27th June 2014
“Next year we’ll be millionaires” was the favourite catchphrase of Derek ‘Del Boy’ Trotter but it seems the average person will have to wait until age 56 before they make their first million.
Analysis by Prudential showed the average worker will have earned a total of £1 million by the time they are just over 56-and-a-half-years-old, if they start work at 18 and earn an average wage throughout their life.
Men are likely to get to the £1 million mark faster than women, with the former reaching it at 51 but a woman having to wait nearly 20 year longer, to six months after her 70th birthday and way beyond the state pension age.
The gap between men and women has closed by two years since 2012 as women’s income increased overall and men in their 30s and 40s witnessed a slight decrease.
You many have earned £1 million by age 56 but Prudential found most people work until age 65 and their career earnings before tax top £1,208,500, increasing to £1,318,000 if they work until 70 and to £1,427,500 if they forego retirement and work until age 75.
If you do retire at 65 you will have paid nearly £216,500 in tax (£123,300) and national insurance (£93,200) on your lifetime earnings. However, individuals don’t have to pay that much tax – they can reduce their tax bill by paying into a pension and receiving tax relief on contributions.
Tax relief is paid by the government on all pension contributions as an incentive to save. Basic rate taxpayers paying 20% income tax receive 20% tax relief on all contributions but the way the relief is calculated means you actually receive another £25 on every £100 saved rather than £20. This extra money isn’t paid into your pocket it goes straight into your pension as a top-up.
Higher rate taxpayers paying 40% income tax, paying £100 into their pension would receive a £50 top up on their contribution.
Stan Russell, retirement expert at Prudential, said the average person paying in £100 a month into a pension over a 40 year career would receive additional tax relief of £12,000 and even more if they are a higher rate taxpayer.
‘Being a millionaire is a dream for most of us, but the reality is that the average UK employee will easily earn £1 million in a lifetime of work. For many people, this cumulative view of lifetime earnings will help open their eyes to the amounts they could be saving for retirement,’ he said.
‘Of course, life tends to get in the way and it is not as simple as recommending that workers should set aside a fixed amount of their lifetime income. But it is definitely the case that the earlier you save and the more you save, the better the retirement income you can expect and the more tax relief you will receive.’