How the FTSE 100 and £10 a week can help you beat the State Pension

Rupert Hargreaves explains how just a small weekly contribution can grow into a sizeable pension pot if it is invested in the FTSE 100.

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According to research compiled by online investment platform Bestinvest, around a quarter of UK retirees don’t feel financially comfortable.

While the full new State Pension is set to rise by £6.58 per week from April next year, Bestinvest’s research shows that for retirees living on the State Pension alone, this will only just be enough to live on.

The research revealed that the average expenditure of a retiree is £743.88 a month, compared to the average of £759.08 that retirees receiving the full New State Pension will be entitled to from April next year. That leaves no room for life’s luxuries, and there’s undoubtedly no flexibility for any unforeseen expenses.

The best way to make sure you don’t fall into this trap is to start your own savings pot right now. Today I’m going to explain how you can do this with just £10 a week and a low-cost FTSE 100 tracker fund.

Pension road map

The first thing you should do if you want to beat the State Pension is to open a SIPP.

These are a great way to save for the future because any income or capital gains earned inside one of these wrappers is tax-free, although income tax may be payable when you withdraw funds.

You’ll also receive tax relief on any contributions at your marginal tax rate, up to a maximum of £40,000 a year. The one drawback is that you can’t withdraw any money from this pension plan until you hit 55 years of age. Still, that won’t be a problem if you are saving for the future.

Many SIPP providers also offer monthly investment schemes, which allow savers to make regular investments in instruments such as FTSE 100 tracker funds. The great thing about a FTSE 100 fund is that it lets you invest in these companies, 100 of the largest firms in the world, at the click of a button.

Over the past decade, the index has produced a total annual return of 7%, and it currently supports a dividend yield of 4.5%. 

Start saving

By making regular monthly investments in the FTSE 100 via a SIPP, I calculate just £10 a week is required to nicely top-up the State Pension, if you start early. £10 a week works out at £520 a year or roughly £43.33 every month. Including tax relief at 20% on any pension contributions, the contribution value rises to £54.16. 

According to my calculations, over 40 years of saving, these monthly contributions would grow into a £139,000 savings pot, enough to provide an additional £5,560 of income every year in retirement.

Contributions of £20 a month or £108.33 after tax relief, will be worth £278,000 after 40 years of saving into the FTSE 100, which would give an additional £11,120 a year of income in retirement.

The bottom line

All in all, it is relatively straightforward to beat the State Pension and retire in comfort if you start saving as soon as possible and make the most of the tax reliefs and investment plans available.

So what are you waiting for? The best time to start saving is now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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