Saving is back in style! With interest rates on the rise, it’s no wonder that more and more people are starting to think about how to grow their money. But if you had a cool million, just how much interest could you expect to earn each year?
Background – why 1 million pounds?
As a kid, I distinctly remember my maths teacher telling me that the average person could expect to earn a million pounds in their lifetime. That was decades ago, and even with inflation, her figures were way off. In fact, according to the ONS, the average Brit will only earn around £566,000 in their lifetime. That’s not even enough buy you a three-bedroom house in some parts of the UK!
For the sake of this article, let’s forget about that, and stick with a 1 million. What kind of interest could you expect to earn on it, and would it be enough to live on? That’s what we’ll be answering.
This scenario isn’t as far-fetched as it might sound. According to Credit Suisse, there are over 2.8 million millionaires in the UK. While many of these people will have their wealth tied up in assets, a good number of them will be looking for ways to earn interest and grow their money.
What’s the interest on a million pounds?
As with all savings and investments, interest and return on investment will vary over time.
At the time of writing, the Bank of England base rate stands at 5.25%. We’ll use that figure in our workings from here on in. Invested properly this is the minimum return you’d expect to see over the longer term anyway.
| Interest Rate | Monthly Interest | Annual Interest |
|---|---|---|
| 2.5% | £2,083.33 | £25,000 |
| 3% | £2,500.00 | £30,000 |
| 3.5% | £2,916.67 | £35,000 |
| 4% | £3,333.33 | £40,000 |
| 4.5% | £3,750.00 | £45,000 |
| 5% | £4,166.67 | £50,000 |
| 5.25% | £4,375 | £52,500 |
| 7.5% | £6,250.00 | £75,000 |
It’s worth noting that these tax estimates assume you have used up your personal allowances and don’t qualify for any other exemptions or reliefs.
What’s the interest per day on 1 million pounds?
At an annual interest rate (AER) of 5%, the interest per day on a million pounds is approximately £136.99. At the current Bank of England base of 5.25% AER, the daily interest on the same amount would be around £143.84.
Is 1 million pounds enough to live on?
You’ve suddenly received a million pounds. Perhaps you sold your savvy side hustle business, or got lucky trading online (see our Trading 212 review). Either way, it’s only natural to wonder whether you could live off the interest alone. After all, who wouldn’t want to live off their wealth, without having to worry about working again?
Whether you could live off the interest alone though depends on how it’s invested and what the return it.
Figures from the ONS reveal the median UK salary to be £33,280. Whilst your £1m at the 4.5% would earning £45,000. Assuming you had no other income, you would pay roughly £8,800 in tax, leaving you with a net £36,200 a year or £3,000 a month. More than the median salary, but not exactly living the high life.
In many parts of the country a net £3,000 would be enough to pay for the mortgage on a reasonably price home. The UK average mortgage payment is around £753, but even if we up that £1,200 to take into account the higher cost of mortgages today, that leaves £1,800 a month, which should even afford you a modest lifestyle in London. In many other parts of the country, you’d likely be able to buy or rent a detached home, and enjoy a more comfortable lifestyle.
Interest rates are expected to peak at 5%, which would leave you with £3,350 after tax. Better, but not the millionaire lifestyle you might have dreamed of.
What if you could do better? After-all few with 1 million pounds in cash, would expect such low returns. Which brings us to the next part. Where should you invest your million for the best returns.
Where to put a million pounds for the best return
The best paying savings accounts at the moment are only paying between 4.5%-5% interest, and then only on a deposits of up to £5,000. An easy access accounts such as Chip will allow deposits up to £85,000, while Chase allows up to £250,000, but the return on these is 4.84% and 4.1% AER respectively. Kroo Bank on the other hand tracks the Bank of England base rate minus 0.9% and accepts deposits of up to £500,000.
You can beat both of these with Trading 212 (see our Trading 212 review), which is currently paying 3.8% AER on uninvested cash, and has a 0.5% cashback Visa card.
The 212 Card is connected with an INVEST Account. When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results. You may receive a certain percentage of the purchase amount back in cash when making a transaction using the Card. Terms Apply
Then there are ISAs. After-all, any returns such as interest or dividends are tax free. The downside here, is you can only squirrel away £20,000 a year. So the bulk of that £1m is going to need to be invested elsewhere.
Another £60,000 a year could be put in a Self Invested Pension Plan (SIPP). This comes with the benefit of tax relief on your contributions, and no additional taxes on the interest or returns generated.
The majority of the £1m though is likely to be invested in the financial markets. UK Government bonds (gilts) are roughly matching the Bank of England base rate, so you’d be able to stick a fair chunk of money there, for relatively safe keeping while figuring out your next moves.
For higher returns, you really need to turn to the stock market via a tracker fund. You’d be playing the long game here, and much of the return would be in the form of capital gains, and dividends, but you could expect annualised returns in the region of 8-10% over a 10 year period.
Is 1 million pounds enough for retirement?
Now when it comes to retiring with a £1 million pension, that is another matter. According to research by Which? published in 2023, you can enjoy a luxurious retirement as a single person on an annual income of £31,000 after tax, while £19,000 is described as comfortable.
For couples this rises to a £45,000 for a luxurious retirement, and £28,000 a year for a comfortable retirement.
All of these figures assume that you own your own home and paid off your mortgage in full.
At 4.5%, the interest on 1 million pounds would be £45,000 before tax. Even after tax, you’d still earn over £34,000 which should afford a comfortable retirement for a single person. Not including the £10,600 a year state pension.
The inclusion of the state pension really bumps up the sum for a couple, not to mention the additional personal allowance, and personal savings allowances.
Conclusion
A million pounds is a huge amount of money, but it’s unlikely to be the life changing amount you imagine. While it’s possible to live off the interest, it’s unlikely to be a lavish lifestyle, especially if you’re used to a high standard of living. However, if you’re willing to make some adjustments and live within your mean, it could be a viable option.
On the other hand, having a 1 million pound pension pot (assuming you’ve paid off your mortgage), would certainly provide a comfortable if not luxurious retirement.
Not quite a £1m but wondering how much your savings are worth? Check out our compound interest calculator.