A 49-year-old pension saver with a pot of £200,000 has been told they are well ahead of the average, but will still need to contribute up to £1,500 a month to reach £1 million by retirement.
The median pension savings for people aged 45 to 54 is £80,000, according to official figures from last year, leaving a £200,000 pot well above average.
Reaching a £1 million pot from that starting point by the current state pension age of 67 would require monthly contributions of £1,502, assuming an investment growth of 5 per cent after fees, according to Ed Monk, a pensions and investment expert at Fidelity International.
"To get there you'll need some hefty contributions, a good slug of investment growth, or more likely a combination of the two," Monk said.
A smaller contribution of £500 a month under the same 5 per cent growth rate would result in a pot of about £654,000 by age 67, he said. Hitting the £1 million mark with a £500 monthly payment would require a much higher return of 7.8 per cent a year.
Retirement income goals
Rather than targeting a specific figure, savers should focus on the lifestyle they want and the income required to support it, said Lloyd Gardner, financial planning director at Rathbones.
"A £1 million pension pot is not necessarily the right objective," Gardner said. "A more important question is: what level of income will the pension need to provide in retirement?"
If a saver retired at 65 with a £1 million pension and the fund achieved 7 per cent annual growth, they could theoretically withdraw about £70,000 a year while broadly maintaining the capital value, he said. If they were comfortable gradually drawing on the fund until it was exhausted at age 90, they could take approximately £86,000 a year.
Without any further contributions, a £200,000 pot would grow to about £590,000 over 16 years by the age of 65, assuming net investment returns of 7 per cent.
To reach £1 million by 65 under the same growth assumptions, a saver would need to contribute about £12,000 in the first year and increase their contributions by 3 per cent annually. This would require total contributions of about £243,000 over the 16-year period.
Rising costs and tax changes
Building a larger pot is being made difficult for many by mounting mortgage and rental costs, high energy bills and grocery prices. Changes to tax rules will also affect some savers.
From 2029, a cap of £2,000 a year will be placed on the amount of money that can be shielded from employer and employee national insurance contributions through salary sacrifice.
The challenge of saving enough is widespread. In June, trade body Pensions UK warned that more than three-quarters of people were not on course to save enough for a "moderate" lifestyle in retirement.
The group estimated a moderate lifestyle costs £32,700 a year for a single person and £45,400 for a couple, and said just 23 per cent of the working population would reach that level.
A "comfortable" lifestyle, allowing more money for indulgences, was estimated to cost £45,400 for a single person and £62,700 for a couple. Pensions UK said only 9 per cent of workers were in line to achieve this.
A frugal, "minimum" retirement lifestyle was estimated at £13,900 a year for a single household and £22,500 for a couple.
