State Pension concerns continues to grow in the UK. The rising cost of living and paltry pension payouts means millions of pensioners remain locked in work. The number of people working in old age could keep growing, too, as Britain’s finances buckle under the weight of its booming elderly population.
Latest Office for National Statistics (ONS) data shows men are retiring at an average age of 65.8 years. For women, this is 64.7 years. Both are the highest number on record. I don’t know about you, but I don’t want to keep clocking in when I should be enjoying the rewards of years of hard work.
The good news is that, with time, regular investment, and a sensible investing strategy, it’s possible to target a comfortable retirement independent of the State Pension. Want to see how?
1. Pick an ISA or SIPP (or both)
The Stocks and Shares ISA is the best investing product on the market in my view. Providing protection from capital gains and dividend taxes, it gives stock market investors more money to reinvest to boost the compounding process.
What’s more, individuals don’t pay a penny in income tax on withdrawals. So 100% of the wealth they generate in their portfolio is theirs.
I also like the Self-Invested Personal Pension (SIPP). It doesn’t offer the same safeguards from income tax. But it does provide tax relief of 20% to 45%, which investors can also use to enhance compound gains.
There are other rules to consider on both ISAs and SIPPs. And the best product for you will depend on your personal circumstances. I myself hold both. In my opinion, it’s important to hold at least one of these to guard against tax grabs and boost your income in retirement.
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.
2. Diversify your portfolio
Another important thing to consider is diversifying your portfolio. Holding a wide range of stocks reduces risk, gives rise to a range of growth and income opportunities, and provides a smoother return over time.
This can be done by selecting a range of individual stocks (15-20 is a good number in my view). Or it can be achieved by buying an exchange-traded fund (ETF) or investment trust like the Scottish Mortgage Investment Trust (LSE:SMT).
Given its focus on cyclical technology shares, this particular trust has underperformed during periods of economic stress. But over the long term, it’s delivered spectacular gains — during the past decade, it’s provided an average annual return of 16.1%.
Can it continue outperforming? I think so, driven by high-growth tech trends like artificial intelligence (AI), cybersecurity, robotics, and cloud and quantum computing. Scottish Mortgage holds shares in 61 different tech stocks, including industry heavyweights such as Amazon, Nvidia, and Meta.
3. Buy dividend shares
By the time we reach retirement, with any luck our portfolios will have been supercharged with shares, funds, and trusts like this. A top tactic to consider to then turn this into passive income is to buy dividend-paying shares.
It’s a plan I’m targeting with my own ISAs and SIPPs when I retire. It could provide room for further portfolio growth and give me a healthy income.
To give you a flavour, a £500,000 portfolio — if invested in 8%-yielding dividend stocks — would provide a £40,000 passive income each year. That’s a nice pile of cash to make up for any shortfalls in the State Pension.
