The State Pension currently pays a maximum of £8,767 per year, and the age we’ll be eligible for it is increasing. I won’t get mine until I’m 67, and those younger than me are likely to have to wait even longer.
It’s not a lot of cash to live on, but wouldn’t it be nice if you could double your income to £17,534 or thereabouts? That still wouldn’t be enough to live a life of luxury, but by the time you retire, presumably without the burden of a mortgage and without any work and travel expenses, it could make life a good bit more comfortable.
How much would you need to accumulate to get that kind of return? The traditional way to provide for a private pension is through an annuity. In fact, until the UK’s pension reforms, it was obligatory to invest a pension fund in an annuity — there was none of this freedom to invest as we please that we enjoy today.
Annuity?
Checking this week’s best single life annuity rates at Hargreaves Lansdown, to get an inflation-proofed income of an extra £8,767 I estimate you’d need to build up a pot of around £320,000 to retire at age 65, or £260,000 at age 70. These days, working beyond 65 is becoming more and more common, and though you might not want to, it’s an option you really might have to consider.
But how to achieve these sums? The only way I’d go is to invest in top UK shares.
Long-term data from the Barclays Equity Gilt Study shows that shares have returned 4.5% above inflation, per year, over the very long term. That means if you start at age 50, you’d need to invest £1,250 per month for the next 15 years to reach £320,000, or £675 if you choose to work until 70 and only need £260,000. That’s a lot of money, there’s no hiding that, but at least we’re taking inflation into account.
Stick with shares?
But why choose an annuity at all? Why not leave your money in shares after retirement instead, and see what income you could get from that 4.5% above-inflation return?
I reckon you’d need £195,000 to generate the equivalent of a second State Pension. That looks to me like a significantly more achievable target, so how much would you need to start investing now to achieve that goal? It works out at £765 per month if you’re 50 now and want to retire at 65. But if you choose to work on for the extra five years until 70, your monthly savings would drop to £510. That’s £118 per week, and for many 50-year-olds that will certainly be achievable.
Risky?
Now, I can’t just leave it at that without considering the risk of trusting your retirement income to the stock market. That return of 4.5% above inflation is an average and is not guaranteed, and there will be bad years as well as good. So you do need to go into this approach fully aware.
But someone in good health retiring today could easily have another 20 years ahead of them, and I think that’s long enough to stick with shares. And I reckon the best way to protect against the ups and downs of share prices is to go for companies paying top dividends — and that’s what I plan to do.
