of the most efficient ways of investing your money.

The earlier you start saving, the more time your pension will have to make the most of these benefits.

Depending on when you start paying into a pension, you’d need to contribute the following amounts to retire with a million pound pension pot. You’d need to pay at least a quarter of your salary, no matter the age you start.

Starting age Monthly personal contribution (4) % of average salary (5)
20 £430 25%
25 £540 23%
30 £700 25%
35 £920 29%
40 £1,220 34%

What are compounding returns?

The longer your money remains invested, the faster it will grow over time.

  1. If a £10,000 pension pot grew 5% in a year, it would grow by £500
  2. If the now £10,500 pension grew by 5% again the next year, it would grow by £525
  3. If that trend continued for 30 years, it would increase by £2,058 in its final year alone!(6)

2. Find an employer that has a good pension scheme

“Find a job you love and you’ll never work a day in your life,” goes the saying. But if you’re set on becoming a pension millionaire, you might want to prioritise finding a job with a great pension scheme.

Since the introduction of compulsory auto-enrolment in 2018, employers have been required to contribute at least 3% of an employee’s salary. But many employers - particularly in the public sector - contribute much more than that. Some may contribute more than 10% of an employee’s salary (7).

As you’ll see in the table below (based on paying into your pension from the age of 30), this can make a significant difference to the amount of personal contributions needed to reach the million pound pension milestone.

Employer contribution Monthly personal contribution from age 30 (8) % of average salary (9)
3% £700 25%
5% £660 24%
8% £590 21%
10% £540 19%
15% £430 15%

3. Increase your contributions over time

Paying into a pension while you’re young is a great start. But as you grow older, your salary will probably grow too.

While you may pay a percentage of your salary into your pension - in which case the amount you pay in will increase with your salary - consider increasing the percentage amount if you can afford to.

Doing this as soon as you get a pay rise will be easier than increasing it after you’ve gotten used to having more expendable income to play with.

Additionally, increasing the amount you pay in over time will help offset the effects of inflation.

What is inflation?

Inflation describes how the relative cost of goods and services increase over time.

£100 today is worth less than 100 years ago because the price of bread and clothes and other items have increased.

Typically, the government aims for an inflation rate (the amount prices increase) of around 2% per year.

If you increase your contributions each year, you’ll have a better chance of outpacing this effect.

4. Consider making lump-sum contributions

Every now and again you might receive a sum of money. You might get a bonus from work or receive an inheritance, for example. Whatever the reason, you’ll need to decide what to do with your cash.

As we’ve seen, pensions are one of the most effective ways to save for the future. And contributing a lump sum in addition to your ongoing contributions can make a big difference.

If you paid in a £1,000 lump sum:

  • The government will boost this to at least £1,250 (depending on your tax band)
  • Your contribution will grow with your pension
  • Your contribution will grow quicker over time thanks to compounding returns

To make the most of compounding returns, you’ll want to invest as much as possible as early as possible. So paying in a lump sum can really give your pension a boost.

But take care: Pensions often invest in the stock market, which goes up and down on a daily basis. Depending on when you pay in a lump sum, you may see larger or smaller gains (or losses) over the short term.

5. Stay on top of your pension if you go on maternity or paternity leave

If you decide to take time off work to raise a child, your employer may - depending on your type of employment - continue to pay a portion of your salary while you’re away.

This portion should start at 90% of your salary and eventually reduce to 0% for the last 13 weeks, if you take a full year off.

This is a crucial time for your pension. If you pay in a percentage of your salary each month, and your salary goes down, so will your pension contributions.

So consider increasing the percentage of your salary paid into your pension while you’re on parental leave, to make up for any fall in income.

6. Don’t dip into your pension at 55

From the age of 55, you can take up to 25% of your pension tax-free. This is known as pension release.

Many people do this to boost their immediate finances so they can make a major purchase, like a new car or significant home improvements.

But if, at the age of 55, you’re still keen on being a pension millionaire, you’ll want to leave your pension alone for a while longer so it has more opportunity to grow.

7. Watch out for high pension fees

Pension providers can charge a wide range of fees, and some charge more than others.

Look out for high pension fees, as these can erode the value of your pension over time. And make sure you identify all the fees charged, as some pension providers don’t always make this as clear as they should.

The following table shows how different fees could impact the value of a £100,000 pension over a 40 year period.

Total pension provider fee Pension pot value after 40 years (10)
0.50% £396,000
1.00% £326,000
1.50% £269,000
2.00% £221,000

So should you choose a pension with low fees?

Not necessarily. You’ll want to strike a balance between the level of fees and the level of service you want.

For example, passively managed pensions (that often follow an index) usually charge lower fees than actively managed pensions (where a fund manager will adjust your investments over time).

8. Combine your old pensions into one

If you’ve ever worked for more than one employer, there’s a chance you might have more than one pension.

Unfortunately, there can be downsides to having more than one pension.

  • Different pensions are unlikely to share the same strategy and portfolio of investments, resulting in mixed overall performance
  • You may pay more fees than are necessary
  • You may lose track of your old pensions by the time you retire
  • Keeping track of multiple pensions can be time consuming and hard work

Combining your old pensions into a new plan can eliminate these downsides.

Combine your pensions with PensionBee

PensionBee is a leading online pension provider, and we specialise in combining pensions into one easy-to-manage plan.

  • It’s simple to do, online or using the app
  • We don’t charge anything to combine your pensions
  • We charge one simple annual fee to manage your new pension
  • You’ll receive help from a dedicated pension manager (your BeeKeeper)
  • We’re rated Excellent on Trustpilot by thousands of customers

Combine your pensions with PensionBee today.

How you could build a million pound pension (recap)

As we’ve seen, retiring with a million pound pension pot isn’t impossible. But it does require you to manage your money carefully.

Consider taking the following steps to improve your chances of retiring a pension millionaire:

  1. Start paying into your pension early
  2. Find an employer that has a good pension scheme
  3. Increase your contributions over time
  4. Consider making lump-sum contributions
  5. Stay on top of your pension if you go on maternity or paternity leave
  6. Don’t dip into your pension at 55
  7. Watch out for high pension fees
  8. Combine your old pensions into one

Footnotes

1) Based on data collected for our UK Pension Landscape report. Calculation assumes customers see 5% annual pension growth, pay a 0.7% pension management fee (based on our Tailored Plan), contribute 8% of their salary (based on average UK income provided by HMRC), see their salary increase 2% per year, experience inflation reducing the rate of return, and retire at age 65.
2) As reported by The Telegraph.
3) Calculated using the Which? pension calculator. Assumes annual investment growth of 0.50% (cash), 4.75% (fixed interest), and 7.25% (equities) during drawdown period. It doesn’t factor inflation or further contributions over time.
4) Calculated using Calculator.net. Assumes government contribution of 25%, employer contribution of 3%, annual investment growth of 4%, and a retirement age of 68. It doesn’t factor inflation or an increase in contributions over time.
5) Average salary data taken from HMRC
6) Calculated using Calculatestuff.com
7) According to Close Brothers’ Employee Benefits page, “A 10% contribution towards our group stakeholder pension plan post probation, providing you contribute 5.3%”
8) Calculated using Calculator.net. Assumes government contribution of 25%, annual investment growth of 4%, and a retirement age of 68. It doesn’t factor inflation or an increase in contributions over time.
9) Average salary data taken from HMRC
10) Calculated using Candidmoney.com. Assumes annual investment growth of 4% and a 40 year investment period. It doesn’t factor inflation or additional contributions over time. Numbers have been rounded to the nearest £1,000.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

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