How to be a pension millionaire for as little as £6 a day. Read our definitive guide to the amount you need to save every month to retire in luxury

Retiring with a million-pound pension pot and the luxury lifestyle it affords may sound like the stuff of dreams. But it could be in closer reach than you think.

It’s unlikely to happen by accident, however. Use these top tips – and invest a good bit of time – and a retirement of frequent holidays, treating loved ones and enjoying the finer things could just be attainable.

1. Start early

It is never too late to start saving for retirement, and even a few years of putting money aside can make a tangible impact on your future lifestyle. However, the earlier you start, the less you need to save to reach £1 million by retirement. That is because the contributions you make to your pension have longer to grow and benefit from the power of compound interest.

In fact, so valuable are early contributions that someone who starts saving at the age of 21 and then stops at 30 could end up with a bigger pension pot when they retire than someone who starts savings the same amount at age 30 and doesn’t stop until their retirement.

If you start saving in your 20s you would need to pay in £460 a month throughout your working life to hit £1 million by the time you retire at age 65, according to calculations from wealth manager, Investec Wealth & Investment. That’s the equivalent of £15 a day.

This assumes you save into a workplace pension using a salary sacrifice scheme and your fund benefits from investment growth of 3.8 per cent a year net of charges and that your contributions increase by 2.6 per cent every year.

Salary sacrifice is a common pension option offered by employers to make your pension saving more tax efficient. You agree to reduce your salary and your employer pays the difference into your pension, which means you benefit from lower National Insurance contributions as well as tax relief.

Wait until you’re in your 30s to start saving and you need to save £775 a month to get to £1 million; in your 40s it rises to £1,400 a month.

Hopefully, by the age of 50 you have some pension savings squirreled away. To get to £1 million from a standing start would be tough for even the very highest earners. You’d need to put away £3,450 a month. To hit a million, you would really need to make lump sum contributions to try to catch up. 

Faye Church, chartered senior financial planner at Investec Wealth & Investment, says that if you’re making larger contributions, you should make sure they are within the Annual Allowance, which limits the amount you can put into your pension each year and benefit from tax relief at £60,000 a year (previously £40,000 until this tax year). 

She adds: ‘People in their 60s would struggle to reach a £1 million pension by the time they reach age 65 if they have no other provision, due to the Annual Allowance and short timeframe.’ If you have not used your Annual Allowance in the previous three years, you can make a one-off contribution of four years’ worth – a total of £180,000. After that, you would have four more years that you could make £60,000 contributions, which would get you to £420,000 by the age of 65.

2. Snap up free money

The figures above for how much you need to put aside every month to hit £1 million include tax relief and contributions from your employer. That means that – once you subtract these perks – the amount that you personally have to save every month could be considerably less.

Take someone in their 20s, who is a basic rate taxpayer and has an employer that matches their pension contributions. To put aside £460 a month, they would only have to put in £184. That is just over £6 a day. Their employer would put in half – £230 – and the Government would top up their contribution by 20 per cent thanks to tax relief on pensions. With salary sacrifice, they would have to pay in £152.

Similarly, someone in their 30s who is a higher-rate taxpayer and had their pension contributions matched by their employer would only have to pay in £254.50 a month to have £775 added to their pension, using salary sacrifice.

3. Ride the waves

These figures – and indeed most pension projections – assume that you will be in employment throughout your working years and that your income will rise steadily over that time. That may prove to be the case, but there is a very good chance that your working life will look far bumpier, with time out for caring responsibilities, health, retraining or redundancy along with other periods of higher earning power or even the odd windfall.

The key is to ride the waves. At the times when you work for an employer with a generous pension scheme, up your contributions if you can. If you get a cash lump sum, such as an inheritance, bonus or redundancy payment, shovel a bit of it into your pension. That way, you’re more likely to stay on track to hit £1 million even if you do have times when you can’t pay in as much as you would like.

And what would you get for £1 million?

A £1 million pension pot could afford you an income after tax of £40,375 if you are a basic-rate taxpayer, and £33,250 if you are a higher-rate taxpayer. That would last you until the age of 95, according to Investec Wealth & Investment’s calculations. This assumes that your remaining pot grows at 3.8 per cent a year after fees and that you receive the full state pension.

The income is just shy of what pension industry standards suggest a single person would need for a comfortable retirement. A single person requires £43,100 for a comfortable retirement, according to the Pensions and Lifetime Savings Association. This would afford you a two-week four-star break in Europe every year, three long weekend breaks in the UK, £70 a week for food and a new car every five years.

I retired at 55 thanks to my £1m savings pot 

‘Loving every second’: Ian Dunsire

Ian Dunsire, 74, retired almost 20 years ago aged 55, and says he has ‘loved every second’. He volunteers as a signalman on the Ffestiniog Railway near his home in Wales, as a trustee for his local wildlife trust, has a small holding – and is looking forward to celebrating his birthday in June with his wife, Barbara, on an Alaskan cruise.

And Ian, right, says it’s all thanks to his £1 million Self Invested Personal Pension (Sipp). ‘I started saving in the early 1990s and put away £10,000 a year for most of my working life,’ he says. ‘There were times when that was harder to do, and it meant giving up things like the odd holiday or fancier car. But I knew it would help us out one day.’

Ian had worked in a demanding consultancy job that involved a lot of travel. Barbara, had a bookkeeping business. Although they enjoyed work, they were thrilled to give it up at the same time to do other things they love.

Ian now draws down £2,500 each month from his pension, which he holds on investment platform AJ Bell, but says its value is still rising thanks to investment returns. He keeps a balanced portfolio, holding a range of sectors and geographies so that he doesn’t suffer too much volatility. Ian’s advice? ‘Go for it! Start as early as you can and then keep saving every month. Put in any other money you get as well. Whenever I got a bonus I would divert it straight into my pension. It’s worth it.

‘I’ve seen friends stop work at retirement age and not enjoy it because they get sick or they’re tired. I’m so glad to have been able to retire early thanks to my Sipp.’

<!- – ad: https://mads.dailymail.co.uk/v8/ua/money/mailplusmoney/article/other/mpu_factbox.html?id=mpu_factbox_1 – ->