Pension warning as pot needed for ‘comfortable’ retirement hits whopping £1.3m | Personal Finance | Finance

Britons planning to retire early now need a “seriously large” pension pot worth over a million pounds to fund a “comfortable” retirement, new research suggests.

When factoring in a two percent inflation rate, calculations from Interactive Investor show that a 55-year-old now needs a pension pot worth £1.3 million if they retire in 2024 and aim for a comfortable retirement. This is an extra £495,000 compared to if they retired at the state pension age of 67.

Meanwhile, a 60-year-old retiring in 2024 would need just under £1.1million for a comfortable retirement, £315,000 more than if they retired at age 67.

For a moderate retirement, a 55-year-old needs a pension pot of £857,000, an extra £350,000 compared to retiring at age 67.

In contrast, a 55-year-old needs a pension pot of £230,000 to fund a minimum retirement, an additional £145,000 compared with retiring at the state pension age of 67.

The investment platform’s calculations are based on PLSA retirement living standards, uprated by inflation of two percent per annum.

Alice Guy, head of pensions and savings at interactive investor, commented: “Many of us dream of early retirement but to get there in style you’ll need a seriously large pension pot. If you’re aiming to retire at 55 years old with a comfortable standard of living in retirement, you’ll now need a pension pot worth an eye-stretching £1.3 million, based on the PLSA Retirement Living standards.

“Even for a moderate retirement, you’ll need around £850,000 to retire at 55 and £679,000 to retire at 60 years old.”

Ms Guy noted that, with Labour rumoured to be considering reintroducing the lifetime allowance, which was previously around £1.1million, it’s “thought-provoking” that this previous level of allowance was arguably not enough for a comfortable retirement if you plan to retire early.

The lifetime allowance refers to the total amount a person can build up across all pension savings without incurring a tax charge. This allowance was abolished in April 2024, but whether this will remain is now uncertain.

Ms Guy said the figures may seem high, “but it factors in future inflation and needing to plug a long gap before the state pension kicks in”.

For a basic no-frills standard of living in retirement, Ms Guy said: “You now need a pension pot worth just over £200,000 to retire at 55 years old. This would give you a modest income of around £15,000 each year which is only really liveable if you have no housing costs.

“With many of us living for longer, retiring early could mean you need to fund over 30 years in retirement and inflation has a big impact on how much you need, £100,000 saved now will be worth a lot less in 15 years, meaning you may need more than you think to achieve a decent standard of living in retirement.”

According to the pensions expert, using a workplace pension or a Self Invested Personal Pension (SIPP) is “one of the best methods” to save for early retirement.

My Guy explained: “This is because your investment returns are sheltered from tax, and you’ll also get and additional tax boost and employer contributions when you pay into your pension.

“The magic of investment compounding means it’s often easier to get to your investment goals as your returns snowball over time. Starting early and keeping on plugging away with regularly investing is one of the best ways to build long-term wealth.”

However, for those not on track with their pensions, Ms Guy noted: “It’s important to remember that how much you need is very individual. We all have different goals when it comes to retirement and how much you need varies massively depending on your costs, lifestyle and how long you need your pension to last.

“If you can afford it then consider increasing your pension contributions as small increases really mount up and can make a big difference when it comes to retirement.”