Your retirement might feel like a lifetime away, but if you want to retire with a healthy pension to live on, the trick is to start saving early. Ideally, you should’ve started contributing to your pension at the age of 22 – so if you’re below this age, you get top marks for being prepared. If you’ve missed that deadline, now’s the time to get started.
Everyone has a pension “lifetime allowance”, which is the maximum amount that you can save into your pension without having to pay tax on your contributions. But what would your monthly pension income look like if you maxed out your lifetime allowance and had a £1 million pension pot to work with on top of your state pension?
The lifetime allowance has been frozen at £0 until the 2025/2026 tax year – this is the maximum you can save into your pension without paying any tax on your contributions. If you’re in your 20s, this is likely to change several times before you reach retirement, so it’s worth doing some research closer to the time.
The amount you receive as a state pension depends on how many years you’ve been paying National Insurance Contributions (NICs) – these are taken straight from your salary, if you’re employed. Assuming you’ve contributed the full 35 years of NICs, you’ll get a state pension of £9,339.20 per year, at the current rates.
You can get “credits” that count towards your NICs total if, for example, you’re unable to work or you’re looking after children. Our state pension guide explains the details.
If you were to retire today at age 66 with a pension pot of £0 and a full state pension, there are a couple of different ways that you could take an income.
Firstly, you could start with a withdrawal of 25% tax free, amounting to £257,900. You can either spend this on a big one-off purchase – such as the holiday of a lifetime or a holiday home – or you could keep it to dip into as you need it.
If you opt to not take the 25% tax free as a lump sum, then you get 25% of each withdrawal tax free instead, which is a type of drawdown known as uncrystallised funds pension lump sums (UFPLS). We’re going to assume for our calculations that you’re not taking this option, but there are pros and cons of UFPLS when it comes to it.
For retirement you have 2 main options: an annuity or “drawdown”. We’re going to work out our million-pound budget based on drawdown, but we’ve explained what an annuity is below.
An annuity is where you swap your pension pot for an income for life. If you were retiring today with a pot of £1 million and opted to take your initial 25% tax free, you could get an annuity of around £28,000 each year. With a full state pension of £9,339.20, this would be an income of around £37,000 per year before tax.
Annuity rates aren’t particularly good at the moment, but they could improve before you retire.
Drawdown is a more flexible option – which is where you take sums out of your pension pot if and when you need them, called “crystallising”) and leave the rest invested. There are a couple of different types, depending on whether you want to take 25% tax-free up front (flexi-access drawdown) or want 25% of each withdrawal to be tax free (uncrystallised funds pension lump sums).
With this option you risk running out of money if you live longer than expected or overspend. But assuming you’ll live another 20 years after your retirement date and that your remaining investments earn around 5% per year, this could get you a pre-tax income of more than £65,000 per year at current figures, plus your state pension.
We’re assuming here that you’re living alone – figures would be different if you have a soulmate living out retirement with you. If you were retiring today then £65,000 per year and state pension after tax, taken with flexi-access drawdown, gives you around £4,750 per month to work with – not bad! We’ve worked out a budget for how you might spend it.
It’s worth noting that retirement isn’t all cruises and champagne – you might need to put money aside or shift your budget to account for care or life insurance down the line to make sure you’re well taken care of.
You’ve likely paid off your mortgage and don’t pay rent, so your home costs would mainly include council tax and utilities. You’d be able to afford to have a cleaner and a gardener, giving you more time for your hobbies and interests.
We’ve assumed that you’ve got yourself a loving pet or two to help keep you company in retirement and you’re planning on jetting across the world a couple of times a year. You’ve also got a car with good breakdown cover and car insurance.
Your fridge will be stuffed with some of the tastiest foods, with around £125 per week available for your food shop. This gives you plenty of budget for luxuries and alcohol as well as the essentials.
You’d have plenty of money available for a couple of really nice meals out each week and some drinks to catch up with your mates and brag about your grandchildren’s achievements.
This would include any maintenance required, as well as fuel and parking costs. You could use some of your initial tax-free lump sum to buy a snazzy car to drive into your retirement in style.
Remember those grandchildren you’ve been bragging about? You have 3. You can pop £50 into each of their JISAs every month. What a generous grandparent you are.
You might need to consider your inheritance tax liability when it comes to gift giving in retirement – you can give up to £3,000 per year without incurring a liability. You can get more information on the gov.uk website.
