If you’re confused about the State Pension, you’re not alone. Recent government changes to the pension system have left millions of people nearing retirement uncertain about what they’re entitled to when they leave the workforce.
According to research from the charity Age UK, one in four people already aged between 50 and 64 don’t know what their State Pension age is. At least one in 10 of those surveyed by the charity knew they’d got their pension age wrong.
Recent changes to the system have hardly helped matters. Last month, male and female retirement ages were unified at 65, and are set to rise to 66 within two years. That’s not to mention changes the government has bought in for couples claiming the State Pension this week, and the new weekly rate.
If State Pension concerns are keeping you up, it’s never too late to act to secure your financial future.
Preparing for retirement
In my opinion, funding your own retirement is the best way to get around State Pension worries. Indeed, if you’ve already put away enough money to be able to retire comfortably, there’s no need to fret about the above changes.
Even for savers nearing retirement, it’s relatively simple to build a retirement portfolio if you make the most of the government benefits on offer. For example, anyone under the age of 75 can open a Self Invested Personal Pension (SIPP) and receive tax relief on any funds contributed. Even non-taxpayers can still contribute up to £2,880 net each tax year, and obtain tax relief.
Also, anyone under the age of 39 can open a Lifetime ISA to help save for retirement, which also comes with a government cash bonus. Any money you contribute is topped up by 25% by the government.
By making the most of these savings products, you can build a pension safety net with relatively little effort. According to my calculations, all you need to do is make a monthly investment in the FTSE 100.
FTSE 100 investing
Over the past decade, the FTSE 100 has returned around 8% per annum for investors, including reinvested dividends. This rate of return is enough to turn £10,000 into £22,000 over a timeframe of 10 years. After factoring in tax relief at the basic rate of 20%, in this example, you’d only need to put away £8,000, or £667 a month. Saving £667 a month for 10 years, with an average annual return of 8%, you could build a pension pot worth £174,000, according to my figures (excluding any investment fees).
Further number crunching tells me that a pot of £174,000 at an estimated retirement age of 66 would be enough to give an annual gross income of £9,500, just under £1,000 a year more than the current yearly rate of the State Pension.
So overall, if State Pension worries are keeping you up as you near retirement, now is the time to secure your financial future by building your own pension pot and financial security net. All you need is a savings plan, and the FTSE 100 to do so.
