A million pounds may be more than most people can hope to save in a lifetime, but it isn’t what it used to be.

That’s because the amount of goods and services you can buy with it has shrunk over the years due to rising prices – and will likely continue shrinking going forward¹. People are also living longer, so the money you have to live off needs to last longer.

In a previous article, we spelt out what it might take to become a pension millionaire. Below, we explore how much income you could draw from a million-pound pension in retirement.

While our analysis doesn’t account for other potential sources of retirement funding, such as paid occasional work, we hope it gets you thinking about your own circumstances and how best to prepare financially for your own retirement.

This is because evidence from the government suggests that most people are not on course to enjoy the kind of retirement they may hope for².

How much retirement income do you want?

According to the Pensions and Lifetime Savings Association (PLSA), a ‘comfortable’ retirement – one that allows you to have a couple of holidays each year and to be a ‘little spontaneous’ with your money – requires an annual disposable income in today’s money of £43,100 per single person and £59,000 per couple³.

Bear in mind that those figures are what you’d need after tax has been deducted. When you draw income from a pension, it is taxed in the same way as income from employment. So, that means a comfortable retirement for a single person requires an annual pension income of £51,714 before tax (no national insurance is due on pension income, otherwise it would be closer to £59,000). For a couple, a comfortable retirement requires an annual pension income of £77,380 before tax (assuming you’re relying on just one individual’s pot and are therefore subject to a higher rate of tax⁴).

The chart summarises what you might need based on the PLSA guidance.

How much money might you need each year for a comfortable retirement?

Source: Vanguard calculations using online government calculator. *Assumes one pension pot supports two people. If spread across two pension pots, the income would likely only be subject to basic-rate tax, in which case the required gross total would be lower and closer to £67,500.

Is it enough?

The PLSA estimates are a useful marker. However, they still may not be enough for some people. Analysis by the Department for Work and Pensions (DWP), for example, suggests ‘high earners’ should target a retirement income that is at least half their current pre-tax income⁵. For very low earners, this increases to 80% of current pre-tax income.

The good news is that some people need less money later in life – they may have fewer dependencies and less debt to service, such as a mortgage, or they might cut their overheads by moving to a smaller home.

Depending on your national insurance record, you’re also entitled to a state pension from your late 60s onwards⁶.

The bad news is that DWP data show that as many as 89% of the working-age population are not on track to meet the PLSA’s definition of a comfortable retirement, let alone anything higher. The DWP also says that high earners are the most likely to be ‘undersaving’, which means they’re more likely to miss the retirement income target of 50% of current pre-tax income.

Hypothetical million-pound-pot scenarios

With that in mind, we’ve crunched a few numbers to see how long a million-pound pension could last, depending on the amounts withdrawn each year.

To keep things simple, our examples assume:

• the individual receives a full state pension, which rises by 2.5% each year,
• their required spending rises by 2% a year to account for increases in the cost of goods and services,
• they draw tax-free cash from their private pension – under current rules, you can draw up to 25% of your pension as tax-free cash, up to a lifetime maximum of £268,275 and
• the money left behind earns a 5% annual investment return after costs.

On this basis, we calculate that you would only need to withdraw money at a starting rate of £36,923 a year to achieve a total after-tax income of £43,100, including the full state pension. As the chart shows, this means a million-pound pension could theoretically give you a ‘comfortable’ retirement for as long as you need it and enable you to leave a financial legacy for your loved ones.

Alternatively, if you’re looking for a higher income of, say, £60,000 a year after tax, a million-pound pension could last around 23 years, as the dotted line shows.

How long a £1 million pension might last based on a retiree’s initial pre-tax annual income

Source: Vanguard calculations. Notes: Spending amount rises by 2% per year; average annual investment growth is 5% after costs; the full state pension is the investor's only other source of taxable income. We calculate the effective tax rate on pension withdrawals above this amount. We assume tax bands rise with inflation going forward, so that the effective rate of tax remains broadly the same as the investor increases their withdrawals. The investor is able to withdraw up to 25% of their pension as a cash lump sum free from tax (up to a lifetime maximum of £268,275) - they do this gradually over time.

How long will you need a pension for?

Of course, some people may choose to spend more of their pension in the earlier part of their retirement, when they are more active, and then spend less later. So assuming a constant income like this may not ring true for everyone.

Even so, thinking about how long you might need to rely on your pension is a crucial consideration. People often underestimate their life expectancy, which means they can run out of money just when they most need it.

A female aged 50 today, for example, has an average life expectancy of 87 years and a one-in-four chance of living to age 95. Try the UK government’s life expectancy calculator to see how long your pension might need to last.

You can also use our pension calculator to get a sense of what your retirement might look like. Think about the pension money you’ve built up so far and whether you’re on course to retire when and how you want to. If you’re not on track, think about what you can do to help plug the gap.

Could you increase your workplace pension contributions or make more use of employer matching⁷?

Should you open a self-invested personal pension (SIPP)? If you don’t know already, a SIPP is a type of personal pension that gives you more control over how your money is invested. You can use it alongside your workplace pension or to bring your other pensions together, including those left over from previous jobs. Combining your pensions can give you a clearer picture of your savings, so you can make more informed decisions around how much you need to save and when you can afford to retire.

¹  The eroding impact of inflation is such that even with inflation of just 2%, a million pounds now left untouched would have the equivalent purchasing power of £552,000 in today’s money after 30 years.

² Analysis of future pension incomes, Department for Work and Pensions, 3 March 2023.

³ Find out more on PLSA’s retirement living standards.

⁴ If spread across two pension pots and subject only to basic-rate tax, the required gross total would be lower and closer to £67,500.

⁵ Analysis of future pension incomes, Department for Work and Pensions, 3 March 2023.

⁶ The state pension age will rise to 67 from 66 over 2026-2028. The full state pension is currently worth £11,500 a year. Check your own state pension forecast.

⁷ In addition to the statutory 3% of your pre-tax annual income between £6,240 and £50,270 that employers pay into your workplace pension, some will voluntary pay more into your workplace pension if you agree to increase your contributions too. Check with your HR department. 
 

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