At the present time, the State Pension amounts to £164.35 per week. This totals £8,546.20 per year, and is paid to any individual above the age of 65 who has 35 years of National Insurance Contributions. While any income is always welcome, the reality is that the vast majority of people will need another pension to supplement the money received from government. And with the State Pension age set to rise, the appeal of the FTSE 100 could increase over the long run.
Return potential
With the FTSE 100 offering a track record of total returns in the high-single digits, it is possible to build a sizeable nest egg by retirement age. It does not require a particular focus on saving, nor does it need to be especially time-consuming.
For example, according to the Office for National Statistics (ONS), the average household disposable income in 2017 was £32,700. In the same year, average household spending was around £28,800. This means that there is a surplus of £3,900 per year, which could be invested into the FTSE 100.
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Assuming that this surplus existed over a 35-year timeframe (the same as the period that National Payments are made in order to qualify for the State Pension) and that it generates an 8% annual return, it would lead to a nest egg of £672,000 by retirement age. If the household in question was to draw 4% of that amount per year as an income in retirement (a similar level to the FTSE 100’s dividend yield), it would mean an income of £26,880 per annum.
Investing opportunity
Clearly, the above calculations are averages, so for many households the figures may differ. Furthermore, inflation is not factored-in. However, they serve to show that it is possible to generate a significantly higher income in retirement than the State Pension from investing surplus disposable income in the UK’s main index.
Of course, there are also tax breaks available to investors which could make their nest eggs even larger. A simple pension would mean that contributions to a portfolio benefit from tax relief, while a lifetime ISA would provide a government bonus each year to individuals who are eligible.
Furthermore, the process of investing surplus capital each month is not a difficult operation. Opening an online account or a pension is a relatively straightforward process and once set up, there is generally a relatively small amount of admin to worry about until retirement is just around the corner. And with the internet causing charges to fall and information to be freely available to all investors, there has never been a better time to plan for retirement.
After all, with the pension age set to rise over the next few decades and the cost of paying for retirees via the State Pension forecast to increase, relying on the FTSE 100 could prove to be the right move for a variety of people.
