Retirees qualifying for the State Pension are currently entitled to an annual income of less than £9,000 a year. According to figures from the Department of Work and Pensions, less than half of retirees qualify for the full amount.
What’s more, over the next decade the State Pension age is set to rise to 67 for both men and women, up from the current level of 65.
These numbers suggest that retirees could face a financial shock when they decide to quit the rat race. They might need to work longer to make up for the shortfall.
As such, now could be a great time to build your own savings nest egg and start planning your retirement finances. With that in mind, here are three strategies you could use to beat the state pension.
One of the best tools pension savers have available to them today is the Self-Invested Personal Pension (SIPP).
Cost-effective and simple to set up, a SIPP provides tax relief at your marginal tax rate to any money you contribute. This means 20% for basic taxpayers. A boost of 20% on your contributions can have a significant impact on your retirement finances over the long term, which means SIPPs should be a crucial part of any retirement plan.
Invest in stocks
If you are serious about building a sizeable pot of savings for retirement, you should be investing your money. You don’t need to follow a complicated investment strategy to make the most of the stock market’s wealth-creating powers.
Over the past few decades, the FTSE 100 has produced a total annual return of 9%, and the FTSE 250 has returned around 12% per annum. All you need to do to copy these returns is to buy a low-cost passive index tracker fund and leave the rest to the fund managers.
Double-digit annual returns are enough to turn even a small monthly contribution into a sizeable nest egg over the long term. Someone aged 40 who invests £200 a month into the FTSE 100 could accumulate a pension pot worth £200,000 by the age of 65. That is excluding any tax reliefs a saver might pick up along the way.
Take a long-term approach
It is possible to build a large pension by saving regularly and investing in the stock market. However, you need to take a long-term view of the market to get the most out of your investments.
In the short term, it is difficult to tell where the market will go. There’s about a 50/50 chance of the market being up or down every day. Over the long term, the market’s direction becomes easier to predict.
For the past 120 years, it has returned around 5% per annum after inflation. This shows that if you are serious about beating the State Pension, taking a long-term view of things is essential.
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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