The full new State Pension is £168.60 per week, or £8,767.20 a year. This alone isn’t enough for most retirees to live off. So I’m planning to beat the State Pension by putting aside my own funds. Today, I’m going to explain why I believe just £50 will be enough.
Tax benefits
£50 a month, or £600 a year, might not seem like a huge sum at first, but thanks to the power of compound interest, this manageable pension deposit will grow into a healthy retirement cushion over the long term.
The first part of my pension savings plan is to open a self-invested personal pension, or SIPP. The great thing about SIPPs is that for every £1 you deposit, the government will add an extra 20% for basic rate taxpayers. This means the government will add £150 a year to my £600 yearly deposit, so the total amount I am putting away is £750 a year.
The other great thing about SIPPs is that as well as the government pension top-up, they also have tax benefits. Any income, or capital gains, generated inside a SIPP wrapper doesn’t attract tax until the funds are withdrawn, making this the perfect vehicle to grow your wealth over time.
Saving for the future
The best way to make sure you have enough money to beat the State Pension when you decide to quit the workforce is to invest your savings. By investing your money, you can generate much higher returns over the long term than just sticking with cash.
The best cash savings account on the market today offers an interest rate of only 1.5%, which is below the rate of inflation, implying that if you leave your money in cash, it won’t actually increase in value. All your hard savings work will be for nothing.
By comparison, over the past few decades, the FTSE 250 has produced an average annual return for investors in the region of 9%. It’s straightforward to achieve this return yourself by investing in a low-cost FTSE 250 tracker fund.
Putting it all together
According to my calculations, if I invest £62.50 a month (my regular monthly contribution of £50 combined with the government top up) over 10 years with an average annual rate of return 9%, this small monthly contribution will grow to be worth £12,100.
Two decades of saving £62.50 a month will leave a pension pot of £41,200, according to my calculations and, saving and investing for 40 years will leave me with a pension pot of £281,000. That’s enough to give me an annual income of around £11,500 in retirement, according to my number crunching.
This might not seem like much first. But when combined with the State Pension which, for the sake of simplicity I’m assuming will remain at its current rate, should give me an average annual income in retirement of just over £20,000 per annum.
The bottom line
So that’s how I plan to beat the State Pension with just £50 a month. No matter how many years you have to go until retirement, these principles still apply.
You might have put away a bit more every month, but by using the power of compound interest, and making the most of the tax benefits available, it’s relatively straightforward to beat the State Pension and achieve a comfortable level of income in retirement.
