In 2020, I expect most of us are thinking about our immediate requirements rather than our pensions. But the State Pension is still very poor, and likely to get worse. And the retirement age is steadily being pushed back.
Someone born after 1978 will not now qualify for the State Pension until they reach 68 years of age. There are no current plans to push that further. But, as a population, we’re ageing. So will there come a time when people have to wait until their seventies to qualify? I’d put money on it.
State Pension triple lock
At the same time, the triple lock is coming under pressure. It guarantees that State Pensions will increase every year by whichever is the greatest of average earnings growth, inflation, or 2.5%. In that way, pensioners should be able to keep up, proportionately, with people in work.
But the extreme public expenses of 2020 will surely make the government like that even less than usual. And I reckon the massive debt built up dealing with Covid-19 could hasten the end of the triple lock. So what’s the solution to a declining State Pension?
At one level, I think the answer is obvious. We have to invest for ourselves to ensure comfort in our old age. The harder question is how? If you have a company pension, that’s a good start. But I think it makes sense to put away as much as possible from our income today to provide for our future. So, where and how?
Historically, shares easily beat cash
With super-low interest rates, a savings account, or a Cash ISA, just don’t cut it. But investing in shares has a tremendous track record of beating cash investments. Yes, there will be some bad times. But, over the long-term, stock market crashes have always come back. And we can barely see them on the long-term share price charts.
A study by Barclays has shown that, over the past century or so, the UK stock market has provided average annual returns of 4.9% above inflation. That should certainly beat the State Pension.
But isn’t investing in the stock market complicated? It doesn’t need to be. We have two very handy kinds of investment account in the UK, which offer different tax reliefs. I’m talking of the Self-Invested Personal Pension (SIPP) and the Individual Savings Account (ISA) here. I use a combination of the two, and both are easy to set up.
But what to actually buy?
So, with a SIPP and a Stocks and Shares ISA in hand, what do we buy? The easiest approach is probably to choose an index tracker. Many go for a FTSE 100 tracker for stability and dividends. But the FTSE 250 has provided better returns over the past 30 years, so that’s an attractive option.
I prefer to choose my own shares to minimise my State Pension dependence. And investors who start with a tracker can always move on to that later. One thing, though, is that we need a long-term approach to offset the short-term risk. I wouldn’t have all my money in shares in 2020 if I was planning to retire in 2021, for example. But I do think the downturn this year is providing opportunities to improve my long-term returns.
