The State Pension pays £10.6k. I’d aim to double it by investing in a Stocks and Shares ISA

The State Pension isn’t enough on its own for an easy retirement so I’d aim to double the income by investing via a Stocks and Shares ISA, free of tax.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

happy senior couple using a laptop in their living room to look at their financial budgets

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The State Pension is the cornerstone of retirement, but it needs further support and for me that means investing in a Stocks and Shares ISA.

The new State Pension, paid to everyone who retired from April 6 2016, currently pays £10,600.20 a year at most. Those with fewer than 35 years of National Insurance contributions get less.

Even the full sum probably isn’t enough to live on. A single person needs £12,800 a year after tax to achieve a ‘minimum’ living standard in retirement, according to the Pensions and Lifetime Savings Association. This rises to £23,300 a year for a ‘moderate’ lifestyle, and £37,300 a year to be ‘comfortable’.

Retirement eats money

If I could invest enough in a Stocks and Shares ISA to double what I get from my State Pension, I’d be well on the way to a moderate retirement (I’ve got some legacy workplace and personal pensions too).

To generate £10,600 a year from shares, I’d need a portfolio worth £265,000 in today’s money. I’m basing that on the so-called 4% rule, a benchmark that says if an investor draws out 4% of their portfolio each year, the pot will never run dry.

If my portfolio yielded 7% and I took all my dividends as income, I would only need to save £151,430, but there’s a risk my capital will shrink. So let’s be ambitious here, and aim for £265,000. How much would I need to invest each month for that?

It’s a question of time. If 30 years from my target retirement age and investing £175 a month, I could beat my target with £285,848.

If 20 years away and investing £410 a month I’d have £265,055. With 10 years to go, I’d have to invest £1,333 monthly to reach £265,155.

These figures all assume I increase my contributions by 3% every year, and generate the average long-term return on the FTSE 100, which is 6.89% a year. In reality, I’d need to invest more, as inflation would erode the value of my £265,000 pot and the income it generates.

I’d pop dividend shares in my ISA

While the State Pension looks pitifully low, these figures show that replicating it is hard. The joy of investing through a Stocks and Shares ISA is that all income is free of tax, even if it pushes a saver well over the personal allowance.

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.

In practice, I’d try to save much more than £265,000 to enjoy a comfortable retirement rather than a moderate one. I’d also try to generate maximum dividend income, by investing in high-yielding FTSE 100 shares.

Loads of top UK different stocks yield 7% or more right now, with many trading at cheap valuations. I’ve recently bought Rio Tinto, which yields 8.53%; Legal & General Group, which yields 8.44%; and fund manager M&G, which yields 10.1%. There are plenty more top dividend shares on the FTSE 100 today.

Investing is risky, of course. Dividends can be cut, share prices may crash. In rare cases, FTSE 100 businesses can go bust. 

Yet I think they remain the best way of supplementing my pension with dividend income and capital growth, tax-free inside a Stocks and Shares ISA.

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.

Harvey Jones has positions in Legal & General Group Plc, M&G Plc, and Rio Tinto Group. The Motley Fool UK has recommended M&g Plc. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »