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The State Pension age is rising. Here’s what I’d do to protect myself

Edward Sheldon, CFA
Retirement saving and pension planning

The State Pension – the regular income paid by the UK government to those in retirement – is a source of frustration for many Britons. Not only is the payout very low at just £168.60 per week (which isn’t enough to live a comfortable lifestyle) but the age at which you can claim it is also rising. In less than a decade’s time, it will hit 67 for both men and women, up from 65 just last year.

However, if you plan ahead, you can protect yourself from both the low payout and the rising age. Act early, and you could build up your own retirement pot that enables you to retire earlier than State Pension age (who wants to work until their late 60s?) and also live a comfortable, relaxing retirement. With that in mind, here are two smart financial moves that could set you free from State Pension worries.

Saving into a SIPP

Saving up a sum of money for retirement is the best way to boost your chances of living a comfortable retirement. But where’s the best place to save your money? One option to consider is saving into Self-Invested Personal Pension (SIPP) account. This is a government-approved personal pension scheme designed specifically for those saving for retirement.

SIPPs offer savers numerous advantages. For starters, they enable you to hold a wide range of investments (more on this below) which means you have the opportunity to grow your money at a high rate over time. Moreover, all your gains and income are tax-free, which means more money for you and less for the taxman.

In addition, when you contribute into a SIPP, the government will top-up your contributions in what is known as ‘tax relief’. For example, if you’re a basic-rate taxpayer and you contribute £400 into your SIPP, the government will add another £100 for you, taking your total contribution to £500. Higher-rate taxpayers can claim even higher levels of tax relief.

SIPPs do have their drawbacks so it’s important to be fully aware of how they work. However, overall, for those looking to boost their retirement wealth, they’re a very effective savings vehicle.

Investing in shares

Once you’ve saved up some money for retirement, you want to get this working hard for you. If you leave it in a cash account earning 1%, you’re not going to get ahead.

If you have a number of years before you plan to retire, it could be worth investing some of your SIPP savings in stock market-based investments such as shares and funds. The reason I say this is that these kinds of investments tend to deliver strong investment returns over time, meaning they can really help you boost your wealth. According to this year’s Barclays Equity Gilt Study, British stocks have delivered a return of around 5% above inflation per year since 1899 – far higher than the returns from cash savings.

Of course, stocks can be volatile in the short term, so you don’t want to be over exposed to the asset class. However, given that long-term stock market investing is a proven way of generating wealth, it could be sensible to have some exposure to stocks.

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Motley Fool UK 2019