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Worried about the State Pension? I’d buy UK dividend shares to make a passive income

Peter Stephens
·3-min read
Retirement saving and pension planning
Retirement saving and pension planning

Worries about the State Pension mean that making a passive income in retirement is likely to be a major concern for many people. The State Pension age is rising, while the annual £9,110 payment is unlikely to provide financial freedom for most people in older age.

Meanwhile, opportunities to make a worthwhile return prior to, and during, retirement have declined this year. Interest rates are at an historic low, while high house prices may make buy-to-let investing unaffordable for many people.

As such, UK dividend shares could be a relatively sound investment opportunity. They offer a generous income, as well as long-term capital growth potential.

Building a retirement portfolio to bolster the State Pension

Making a passive income in retirement that reduces your reliance on the State Pension requires a sizeable nest egg. In other words, money needs to be invested over the long run to build a portfolio by retirement from which an income can be drawn each year.

Buying UK dividend shares could be a means of achieving that goal. Historically, a large proportion of the stock market’s total returns have been obtained from the reinvestment of dividends. With interest rates low and many UK shares currently offering high yields, they may become more popular over the coming years. This could push their prices higher from a low starting point, which could help you to build a retirement nest egg.

Investing in UK dividend shares to make a passive income

Even investing modest amounts in UK dividend shares may lead to a generous passive income in retirement. For example, the FTSE 250’s annual total returns over the past 20 years have been around 8%. Investing £250 a month in a diverse range of stocks over a 35-year time period could produce a portfolio valued at £575,000. From that, a 4% annual withdrawal of £23,000 could provide a worthwhile income return.

Certainly, not all investors will have 35 years left until they retire. However, starting to invest as early as possible will provide your portfolio with more time to benefit from compound returns that could lead to a higher passive income. Many UK dividend shares are currently trading at low prices after the recent stock market crash. So now could be the right time to start buying a diverse range of companies for the long run.

Of course, there’ll be challenges ahead that impact negatively on the stock market’s performance. For example, risks such as Brexit and coronavirus may cause stock prices to come under pressure in the coming months.

However, buying and holding a range of UK dividend shares for the long run may produce a surprisingly large nest egg. And that would offer a worthwhile passive income in older age. It could supplement the State Pension and ease your concerns about enjoying financial freedom in retirement.

The post Worried about the State Pension? I’d buy UK dividend shares to make a passive income appeared first on The Motley Fool UK.

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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