Thanks to the introduction of the government’s workplace pensions scheme, more people in the UK and are now saving for a pension than ever before.
Indeed, according to data from the Department of Work and Pensions, the total value of savings into workplace pensions rose £4.3bn to £90.3bn last year.
yet the problem is that people are saving, but pension managers are not providing value for money. According to the Financial Times, over the past 10 years, the compound growth rate in assets for UK pension funds has been just 1.6% annually in dollar terms. My calculations show that at this rate, it would take you 289 years to build a pension pot worth £1m with an initial investment of £10,000 (that’s excluding inflation!)
However, you don’t have to put up with these low returns. I believe any investor can retire with £1m just by investing in the FTSE 100.
Slow and steady
There are two reasons generally cited as being behind pension funds’ poor returns. Firstly, high fees have eaten away at performance, and secondly, pension fund managers have made poor decisions.
The problem is, fund managers still get paid even if they make a mistake and lose money. Your hard-earned savings then end up footing the bill. What’s more, most active investment managers fail to beat or even match the market’s performance when fees are included.
In my opinion, the best answer to this problem is to invest in the FTSE 100 via a low-cost tracker fund. This approach kills two birds with one stone. You don’t have to worry about picking the right stocks, and with tracker fees as low as 0.06% you don’t need to worry about them eating away at your hard earned cash either.
Since 1995, the FTSE 100 has produced a total capital return of 377%, or around 6.2% per annum and that’s excluding any dividends. The index currently supports a dividend yield of 3.7%. On capital growth alone then, the FTSE 100 has produced a return nearly four times better than the average pension fund.
These figures clearly show if you want to generate the best return on your pension savings, the FTSE 100 is clearly the way to go. And once you’ve started investing in the index, it should do all of the hard work for you.
Long term investing
Depending on what age you start saving, and how much you’re putting away, it is entirely possible to make a million before retirement.
Assuming you start from zero at age 20 and save £100 a month in a tracker that yields an average annual return (after fees of 0.06%) of 6.1% for 40 years. By age 60 you will have a pot of £197,000 waiting for you. If you save another 10 years, by age 70, you should have £372,000 stashed away.
If you start saving later in life, you are going to have to put more money away every month, but it’s possible to hit £1m.
If, by age 30 you’re saving £500 a month, achieving a rate of return of 6.1%, by age 70 your pension should have reached the £1m high watermark.
Putting it all together
Trying to save a million pounds for retirement might seem like an impossible dream, but it is entirely possible if you save diligently and invest your money.
One of the best ways to invest, with minimal effort, really is in the FTSE 100. But as shown above, time is of the essence. The sooner you start saving for retirement, the better and the easier it will be to reach that £1m goal as time does the heavy lifting for you.
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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.