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The State Pension is rising by 4% but it’s still peanuts

Edward Sheldon, CFA
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For those who rely on the State Pension in retirement, there’s good news. Thanks to the ‘triple lock’ guarantee (which ensures that annual State Pension increases are decided by whatever is the highest out of price inflation, average earnings growth, or 2.5%), pensioners will get a near-4% pension increase from next April. That’s around double the level of inflation the UK has experienced this year, which means the payout increase will be a welcome boost to the millions of people across the UK who live off the State Pension.

However, before you get too excited about the 4% (it’s actually 3.9%) hike, let’s put it in perspective.

The truth about the State Pension

A near-4% State Pension rise is better than nothing, of course. Yet, as one reader on a popular UK news site aptly posted, “4% of not much still ends up as not much.”

You see, currently, the new State Pension is just £168.60 per week. And that’s if you qualify for the full amount. Many people don’t. So the 4% increase will take the weekly payment to just over £175 which is still an incredibly low amount to live off in your later years.

That equates to around £9,109 per year, which is still well under the £10,000 minimum income the Joseph Rowntree Foundation (JRF) says a pensioner needs to live a ‘basic’ lifestyle in retirement (i.e. more than just housing and food). Even with a 4% rise, the UK State Pension will still be one of the worst pensions in the developed world.

While plenty of newspapers are showing pictures of pensioners jumping for joy on news of the increase, we need to be realistic here. An extra £6.58 is not going to make much of a difference. These days, you’d be lucky to buy a sandwich and a coffee for £6.58.

Act now to salvage your retirement

If you’re yet to hit retirement, it’s not too late to save yourself from State Pension misery. There are a number of things you can do to boost your savings now so that you have multiple sources of income in your later years and you’re not reliant on low government payouts.

For example, if you contribute into a Self-Invested Personal Pension (SIPP) account, the government will reward you for saving by topping up your contributions. If you’re a basic-rate taxpayer, an £800 contribution is topped up to £1,000. This is a super deal you’d be crazy not to take advantage of if you’re looking to boost your retirement savings at the last minute.

You could also look at building an income stream through dividend stocks, investment trusts, or funds. Right now, plenty of FTSE 100 companies offer yields of 6% or higher, meaning it’s very easy to build up a healthy passive income.

Ultimately, if you’re looking to salvage your retirement, the key is to act sooner rather than later. If you’re interested in learning more about retirement saving and wealth building, you’ve come to the right place.

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Motley Fool UK 2019