Many investors worry that the State Pension might not be enough to live on in later life. If you fall into this bracket, now is the time to take action. Today I’m going to explain how investors can reduce their reliance on the government retirement subsidy with just £100 a month by investing in UK shares.
How to beat the State Pension
I believe the best way to reduce dependence on the State Pension is to set up a private pension. There are many ways investors can do this. You can set up a SIPP or buy a pension plan from a well-known provider.
If you are comfortable investing your own money in UK shares, the former may be the best option.
SIPPs are an excellent tool to supplement the State Pension. Any money contributed is entitled to tax relief at a saver’s marginal tax rate. That is 20% for basic rate taxpayers. On top of this, any income or capital gains earned on money saved inside a SIPP wrapper do not attract any further tax.
The combination of these tax benefits makes SIPPs a great savings tool and provides enormous benefits for savers.
Time to start investing
I reckon the best way to take advantage of these tax benefits is to invest your SIPP funds.
If you’re comfortable using this approach, many online stockbrokers will allow investors to set up a monthly investment plan from as little as £50 a month.
So, even though a weekly contribution of £100 might not seem like a massive amount of money, it is enough to get started investing. If you want to beat the State Pension, I think it is worth considering this option
If you are comfortable investing a large lump sum into individual equities, I think the best way to invest for the future is to buy a basket of high-quality UK shares.
Unilever and AstraZeneca have substantial competitive advantages and strong balance sheets. I think these qualities will help these companies produce impressive total returns for investors in the long term.
Another alternative is to buy a basket of stocks through an investment fund. Using this approach gives investors the option to own a well-diversified portfolio of UK shares at the click of a button. By using this approach, investors can avoid having to spend lots of time and effort in selecting individual companies.
Both of the approaches outlined above are perfectly suitable, in my opinion, for anyone who wants to beat the State Pension.
Healthy returns
UK shares have produced a healthy total return for investors in the past. Over the past century, UK blue chips have produced an average annual return of 8% for investors. I think it is reasonable to assume investors will continue to see this rate of return. One hundred years of data is difficult to argue with.
At this rate of return, I calculate it would be possible to turn an investment of £100 a week, or £433 a month, into a financial nest egg of £650,000 in three decades.
This would be enough to provide an annual income of £26,000 in retirement. That is significantly higher than the current rate of State Pension.
