Last month, retirees and pension advice services across the UK reacted with horror after a study concluded that the State Pension age should rise to 75. The Department for Work and Pensions has since come out to clarify it has no intention to increase the age to this level for the foreseeable future.
However, the State Pension age is going to increase steadily over the next few years anyway, and this could be a problem for potential retirees.
Rising State Pension
At the time of writing, the State Pension age is gradually increasing for men and women and will reach 67 by 2028. While this might seem unfair, the fact of the matter is that everybody is living longer, and the government cannot afford not to raise the State Pension age.
But you can get around this issue by starting your own retirement pot. Savers are allowed to start withdrawing money from a private pension when they reach the age of 55. So, in theory, you could retire a full 12 years before the State Pension age.
Saving for the future
The best way to save for this goal is to use a tax-efficient wrapper such as a SIPP. How much you need to save depends on how much you’ve already got stashed away and your age. The level of risk you’re comfortable with is also a massive factor.
A saver at 40 years of age who already has £200,000 invested will need to put away an additional £700 a month for the next 15 years to build a pension pot worth £625,000. I calculate this will be enough to give an annual income of £25,000 in retirement and assume a basic yearly rate of return of 5%.
That annual rate of return entails relatively little risk. However, if the saver is willing to take on more risk and invest their money in a low-cost FTSE 250 tracker fund, contributions will be lower. The FTSE 250, for example, has produced an average annual return of around 10% for the past decade.
At this rate of return, I calculate the saver won’t need to put away any additional money at all. The figures above exclude inflation and any tax benefits received by using a SIPP to save.
Investing beats cash
Put simply, I’m planning to beat the rising State Pension age by investing my money in a basket of blue-chip companies. Over the past 100 years, UK stocks have produced an average annual return after inflation of around 5%. Including inflation, the average annual return is about 7%. Over the same time frame, the approximate return investors have received on cash is around 1.5%, including inflation.
A return of just 1.5% per annum makes it challenging to grow the value of your money over the long term. That’s why investing is so important if you are saving for the future.
It’s impossible to tell what the stock market might do five days or five months from now, but there’s a very high chance the market will be higher in five years that it is today. The same can’t be said for cash after deducting the impact of inflation.
Investing your money might seem like a lot of extra work at first glance, but the returns make up for it over the long term.
