Page last updated at 00:06 GMT, Friday, 13 November 2009

A lottery win so you never work again

By Kevin Peachey
Personal finance reporter, BBC News

The 'Magnificent Seven' syndicate
This lucky septet won 45.5m on the Euromillions

When a syndicate of seven office workers from Merseyside won the £45m jackpot in the Euromillions lottery draw, they immediately announced their plans to quit their jobs.

Their win - a cool £6.5m each - was enough for the "Magnificent Seven" Hewlett Packard IT workers to contemplate a life of leisure.

News of their luck prompted the same conversation from supermarkets to staffrooms, from butchers to building sites - how big a win means you never need to work again?

So, the BBC News website, with the help of some financial experts, has calculated the lucky numbers for a job-free life.

The amount varies depending on how old the winner is and what type of investments that person is willing to make.

A £554,676 win for a 40-year-old woman willing to take a risk on investments would be enough to earn an average wage every year until she died.

But for a 21-year-old man wanting a risk-free return, it could need just over £2m.

The maths bit

So, how did we work it out?

Man aged 21: £2,019,117
Man aged 40: £1,268,780
Woman aged 21: £1,658,201
Woman aged 40: £1,069,225
Source: Canada Life

Basically, we wanted to know how much a winner would need to invest to earn a regular return equivalent to the median annual earnings in the UK.

If you line up all the workers in the UK, from the highest earners and one end to the lowest at the other, and pick the person exactly in the middle - that is the median.

This middle man earned £28,000 in 2009. The figure for women was £22,000.

After income tax and National Insurance contributions are deducted, the take-home pay is £21,244 for a man and £17,104 for a woman.

That will not buy you a dream home or a fleet of sports cars, but it is the average that people in the UK live on.

So how big a lump sum would a lottery winner need to get this level of take-home pay for the rest of their life, and how could they get it?

Early retirement

Insurance companies sell annuities - a guaranteed retirement income for the rest of your life. Crudely, this is calculated on your chances of living, with most people buying an annuity in their 60s with their pot of retirement savings.

Lottery balls
The UK National Lottery has been running for 15 years

The life expectancy of a man aged 21 now is nearly 87. To guarantee an annual income of £21,244 for the rest of his life, insurance company Canada Life charges a price of just over £2m.

A man aged 40 now clearly will not need to be paid for as long, so he will be charged £1.27m.

Because the median earnings of a woman are lower, the annuity is cheaper, according to Laith Khalaf, a pensions analyst at Hargreaves Lansdown.

He found that Canada Life would charge a 21-year-old woman £1.66m. This will guarantee an annual income of £17,104 for the rest of her life. She is expected to live until she is aged just over 90.

For a 40-year-old woman, the price charged for the annuity is £1.07m.

All of these calculations protect this income against an estimated inflation rate of 3% a year. They also take into account tax that would have to be paid.

Playing the markets

Taking early retirement, by purchasing an annuity, might be the safest way of guaranteeing an income for our lucky Lotto winner. Yet it is not the only way.

Man aged 21: £807,245
Man aged 40: £659,248
Woman aged 21: £666,076
Woman aged 40: £554,676
Source: Fidelity International

Another option is having an investment portfolio. Because of the greater risks involved in this method, the lump sum needed is lower.

We asked investment specialists Fidelity International to come up with a lump sum which would bring us the typical annual incomes outlined earlier.

This money would be invested in shares of leading companies, government bonds, and in ordinary savings accounts to bring us the return.

They found a 21-year-old man would need a lump sum of £807,245. A woman of the same age would need to put in £666,076.

For our 40-year-olds, the man would need to win £659,248 and the woman would need £554,676.

This assumed an average annual growth rate of 5% in these investments and inflation of 3%.

But before we get carried away, some of this income could be taxed. Although the 21-year-old might over time be able to drip-feed more of their lottery win into tax-free Individual Savings Accounts, the older investors would have less opportunity to do this so face capital gains and income tax on at least some of their investment income.

Unlike the annuity, these investments can be handed down to children in a will. An annuity is just for an individual until he or she dies.

The odds

So there we have it. If you are a 40-year-old woman willing to take a risk, you need to win just over half a million pounds, but if you are a "safety first" 21-year-old man, you need a jackpot of just over £2m.

We need to save more to live the life of a lottery winner in our retirement
Julian Webb, Fidelity International

Unfortunately, and unsurprisingly, the odds of that happening are rather long.

In the main UK Lotto game, which is drawn twice a week, the average top prize is just over £2m for those who get all the numbers correct. The chance of winning that jackpot is one in 13,983,816 - in other words, nearly a 14 million-to-one chance.

The estimated next highest prize, by matching five numbers and the bonus ball, is £100,000.

So while a win is highly unlikely for most of us, these kinds of calculations are worthwhile, according to Julian Webb of Fidelity International.

"While we would all like to win this amount of money on the lottery, unfortunately most of us will not. However, it is worth applying this thinking to what we need to save, in order to enjoy an income equal to the average wage in our retirement," he says.

"Today, people are retiring with an average pot of money of just £35,000, which would leave them on less than the minimum wage, so the message is clear - we need to save more to live the life of a lottery winner in our retirement."

In a completely unscientific poll, the BBC asked 10 shopkeepers in London with an average age of 36 how much they thought they would need to win on the lottery to give up work forever. They overestimated.

Answers ranged from £1m to £5m, with an average of £2.2m, but a fair sprinkling said they would continue in their jobs even if they won the jackpot.

"The more you work, the more you keep young," says the man behind the till in one hardware store. "And money never gives you happiness."

It is not a sentiment the winning Magnificent Seven from Liverpool seem to agree with.

In the words of one of them, 28-year-old James Bennett: "The best thing is knowing I can now support my children for the rest of their lives - there is simply no better feeling than that."

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