How to save £1 million and retire without winning the lottery

It’s everyone’s dream… retiring when we’re still young enough to enjoy life, with enough put by in our pension pot, savings and investments to finance the life we want to live until the day we meet our maker.

But with the average UK pension pot standing at just over £61,000 after a lifetime of saving, you’re going to have to plan to achieve that dream lifestyle, and balance your spending to avoid depleting your savings.

Here’s how planning ahead and using your money wisely can help you fund the retirement you really want.

First things first: talk to a financial planner

We would say that, wouldn’t we? But it’s true. Research by The International Longevity Centre UK revealed that just by taking professional advice, UK savers improve their pension savings alone by £30,991.

Don’t take everything from the same pot

By the time you retire, you may have a collection of different savings and investment pots: a pension, an ISA, bonds, a trust fund, for example. But don’t make the mistake of treating them the same and withdrawing from them without a tax-efficient strategy.

Every savings and investment vehicle you have is effectively a ‘tax wrapper’ for a chunk of money you are putting by for the future. And different tax wrappers are taxed in different ways and at different rates.

Generally speaking, you should withdraw from your least-expensive asset first – the ones that are earning you least interest, or those that are non-taxable so withdrawing from them doesn’t incur any tax liability. But don’t drain one asset before you start on the next. Remember, you should still be looking to have a portfolio that’s balanced in line with the risks you’re prepared to take.

And speaking of risks…

Don’t be too cautious

As a retiree, your focus should be on preserving your financial security. You’re living on the wealth you accumulated in your years of productive earning. But you still need that wealth to work for you. So don’t pull everything out of the stock market and put it all into ‘safe’ assets like bonds. Your portfolio will have been planned to last you until the end of your days, and to do that, it will still need to be invested to keep up with inflation, which erodes your spending power.

Avoid taking your state pension too early

In the UK, the state pension age is 66 for men born after 1951 and women after 1953. But the longer you delay taking your pension beyond age 66, the more it will be worth when you do take it. You’ll get an extra £10.42 per week if you delay taking it for one year, for example – that’s over £500 per year.

You can take 25% of your private pension tax-free from age 55, which can be handy if you have enough in the remaining 75%, plus your state pension and any other investments, to fund your retirement. But be careful: depending on how your private pension is invested, you may not be able to draw down that tax-free sum without triggering the rest of your pension paying out at the same time – either as a taxable lump sum or an annuity you don’t want or need until you retire.

It’s not about the returns

Throughout your investing life, you’ve probably paid a lot of attention to the returns your investments are making, But as a retiree, it’s all about what your investments can buy you.

An annuity, for example – the default option for most pension schemes – can give you a predictable fixed income based on gradually reducing the money in your pot. But you may want to balance this with withdrawing from your other investments at a consistent percentage every year, or taking the dividends you may otherwise have reinvested in your earning years.

Don’t spend it all at once

When your income is unlinked from your earnings and your assets are in front of you, waiting to be spent, it’s perhaps understandable to loosen the reins on your budget and splash out on things you wouldn’t otherwise have done if you were still living off a monthly salary.

It’s tempting, too, to see the money you’re no longer spending on commuting, buying smart clothes for the office and expensive lunches as money available to spend on ad-hoc, unplanned treats. (A lot of people found this out the hard way when working from home in lockdown, only to see spending increase dramatically again as they started going back to the office and booking holidays.)

But don’t forget that, even though your retirement lifestyle may cost less on a day-to-day basis, you probably still want to spend on planned activities such as holidays, financing grandchildren’s education or doing up the house. And as we get older, health and care costs will increase.

It’s a good idea to talk to a professional about building these additional costs into your spending plans as the years go by. And right from the start, set a budget for your regular expenses and any discretionary spending you have. You won’t be able to rely on annual pay rises to offset inflation, so make sure that’s worked into your budget, too.

Agree with your partner

It’s vital if you’re planning for retirement as a couple that you and your partner agree on how you handle your finances, especially if you were reasonably financially independent of each other in your pre-retirement life. One of you may be a lot more risk-tolerant than the other, which was fine when you were both earning your own income, but you need to make sure that you are both comfortable with your retirement finances.

A financial adviser or coach can steer a middle way through differing expectations.

Is that £1 million-worth of advice?

If all of this sounds like sensible but pretty standard advice, and nothing that would make a million pounds-worth of difference to your finances, think again.

We recently took on clients who had built significant wealth throughout their working lives and had recently sold their business, which added to the amounts they already had.

After a discussion around what they wanted the balance of their lives to be about, we were able to put a framework in place to help them live the very comfortable lifestyles they were used to, to never worry about money again and to reduce their personal tax liabilities significantly. We were able to calculate that our planning together would save and make them over £3m!

Perhaps the biggest difference you can make to your retirement income is to get professional advice. You don’t need to be mega-wealthy to see a significant impact on your finances… and on your peace of mind.

The small print: past performance is no guarantee of future results

Free advice & news

Join our ever growing (and free!) mail list for financial advice and news

No thanks, I've changed my mind