How much interest on 1 million pounds is largely dependent on the interest rate available at the time.
Traditionally we’ve been used to interest rates of around 3-5% and so £1million would give you £30,000-50,000 a year. That’s certainly comfortable given the average UK salary is normally just over £25,000.
However, after 2008 and more recently the Coronavirus pandemic, good interest rates like that feel a long time ago.
With interest rates around 0-1%, a large amount of £1million in capital would yield anything from nothing at all to just £10,000.
But the troubles don’t end there. The whole point of interest is to counter inflation. Interest rates in savings accounts have never really been high enough to drive significant growth . You won’t get rich from it.
However, every year money becomes less and less valuable. Notice how things always get more expensive? That’s inflation.
£1million was worth a lot more in real terms in the year 2000 than it is now.
If you had £1million and held onto it without earning any interest on it then you would have actually lost money, even though you would still have £1 million, because the same amount would now have less buying power.
It’s the same thing as if you’ve been in the same job for 10 years without a pay rise. You probably already deserve a rise as your skills have probably improved. But even if they haven’t and you are doing the exact same work as before, the salary you receive is worth less than it was before.
The Stock Market
With such historically low interest rates, one of the best ways to actually achieve growth from savings is by investing in assets.
An asset is something that earns you money – like rented property or stocks.
That means that while inflation is reducing the value of money you are making extra money to counteract the reduction.
If you invest well then you can make more money than is required to beat inflation and achieve capital growth.
The historical returns of the FTSE 100 are between five and eight percent since 1984, including big crashes like Black Monday in 1987, the Dot Com Bubble and the 2008 recession. That means £1 million could make £50,000 – £80,000 a year.
But when asking how much interest on 1 million pounds you should also consider how much tax on 1 million pounds.
The first thing you should probably do is start paying the money into an ISA in order to bring down your taxable income.
If you invested £1 million all at once without a tax wrapper like an ISA then all the income would be taxable. So if you made that £50,000+ a year you would be a higher rate tax payer and have to give up 40% of the gains.
An ISA can shield you from that tax, but only on the money held within it and you can only pay in £20,000 a year. So it would take you 50 years to pay in the full amount.
Of course if you £1 million is your savings goal then you can start early and gradually build up to £1 million in ISAs which should take less time because your ISAs should be earning returns. When you finally reach £1 million everything in ISAs should be tax-free.