Leveraging the power of UK shares is a proven tactic for establishing a more substantial pension pot. Even when starting from scratch at 40, investors can build lucrative portfolios that open the door to a more comfortable retirement.
Since its inception, the FTSE 250 has historically provided an average total annualised return of 10.2%. That’s even after the recent stock market turmoil. And drip-feeding just £500 a month at this rate of return could theoretically lead to a £951,951 portfolio after 28 years. Let’s explore how.
Thanks to financial and technological innovations, investors are spoilt for choice in 2023.
Brokers competing against each other are offering lower and lower account and trading fees with each passing year. Specialised investment vehicles like the Stocks and Shares ISA and Self-Invested Personal Pensions (SIPPs) help keep the taxman away from retirement savings. And the rise of index-tracking exchange-traded funds means that novice investors can replicate the stock market’s performance with virtually no effort.
What’s more, for those wanting to pick UK shares, research services from experts like The Motley Fool can help build a successful, or even potentially market-beating, investment portfolio.
Index investing vs stock picking
Stock picking is not for everyone. Beyond the prerequisite skills and knowledge, it requires immense emotional discipline. The latter can be quite a rare trait. And for many long-term investors, remaining confident while their portfolio is seemingly dropping off a cliff can be quite the challenge.
That’s why index investing is by far the more popular tactic. It takes care of diversification as well as portfolio management. And it also means investors don’t need to spend hours pouring over financial statements or research reports.
However, there is a caveat. Investing in an index also eliminates any possibility of achieving market-beating returns. That’s something only picking individual UK shares can provide. And suppose an investor can only muster an extra 2% versus the FTSE 250? Over 28 years, that’s the difference between £950k and £1.42m!
Picking UK shares has risks
As exciting as the prospect of having £1.42m in a pension pot is, there’s never a guarantee. A poorly constructed portfolio consisting of bad businesses, or even good ones bought at the wrong price, can easily destroy wealth rather than create it.
Even if an investor owns the best UK shares on the London Stock Exchange, one unfortunately timed market crash or correction can decimate retirement savings. At least in the short term. As such, an investor could have considerably less than expected when the time comes to retire.
Nevertheless, given the constant attacks on the State Pension, individuals must take necessary steps to safeguard their financial future. And investing intelligently in the stock market with a tax-efficient account is, in my opinion, one of the best solutions.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.