The most recent set of figures from HM Revenue & Customs on annual pension income contains some worrying information. The data, which was compiled using numbers from the 2016–17 tax year, shows the average pension income in some areas of the country is less than £11,000 a year. That’s including the State Pension.
These numbers make it clear that if you’re worried about your State Pension, you’re not alone. Every year, thousands of retirees quit the workforce without suitable pension savings. And the complex rules governing the State Pension system could mean you end up with a lower income than expected in retirement.
Start saving for your future
Considering the above, I believe the best course of action every saver can take is to set up their own pension plan. However, it’s not enough to leave this money sitting idle in an account.
Today, interest rates are at such a low level that even the best savings account on the market doesn’t offer a rate of interest that exceeds inflation. This means that rather than growing in value, your money will actually lose purchasing power over time as it fails to keep up with rising prices.
The best solution to get around this problem is, in my opinion, to invest your money in a low-cost FTSE 100 tracker fund.
The best investment
There are many advantages to investing in a FTSE 100 tracker over keeping your money in cash, or trying to invest funds yourself in individual securities.
For a start, this tracker gives you exposure to the leading FTSE index, the top 100 blue-chip companies in the UK. This virtually eliminates any risk that you’ll suffer a permanent capital impairment on your money. For the FTSE 100 index to go to zero, these 100 companies would all have to go bankrupt at once. If that happened, there would probably be more significant problems in the world to worry about.
As well as the diversification offered by a FTSE 100 tracker, you also have the income to consider. The UK’s leading stock index is one of the best in the world for dividend income.
It currently supports a dividend yield of around 4.4%, significantly more than any savings account the market offers right now. What’s more, you can put as much money as you want into a FTSE 100 tracker, unlike many savings accounts on the market today, which only offer a level of interest up to a specific amount.
On top of the inflation-busting 4.4% dividend yield, an investment in the FTSE 100 also offers the potential for capital gains. Indeed, over the past 10 years, the index has produced an average annual return for investors of around 7%. That’s including both income and capital gains.
Unfortunately, there’s also been some volatility along the way. You’re always going to get some ups and downs with stocks. That’s just part of investing. However, saving for retirement isn’t a sprint, it’s a marathon, and long-term returns are what really matter.
An average annual return of 7% might not seem revolutionary. But considering it requires no effort whatsoever on your part (apart from clicking ‘buy’ when requiring investment) it’s a fantastic rate of return.
So that’s why I think the FTSE 100 is the perfect solution to your pension worries.
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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.