State Pension concerns could become increasingly commonplace. The age at which it starts being paid is expected to rise to 68 over the long run. Meanwhile, the cost of the coronavirus pandemic could mean that the speed at which it grows is reduced to some extent.
Therefore, with many cheap UK shares available to buy after the stock market crash, now could be an opportune moment to start investing through a tax-efficient account such as a Stocks and Shares ISA. Doing so could provide a supplementary passive income in older age.
State Pension concerns
Even if the State Pension rises at a brisk pace, it is unlikely to sustain many retirees. It currently amounts to just £9,110 per annum. That’s around a third of the average UK annual salary. As such, it can provide some help in paying for essential items in older age. However, it is unlikely to provide the type of financial freedom that many people hope for in retirement.
Therefore, obtaining a passive income from elsewhere in older age could become increasingly important. At a time when interest rates are low and many mainstream asset prices are high, a simple means of achieving this goal may be to purchase a diverse range of UK shares. Over time, they have the potential to deliver improving returns after what has been a challenging 2020 that has included a stock market crash.
Investing money in cheap UK shares
Cheap UK shares could offer a means of building a retirement portfolio that reduces an individual’s reliance on the State Pension. Certainly, the stock market has disappointed so far this year. For example, the FTSE 100 is currently down over 20% year-to-date. However, it has experienced several similar periods in its history. They have included the global financial crisis and the dotcom bubble. Yet, it has produced an annualised return in the high-single-digits.
At the present time, many companies trade on low valuations following the stock market crash. Therefore, it may be possible for an investor to obtain a market-beating return over the long run. Investing money in stocks after a market decline has historically been a sound means of buying high-quality companies at a discount to their intrinsic value.
Opening a Stocks and Shares ISA
Buying cheap UK shares in a Stocks and Shares ISA may be a sound means of further reducing an individual’s dependence on the State Pension. No tax is levied on any amounts invested through an ISA. This could mean that capital gains tax and dividend tax are avoided for a relatively small annual management charge.
Certainly, the stock market could experience further volatility in the short run. But its track record suggests that purchasing shares now and holding them for the long run may enable an investor to enjoy greater financial freedom in retirement.
The post Why I’d buy cheap UK shares in a Stocks and Shares ISA to overcome State Pension concerns appeared first on The Motley Fool UK.
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