At less than £9,000 per year, many retires might find it challenging to live off the State Pension alone. As such, building a separate retirement pot makes a lot of sense.
Investing in the FTSE 100 is a great way to build a savings nest egg and generate a passive income to live off in retirement, boosting your financial prospects.
You can also take advantage of easy-to-set-up pension accounts such as SIPPs, which offer tax benefits and a government bonus on any contribution to help speed up your savings plans.
A global index
Since its inception in 1984, the FTSE 100 has produced a total annual return of 9%. This might not seem like a lot at first, but when compounded over the long term, this rate of return can turn even modest sums into a sizeable nest egg.
In addition, investors can take advantage of the tax benefits offered by a SIPP. Any money paid into a SIPP is entitled to tax relief up to your marginal tax rate, that’s 20% for basic rate taxpayers. Tax relief is available on contributions up to £40,000.
On top of this, any capital gains or income received on investments inside a SIPP are tax-free, although you will have to pay tax on any money withdrawn.
This tax relief can be really helpful when planning for the future.
For example, a basic rate taxpayer aged 30 who invests £100 a month into the FTSE 100 via a SIPP would receive a government top-up of £25. Including this tax bonus, annual contributions would amount to £1,500.
From a standing start, this saver would be able to build a savings pot worth £370,000 by age 65. From this, an annual income of over £15,910 could be generated from the FTSE 100 based on its present dividend yield of 4.3%.
While political and economic uncertainty might make it seem like the FTSE 100 is a risky investment today, over the long term, the prospects for the UK and global economy seem bright.
The FTSE 100 is a truly global index, with around 70% of its profits coming from outside the UK. Therefore, the index could provide insulation against economic issues caused by Brexit.
What’s more, many of the companies that make up the index report profits in dollars, so investors should benefit if the value of the pound falls further.
The best way to get exposure to the FTSE 100 is to buy a low-cost tracker fund. Today, you can do this relatively quickly, and most SIPP providers allow monthly investment plans into passive tracker funds, meaning that you have to do no work whatsoever.
With the State Pension age set to rise over the next few decades, building your own pension savings with the FTSE 100 might be the best way to beat the State Pension and retire in comfort on your terms.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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