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How I’m planning to avoid a State Pension shock

Running out of money in retirement is an experienced no one wants to have. But unfortunately, this is the prospect many retirees face when they leave the workforce.

According to various studies and surveys, a large percentage of potential retirees don’t know how much money they are entitled to in retirement and are shocked when they find out how small the weekly State Pension they’re entitled to is.

A token payout

The actual amount varies greatly depending on your National Insurance contribution record and other factors. The full new State Pension is £168.60 per week, but it can be increased if you defer taking it, or reduced if your National Insurance contribution record isn’t long enough.

You need at least 10 qualifying years on your record to get any State Pension and a full 35 qualifying years to get the total amount. Other factors can also influence how much you’re entitled to, such as age and whether or not you have received other benefits throughout your life.

With so many different factors to consider, it’s no surprise so many retirees end up struggling to make ends meet. And to make sure I don’t fall into this trap, I’m planning to make sure I have enough money in retirement no matter what happens.

Fail to plan, plan to fail

I firmly believe the best way to make sure I can retire comfortably is to look after my own pension savings. This way I don’t have to worry about whether or not I qualify for the State Pension, or if it will even exist by the time I hit retirement.

There are plenty of tools and tax benefits available for anyone who wants to follow the same path. SIPPs and LISA’s both offer government bonuses for savers putting money away in these tax-free wrappers. Any money deposited in a SIPP will receive a government top-up of 20% for basic rate taxpayers and money invested in a LISA will receive a bonus of 25%, up to £1,000 a year. It seems silly to ignore such attractive cash bonuses.

Limiting risk

The one downside of managing my own pension funds is the risk I may make the wrong investment decision, which could potentially cost me several years of income in retirement. To try and reduce the risk of this happening, I’m limiting my investments to simple index tracker funds and bond funds.

This hands-free approach will hopefully allow me to benefit from the investment returns available from the stock market, while at the same time almost eliminating the risk of incurring a permanent capital loss.

For example, over the past few decades, the FTSE 100 has produced a steady average annual return of around 7-8%. While there’s no guarantee the index will continue to rise at this rate, the opportunity to achieve a mid-single digit annual return without having to put in any extra effort is exceptionally appealing.

So, that’s how I am planning to avoid a State Pension shock. And if you want to avoid falling into the pension trap, I highly recommend taking a similar approach.

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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.