How to build a £1m pension pot

Key takeaways

• With the removal of the lifetime allowance, pension pots can grow without penalty. 
• The earlier you start, the more time for your contributions to grow.
• Factor in inflation. In 50 years, £1m won’t go as far.

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How to build a £1 million pension 

In April 2024, the previous Chancellor consigned the lifetime allowance to the history books, which had previously restricted pension wealth to £1,073,100. The sky’s the limit when it comes to how much you can stash in your pension over your lifetime.

So, how much do you need to stash away in your pension to reach a cool £1 million by the time you retire?

Let’s break down some of the numbers.

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How much do you need to contribute?

It’s probably no surprise that reaching £1 million is much easier if you have a long time to invest.

The magic of compounding means the earlier you start, the easier it is to get to the magic £1 million mark as your wealth begins to snowball. Not only are you contributing for longer and paying in more, but your existing wealth has much longer to grow. No wonder Albert Einstein dubbed it “the eighth wonder of the world”.

The table below shows what you need to contribute to your pension every month to have £1 million saved up in 20, 30, 40, or 50 years’ time. The calculations assume that investors increase their contributions by 2% each year, in line with the Bank of England’s inflation target and that investments grow at 5% each year after any investment fees. They also factor in 2% inflation and the tax relief for basic and higher rate taxpayers.

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To hit £1 million in today’s money, investors with a 50-year time frame need to invest around £750 each month, while those with 40 years to invest need to stash away £1,120 each month. 

While 50 years sounds like a long time, if you’re in your 20s now, it’s possible you may still be contributing well into your 70s. 

Meanwhile, if you have a medium time frame of 20 years, you’ll need to do some serious saving, aiming for £3,120 each month to hit £1 million by the time you retire.

It really does pay to start early as investors with 20 years to invest need to save nearly 3 times more each month than those who still have 40 years to retirement to reach the same goal. 

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How does inflation affect my pension pot?

When it comes to building a £1 million pension pot, inflation is a crucial factor. While £1 million seems like a huge investment pot, it will be worth a lot less in the future, thanks to inflation.

The impact is striking. To reach £1 million in today’s money you will need wealth of around £2.2 million in 40 years, assuming an average inflation rate of around 2% each year.

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The difference investment returns make

As well as inflation, investment returns also have a huge impact on the eventual value of your retirement fund.

Just a 1% increase in investing returns could boost your pension wealth by a massive £574,000, by the time you retire, assuming you invest for 40 years.

However, the reverse is also true. If you invest for the long term then a 1% drop in investment returns could mean you fall short when it comes to your retirement dreams.

That’s why it’s crucial to stick to a strategy and keep monitoring your investments to see if you’re on track to hit your goals.

As a long-term investor, stock market volatility means the investing journey won’t always be smooth. There will be ups and downs, with some periods outperforming others. But long-term market trends show that investing is one of the most effective ways to build wealth over time.

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How can I boost my pension contributions?

Despite the hefty numbers, the good news is that getting to £1 million might be easier than it first appears. This is because pension savings benefit from tax relief.

This means a pension contribution of £80 is automatically topped up to £100 by the government.

For higher rate taxpayers it’s an even better deal as you can claim extra tax relief through your tax return. This effectively means that contributing £100 to your pension only costs £60 after tax.

Thanks to the generous tax rules, a £750 monthly pension contribution costs just £600 after tax for a basic rate taxpayer and £450 after tax for a higher rate taxpayer.

For higher rate taxpayers, this means that with an initial cost of just £450 per month, you could potentially accumulate £1 million in today’s money over 50 years. That’s assuming you gradually increase your contributions by 2% each year as your wages hopefully grow with inflation.

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Other ways to boost your contributions

When it comes to your pension, tax relief isn’t the only way to maximise your long term wealth. 

If you’re an employee then it’s also crucial to take full advantage of employer pension contributions. Many employers will increase their contributions if you contribute more to your pension, helping to grow your wealth even faster.

And don’t forget to check your pension entitlement when changing jobs. Moving to a position with a higher pension contribution from your employer can be one of the most effective, and often overlooked, ways to boost your long-term wealth.

In addition, minimising your pension fees can be a great way to boost your retirement savings. High pension fees can seriously eat into your investment returns, reducing the amount your pension grows over time.

Switching to a lower-cost pension provider can be a simple way to boost your returns and grow your wealth over time. Just be sure to review any potential protections that may be affected. 

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Keep an eye on the pension rules

If you’re planning to boost your pension contributions, it’s vital to understand the tax rules and any changes that may crop up. Getting to grips with these nuances is key to avoiding surprises and ensuring you're making the most of your pension.

For the 2024-2025 tax year, pension contributions are capped at £60,000, although you may be able to carry forward unused allowance from previous years. The cap applies to total contributions including pension tax relief and any payments by your employer.

Your contributions are also capped at your taxable income for any given tax year, so you won’t be able to contribute more than you earn.

The Chancellor’s Autumn Budget changes mean pensions will now attract inheritance tax from April 2027. This means if you have any pension wealth left to pass on, it could be charged inheritance tax of up to 40%. The final tax charge will depend on the value of your other assets and any reliefs or exemptions available.

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Can I become a pension millionaire?

If you do manage to save £1 million pension wealth, then you’ll get to the fun bit: working out how to withdraw and spend your pension wealth!

Managing a large pension portfolio requires careful research, planning and discipline, but it’s a nice problem to have. 

And as for spending it, whether it’s a trip round the world or a holiday home in Eastbourne, the choice is yours. Just don’t spend it all at once!

When it comes to drawing your pension, you may want to speak with a qualified financial advisor to understand all of your options, the tax you may be liable to pay on withdrawals, and how best to support your needs for your golden years.

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Right now, you can get free shares worth up to £2,000 when you contribute £5,000 or more to your Freetrade SIPP.

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Important information

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