Your £1m pension could be worth £21,000 a year

Types of Pension Plans


Having a million pound pension sounds impressive – but few retirement savers realise what that really means as money to spend once they have given up work. The number is the lifetime allowance limit for the maximum any retirement saver can have in a pension fund.

Financial firm Royal London have calculated that a £1 million pension fund can pay out just £21,000 a year in retirement, depending on the options you select. According to the firm, if you select a pension income that increases each year by RPI and has spouses benefit, your pension starting income could be in the region of £21,000.

To hit that limit means saving around £500,000 over a working lifetime, assuming a worker has gained maximum tax relief on their contributions and at least £100,000 fund growth. The rest comes from tax relief.

The £1 million pot from a private pension is also around half that offered to civil servants and workers in the public sector or more generous final salary schemes. They can expect a pension to pay up to £50,000 a year.

Scandal for private pension savers

Both the private and final salary schemes come with index-linking and spouse pensions. Former pensions minister Steve Webb, director of policy at the firm, said: ‘If you have saved all your life you will expect a comfortable pension in your retirement. It is scandal that savers can’t.

“Saving for a pension should be a long-term business, and constant tinkering with tax limits in pursuit of short-term revenue by the Government gains creates uncertainty for savers and makes saving in a pension a less attractive option.”

Financial experts blame government tax grabs and low interest rates for disappointing pension returns.

QROPS alternative for expats

Expats do have an alternative – the Qualifying Recognised Overseas Pension Scheme (QROPS). One little known benefit is QROPS are exempt from the lifetime allowance, providing a pension is less than £1 million on transfer out of a UK scheme.

Once in a QROPS, the fund can continue growing without any fear of a tax penalty imposed by HM Revenue and Customs (HMRC). If a UK pension breaches the lifetime allowance limit, HMRC will want a 55% slice of the fund.

However, government rules do not allow public sector workers or civil servants to switch their pensions to a QROPS – but workplace final salary and direct contribution schemes can transfer to the offshore schemes.