The State Pension – the income that’s paid to people in retirement by the UK government – is a worryingly low amount of money. Currently, it’s just £168.60 per week, and that’s if you qualify for the full amount. Many people don’t.
In fact, a recent study by Canada Life found only one-third of individuals across the UK are actually receiving the full new State Pension. According to the insurance group, around two in five pensioners are receiving less than £150 per week.
Even if you do qualify for the full State Pension payout of £168.60 per week, attempting to live off this amount alone – which one in four single pensioners is currently trying to do – could be a real struggle. Once you factor in basic living costs such as food, healthcare, and household bills, it’s unlikely there will be anything left over.
What this ultimately means is it’s extremely important to plan ahead and build up some extra income for retirement, so the State Pension is not your only source of income in later years. Here, I’ll look at three simple income strategies that could help provide a little extra income in retirement.
Equity income funds
An equity income fund is a particular type of investment fund that predominantly focuses on generating regular income payments for investors, along with a little bit of capital growth as well. Often offering yields of around 4% or so, equity income funds are extremely popular with UK retirees.
Today, there’s a broad range of equity income funds available for investors to choose from and it’s extremely easy to invest through online platforms such as Hargreaves Lansdown. If you’re looking for ideas, a good place to start could be Hargreaves’ Wealth 50 – the broker’s list of preferred funds.
Alternatively, you could also consider exchange-traded funds (ETFs). These aim to track a stock market index, such as the FTSE 100, and can also be an effective way of generating a second income stream.
One good example of an ETF that could provide some retirement income is the Legal & General UK Index fund. This aims to track the performance of the FTSE All Share index – a broad index of more than 600 companies – and it currently offers a yield of 4.1%, paid bi-annually. It’s available on the Hargreaves Lansdown platform with a low fee of just 0.04% per year.
Finally, a third option to consider is constructing your own portfolio of dividend stocks. These are stocks that pay out a proportion of the company’s profits to shareholders in cash on a regular basis. With these kinds of stocks, it’s quite easy to build up a passive income stream, although dividend payments are not guaranteed.
Right now, there are fantastic dividend yields on offer from well-known FTSE 100 dividend stocks. For example, Shell shares currently offer investors a yield of 5.8%. Legal & General’s yield is even higher, at around 7%.
With yields like that on offer, it shouldn’t be too hard to build up a healthy second income to boost your income in retirement.
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Edward Sheldon owns shares in Hargreaves Lansdown, Royal Dutch Shell and Legal & General Group. The Motley Fool UK has recommended Hargreaves Lansdown. 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.