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The UK State Pension is the developed world’s worst, but there’s one thing you can do about it

Harvey Jones
A golden egg in a nest

Everybody knows the British like to moan, but sometimes we have cause to be glum. Our State Pension is a good example.

The State Pension we’re in

The UK State Pension is the worst in the developed world, according to OECD data. It pays out just 29% of average earnings, compared to 100.6% in the Netherlands, 94% in Portugal and 93.2% in Italy. The OECD average is 62.9%.

The new single-tier pension is worth just £8,767.20 a year, leaving most people with a massive shortfall unless they have income from other sources.

This means you cannot rely on it to give you a comfortable retirement. Worse, you have to wait longer to get it. New figures show the number of people claiming the pension fell by 120,000 in the year to February 2019, due to gender equalisation and rises in the qualifying age. This trend should continue as the State Pension age climbs to 66 and beyond.

Plan of attack

You can grumble as much as you like, but ultimately, there is only one thing you can do about it. Start saving under your own steam. That way you are not wholly reliant on the State but have your own pot of funds to dip into as well.

So if your company offers a workplace pension, do NOT opt out of it. This is the best way to save, because you get employer contributions, plus tax relief on top.

Don’t stop there. You could supplement this by taking out a self-invested personal pension (SIPP), which allows you to manage your own portfolio of stocks and funds, and claim tax relief on your contributions.

Open a Stocks and Shares ISA

Alternatively, you could take out a Stocks and Shares ISA. You do not get tax relief on your contributions, but the money grows free of income tax and capital gains tax, so you won’t pay any tax on it for the rest of your life.

The ideal combination is to split your money between a pension and an ISA. That way you get tax relief on half of your contributions, and escape income tax on half your withdrawals.

You can pay up to £40,000 or 100% of your income into a pension each year, plus £20,000 into an ISA. This is of course far more than most people can afford, but even small, regular amounts will grow into a major sum over time.

If you are between 18 and 39, you should also consider a Lifetime ISA. This allows you to invest up to £4,000 a year (part of your £20,000 allowance) and claim a 25% government top-up worth to £1,000. The money can only be used for a property deposit or retirement.

Get the balance right

Next, you have to start building a balanced portfolio of stocks and shares or funds. This is where Fool.co.uk comes in. GA Chester has some great tips for a FTSE 100 starter portfolio, and there are plenty of other recommendations on the site.

Shares are the best way to build your long-term wealth because over time, they offer superior returns to low-risk rivals such as cash, albeit with short-term volatility on the way. But when investing for 10, 20, 30 or 40 years (as you should be for retirement), you can afford to ignore daily dips and lurches.

The UK State Pension may be worst in the developed world but your retirement doesn’t have to be.

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Harvey Jones has no position in any of the shares 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 2019