I can’t imagine getting by on £230.25 a week from the UK State Pension. But that’s the reality for millions of older Britons who haven’t built their own retirement nest eggs. And while the government is topping this up to £241.30 as of April, the age required to claim the State Pension is also beginning its rise from 66 to 67.
The situation looks even more dire for younger workers. With concerns about the long-term sustainability of the triple lock, even someone in their 40s will not only have to wait even longer before eligibility, but they could end up with far less after inflation.
Luckily, UK shares offer a solution…
Unlock a comfortable retirement
Relying on the State Pension as a retirement plan is a bad idea. For reference, Pensions UK have estimated a minimum of £13,400 income is needed to cover just the bare essentials. For a comfortable lifestyle, that number jumps all the way to £43,900.
The good news is, even a 40-year-old today starting from scratch can reach this target by investing in high-quality UK shares using a SIPP.
If the goal is to retire at 67, that translates into a 27-year time horizon. Adjusting the £43,900 target by an assumed inflation rate of 2% a year means that in 2053, someone will need to have a retirement income closer to £74,932.
But by putting aside £800 a month in a SIPP, which gets topped up to £1,000 after tax relief, and earning an 11% annualised return, a brand-new retirement portfolio today would grow to £1,988,724. And by following the 4% withdrawal rule, that translates into an annual income of £79,549.
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.
Earning an 11% return
Over the long run, UK shares have historically generated returns closer to 8% a year. So if the target’s 11%, an index tracker likely isn’t going to cut it. But a custom-crafted portfolio might.
By exclusively investing in the best British businesses, investors can unlock impressive market-beating returns. And anyone whose been investing in Diploma (LSE:DPLM) over the last 20 years has learned this first-hand.
Since March 2006, when including dividends, shareholders have enjoyed an average annualised return of a staggering 22.3%. In terms of money, that’s enough to transform £1,000 a month into £4,413,560, or £176,542 a year, in retirement income!
Still worth considering?
With a market-cap of £6.7bn, Diploma’s days of delivering 20%+ annualised returns are likely in the rear-view mirror. But that doesn’t mean the growth story’s over.
In fact, just earlier this week, the stock rocketed almost 18% in a single day following a guidance upgrade from management. Resilient demand within aerospace, rising defence spending, and accelerating data centre build-out are all providing powerful tailwinds, resulting in an upward revision for organic revenue growth and profit margins.
However, it’s important to highlight the risks of Diploma’s highly acquisitive growth model. By continuously executing bolt-on acquisitions, management’s been able to expand into new verticals, growing its addressable market.
Yet acquisitions don’t always pan out. And failing to integrate newly-acquired businesses could result in lacklustre future performance as well as a weakened balance sheet.
Nevertheless, with a stellar track record, investors looking to protect their retirement without relying on the State Pension may want to consider taking a closer look.
