The full State Pension in the UK currently stands at £8,546 per year, which isn’t much to live on. Doubling that amount of money would be attractive to many people, but how do you do that when you are busy working now and probably don’t have the time or inclination to throw yourself into investing in individual shares on the stock market?
Collective investments
The key is to invest in a managed fund or a passive index tracking fund. My Foolish colleague Edward Sheldon recently wrote about five funds you could invest in here and here. But there are many to choose from and it’s possible to use managed funds to invest in shares all over the world from many different investing angles. After a little initial research, you should be able to find a fund you like and then start investing regularly.
However, you could be so busy now that even putting time into researching managed funds seems like a daunting task. Fear not, you could go for a simple index tracking fund and still do well enough over time to build up a pension pot capable of equalling the returns from the state. I’m long-term bullish on the FTSE 100 index, for example, so your pension plan could be as simple as investing regular money in a FTSE 100 index tracking fund.
The ‘secret’ to building up a decent-sized pot of money for retirement is to harness the power of compounding. To do that, make sure you choose a tracker fund or managed fund that reinvests your dividend gains. On top of that, keep making regular payments into your chosen fund or funds and do it for as long as you can, because gains from compounding accelerate over time.
This is what to shoot for
The yield from the FTSE 100 is currently running at just above 4%. To harvest the equivalent of the State Pension in dividends – £8,546 – you’d need an investment in the index of around £213, 650. So, in today’s money, I reckon that’s the kind of sum you should be aiming for in order to double up on your State Pension income. With the power of compounding and regular investments, you could find that achieving that sum of money is easier than it seems. Once you have it, you can draw on the dividend payments or withdraw chunks of the capital, or both, through your retirement.
One final and relatively simple thing to consider is to set up your investments within the shelter of a tax-free wrapper. Pension plans and Self-Invested Pension Plans (SIPPS) will give you tax relief when you pay money in, but you will pay income tax when you draw money out in retirement. Individual Savings Accounts (ISAs) do not give you tax relief when you pay money in, but there is no tax to pay when you draw money out. Bearing in mind that compounding should provide you with hefty gains in your funds over time, I think ISAs are very attractive. Good luck on your retirement investing journey.
