Here’s how I’d use a FTSE 100 tracker fund to double the State Pension

The State Pension is a great safety net. But for many people, it won’t be enough to live on. The current payout is £168.60 per week, or £8,767 per year. This payout is linked to inflation, but it’s only enough to provide a fairly modest lifestyle.

For people who are still of working age today, there’s also the risk that the system will change in the future. Recent years have seen the state pension age rise from 60 to 65 for women. By 2028, this age will have risen to 67 for both men and women. A further increase to 68 is planned by 2039.

Under the current rules, someone who is 40 today could expect to start claiming the state pension in 2047. I suspect that the pension age will rise to 70 before then, but even if it doesn’t, that still means another 28 years of working.

Planning so far ahead isn’t easy. But there is a silver lining to this cloud. Even if you’re in your 40s and have no savings, you still have time to build a retirement fund to boost the income from your state pension.

How to double the State Pension

A handy rule of thumb used by financial planners is the 4% rule. This states that if you have a lump sum invested in the stock market, you should be able to withdraw 4% of the starting fund value each year for 30 years, without running out of cash.

There are no guarantees, but given that the FTSE 100 offers a dividend yield of 4.5% at the moment, I think it’s reasonable to expect that you can withdraw 4% each year quite safely.

Based on the 4% rule, you’d need a fund of £219,180 today to provide an annual income of £8,767, matching the State Pension.

However, the impact of inflation — the cost of living — means that the amount you’ll need in 28 years’ time will be much higher. Based on the Bank of England’s 2% target for inflation, I estimate that you’d need a stock market fund of about £382,000 in 2047 to match the state pension.

How can I save that much?

The good news is that saving £382k could be easier than you think. Here’s why.

Over the last century, the average annual return from the UK stock market has been about 8%.

I think that the cheapest and most reliable way to benefit from these long-term returns is to put cash into a cheap FTSE 100 tracker fund each month. If you hold the fund inside a Stocks and Shares ISA, then you can avoid any future tax on the gains in your account. You’ll also be able to withdraw income tax free from your fund in the future.

I’ve crunched the numbers to provide some estimates of how much you might need to save, if you want to build a retirement fund that can match the income from the state pension:

A word of warning: it will take a while before your account hits the big numbers. But if you start early and keep up your payments through thick and thin, this method of investing can work very well.