This includes the cost of your pet’s food as well as any toys and adorable jumpers. Your fur babies get the best treatment – you send them to doggy daycare or get a good catsitter when you go away.
This is where you spend the bulk of your money. You’re not working anymore, so it’s time to have fun. You have some money in your budget for your hobbies, whether you’re a thrill seeker or a crafter. You also have money for days out with your family, for streaming services and for the theatre. You can afford to keep your wardrobe up-to-date for the changing seasons and all of those holidays.
This pays for your haircuts, any dental work and for glasses or contact lenses. You’ve also got yourself a gym and swim membership to keep you in tip-top shape, even in retirement.
You go big at Christmas and on birthdays with gift giving, even giving a donation to charity every month. You go on 3 x 2-week holidays each year, living life with an endless tan and plenty of photos to prove it.
While it is possible to save up the maximum amount for your retirement, it might not feel like a realistic aim – don’t be disheartened, you’ll still be able to live a pretty comfortable retirement with a pot of the recommended £237,000. With this, you could draw down approximately £20,000 per year, to add to your state pension of £9,339.20. This gives you nearly £30,000 per year to work with, which is a pretty good income if you don’t have a mortgage to take care of. If you’d prefer some more luxuries, you’d want to aim for a pot closer to £350,000.
One way to work out how much you should be saving into your pension is to halve your age when you start to save and save that percentage of your annual income for the remainder of your working life.
Let's say that you're 24 and you're saving into your pension for the first time. Ideally, you'd save at least 12% each year for the rest of your working life. If you start a little later then you'll need to save more in order to make up for the years you haven't paid in. So if you start at 30, you'll want to save 15% of your annual salary. * This is a fictional, but realistic, example.
Example: Working out how much to save
Have we motivated you to get started on your pension savings? Here’s how to save for your retirement.
The first place to start is typically your workplace pension, which you’ll be auto-enrolled to if you work in the UK, you’re between 22 and state pension age and earn at least £10,000 per year. If you don’t fit into this criteria, you can usually still join your workplace pension if you want to.
With auto-enrolment, your employer will pay 3% of your pre-tax salary into your pension each year, as long as you pay 5%. This means that a minimum of 8% gets saved into your pension each year. Some employers match your contributions to a certain level – sometimes up to 10%. It’s worth taking advantage of this if it is available to you, as it’s essentially a pay rise for future you.
Most people skip out this step, tossing their incoming post into a folder to keep until they need it, but it’s always a good idea to log in and see what your pension pot is being invested into. Pension providers often have a default fund that will perform pretty well that you’ll be automatically placed on. You’re often able to change the fund that you’re invested in to match your attitude to risk and your values a little closer, which is worthwhile.
Using the rough guide above, work out whether you’re saving enough for your retirement. If you’re not, look into either increasing your workplace contributions or opening your own private pension.
There are plenty of different providers available to save into for your retirement – some that require a more hands-on approach to investments than others.
For example, traditional investment brokers let you choose individual investments to place into your pension, whereas robo-advisors, such as Penfold, let you choose from a range of ready-made portfolios, which can save you time.
You can usually choose ethical or ESG portfolios if you’re keen on saving the world and growing your pension pot. You’re often able to choose between different risk profiles – so you can make sure that your investments match with your own attitude to risk. The good thing about saving into a private pension is that you get an additional top-up from the government as tax relief. This works out as 25% of your contributions – so for every £100 you put into your pension, the government will add £25.
The chances are, you won’t stay in the same job for your entire life. This could leave you with a different pension pot for each employment, which can be difficult to manage down the line and might work out more expensive.
You can’t consolidate or move your current workplace pension, but you can consolidate any pensions from previous employment. From your third employment onwards, it’s worth thinking about consolidating your pension pots. This allows you to keep most, if not all, your pension sums in one place to ensure that they match with your goals. If you haven’t kept all of your documents and paperwork, some pension providers can track down your old pensions for you.
A £1 million pension pot isn’t completely out of reach, as long as you’re dedicated enough to save up for it, but it might be easier to set yourself a more realistic aim. Spend some time thinking about what you’d ideally like your income to be in your retirement – if you subtract your state pension and multiply the remainder by 20 then you’ve got a good idea of how much you’ll need in total.
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