The State Pension currently amounts to just over £8,546 per year. Most people will require more than £712 per month to live comfortably in retirement. And with the State Pension age set to increase to 68 over the coming years, having another income in retirement seems to be more important than ever.
Clearly, there are various methods of obtaining an improved financial outlook in retirement. For many people, though, a lack of time means that it is becoming increasingly difficult to plan successfully for older age. Here’s one way of doubling the State Pension in retirement, which may prove to be relatively straightforward to implement.
Efficiency
The idea of avoiding tax may not sound especially legal to many people. However, by investing through a vehicle such as a SIPP or an ISA, it is possible to reduce the total tax you pay legally and easily. This can amount to a significant sum over the course of an individual’s lifetime, and it may therefore make sense to legally avoid paying tax you don’t need to where possible.
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With the opening of a SIPP or an ISA being easier than ever thanks to the internet, having a tax efficient means of saving for retirement is available to the vast majority of people. And with their costs often being marginally different than a bog-standard share-dealing account, they could make a positive impact on an individual’s retirement prospects.
Returns
Investing in a tracker fund may be a worthwhile move for investors who are time-poor. They offer low costs and simplicity, as well as a diverse range of companies. The FTSE 100, for example, contains a wide range of stocks which operate in a variety of sectors and geographies. The FTSE 250 is more focused on the UK than its large-cap peer, with around 50% of its constituents’ income being generated domestically.
Both indices offer significant return potential. However, the FTSE 250 has historically outperformed its larger peer. It has generated a total return of over 10% per year in the last two decades. This rate of growth may or may not continue in future, but its track record suggests that in the long run it has the capacity to deliver impressive levels of growth.
Investment
An individual aiming to double their State Pension through investing in a tracker fund such as the FTSE 250 would need to generate a sum of over £200,000 by retirement. This assumes that in retirement that person would withdraw 4% of the capital value each year, which may allow the portfolio to continue growing if the total return is above that figure.
In order to achieve a nest egg of that size, an individual investing over a 20-year timeframe would need to put aside around £300 per month. Over 40 years, the required investment per month would fall to around £40. As well as showing that it is better to start planning for retirement at a relatively young age, this shows that it is possible to effectively boost the State Pension even in the latter part of an individual’s career.
For those investors who are seeking a higher return than the FTSE 250 or another tracker index could provide, the recent falls in share prices could present buying opportunities. By holding shares within a tax-efficient account for the long term, it may be possible to enjoy greater financial freedom in retirement.
