Here's how I’d invest £200 a month in UK shares to double the State Pension

Here’s how I’d invest £200 a month in UK shares to double the State Pension

Investing money regularly in UK shares could lead to a surprisingly large retirement nest egg. It may even double the State Pension.

Peter Stephens ❯

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 9 December, 2020 7:47 am GMT

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The State Pension currently amounts to around £9,100. For most people, that’s unlikely to provide financial freedom in older age. As such, investing money regularly in UK shares could provide a worthwhile passive income in retirement.

With many FTSE 100 and FTSE 250 companies trading at attractive prices given their long-term growth prospects, now could be the right time to start buying high-quality stocks at low prices.

Investing money in UK shares

Investing money in UK shares to make a passive income that’s double the State Pension may sound unlikely at first glance. After all, many FTSE 100 and FTSE 250 shares continue to trade significantly lower than they did a year ago. The indexes themselves are also well down on their all-time highs, despite their recent rallies.

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However, the index’s long-term prospects appear to be sound. Judging by their past returns of around 8% per annum, they could turn modest regular investments into a large portfolio. And, with many stocks trading at cheap prices, there may be scope for an investor to outperform the market in the coming years as a stock market recovery takes hold.

Generating a passive income that beats the State Pension

Perhaps the best way to illustrate the potential for UK shares to deliver a passive income that’s double the State Pension in retirement is via an example. An investment of £200 per month in a diverse range of UK shares that obtains the same annual return as the stock market of 8% could end up with a portfolio valued at around £300,000 over a 30-year working life.

From that, a 4% annual income return amounts to £12,000. That’s more than the current State Pension. As such, they could enjoy significantly greater financial freedom in older age than if they didn’t have a passive income.

Buying opportunities across the FTSE 100 and FTSE 250

As mentioned, many UK shares appear to offer good value for money at present. For example, stocks such as Tesco, Berkeley Group, AstraZeneca and BHP appear to have attractive valuations that may not take into account their long-term growth prospects.

All four companies have dominant positions within their industries. And they also look set to benefit from changes within their respective sectors. And, with them having solid balance sheets, they could make investments themselves to strengthen their profit growth prospects in the coming years.

Clearly, the 2020 stock market crash may dissuade some investors from buying UK shares. However, with interest rates being low, other options such as cash and bonds are unlikely to provide the return required to build a passive income that reduces a retiree’s reliance on the State Pension. In fact, with stock prices being low, it may be possible to generate market-beating returns that make an even more positive impact on an investor’s retirement outlook.