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I’d top up my State Pension by investing in stocks. Here’s how

Kirsteen Mackay
Retirement saving and pension planning

It’s no secret that the State Pension is not enough for most of us to live on. At £168.80 per week, it’s less than half the real living wage of a person working 37 hours per week. With utility bills and grocery shopping increasing in price, it’s no wonder people are looking for ways to supplement their state payout.

When thinking of retirement, most people daydream about all the things they’d like to do with their free time, whether that be travelling, catching up with friends and family, pursuing hobbies and interests or just enjoying their down-time reading, cooking and walking.

With all this in mind, a little extra cash is a must-have. No matter what you dream of doing with your time, most of it will require a bit of extra cash. So, what can be done when you’re young, to ensure you supplement your pension in your retirement years?

There are various ways you can invest your money, and the UK stock market is a great place to boost your future income potential.

Funds and trusts

Investing in funds or trusts could be an easy way of investing your money rather than buying individual shares yourself, as you can leave it up to the experts to guide you by paying an active manager to do the hard work for you.

But you can buy your own tracker funds too, which is also easy and might be preferred by some after what happened last year.

After the devastating losses many investors suffered in the 2019 Neil Woodford scandal, active management is now under a cloud. Also, many people don’t want to spend their savings on paying a fund manager and would rather put their extra cash into a simple index fund, such as a FTSE 250 tracker. The FTSE 250 has produced an average annual return of over 11% during the past 10 years, while the figure has been approximately 7% for the FTSE 100. These are good rates of return for investors saving for the long term. At an average annual interest rate of 9%, if you invest £10,000 today and top up with £250 per month, in 37 years, your pension pot would be worth over £1m.  This would give you an annual income of £50k for 20 years, a very comfortable addition to the state pension. 

Put your pension savings in a SIPP

Whether you want to buy index funds or individual shares, the best way to do this is through a Self-Invested Personal Pension (SIPP), which allows you to buy and sell stocks and funds, while also gaining a government contribution equivalent to your marginal tax rate. 

Taking responsibility for your pension savings can be daunting and rightly so as you must be comfortable with your investment decisions and confident in your choices. As is commonly known, but not always considered, the value of your investments can go down as well as up, so if you’re actively managing your own investments you need to keep up to date with changes in the market.

This shouldn’t put you off, there is plenty of good advice and information available to active investors looking to invest for a profitable future and to top up the depressingly low State Pension.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020