Retirees quitting the workforce today are entitled to a basic State Pension of £168.60 a week. Although the actual amount you get will vary depending on your age, National Insurance record, and other factors, plenty of research suggests that most will struggle to live off this meagre weekly allowance.
The best way to make sure you don’t run out of money in retirement is to start preparing for the event as soon as possible. And the sooner you start saving, the better, because time is the greatest tool savers have available to them.
The power of time
The power of time should not be underestimated. Time allows your money to compound, which is essentially the process of your money earning money itself.
For example, if you’re earning 1.5% in interest a year and you want to save £10,000 with only 10 years to invest, you will need to put away £77.20 a month. According to my calculations, depositing a total of £9,264 over a decade will receive £736 in interest.
However, if you have 27 years to reach this target, you will only need to put away £25 a month, or a total of £8,100 over the period, with interest making up the rest.
Simply put, it’s much easier to reach a set target if you start saving sooner rather than later — that’s the first move I’ve made.
Double your money
Time isn’t the only trick you can use to double your State Pension in retirement. According to my calculations, a pension pot of approximately £220,000 is required to double the current rate of State Pension in retirement.
Unfortunately, with interest rates where they are today, I calculate that it will take you nearly 30 years, saving £500 a month, to reach this target, assuming an annual interest rate of 1.5%.
A better way to reach the goal is to invest your money. According to City analysts, over the past 100 years, UK stocks have produced an average return of around 5% per annum for investors, after inflation. At this rate of return, I calculate a saver will need to put away £250 a month for 30 years to build a pension pot worth around £220,000.
That’s the second move I’m recommending if you want to double your State Pension.
Tax benefit
Finally, investors should also look to make the most of all of the available tax benefits to help save for retirement. For example, any money deposited into a self-invested pension plan (SIPP) attracts tax relief at the taxpayer’s marginal rate which, in most cases, is around 20%. This means for every £80 you contribute, the government will add an extra £20.
Using the example above, I calculate a basic rate taxpayer, looking to save approximately £250 a month, will only need to contribute £200 a month to reach this target. The government will then add 20% basic tax relief, boosting the total contribution to £250. This implies that over three decades of saving, the government will add an extra £18,000 to your pension pot — that’s excluding any interest received.
