The full new State Pension is £168.60 per week or £8,767.20 a year, a level that is designed to give us a basic income in retirement. However, according to a range of surveys, most retirees believe that this token amount isn’t enough to survive on in old age.
And if you are worried about your pension, the best thing you can do today is set up your own pension fund. If you have your own savings set aside, you can dictate your future. You do not have to rely on the state to give you an income when you decide to exit the workforce.
And there’s a straightforward trick that I’m using today to make sure I have enough money to retire comfortably when the time comes.
Tax benefits
My simple trick has two parts. The first is opening a Self Invested Personal Pension (SIPP).
SIPPs are, in my opinion, the best way to save for the future. Not only are any capital gains or income received on assets inside a SIPP tax-free, but you also get tax benefits when you deposit money.
Investors will receive income tax relief base on their marginal tax rate. So, any money invested will be topped up by 20% by the taxman for basic rate taxpayers, and higher or additional-rate taxpayers can claim back a further 20% or 25% respectively. Every UK resident under 75 can add money to a pension and get tax relief, even non-earners, although tax relief is limited to 100% of your annual earnings. You can pay in a maximum of £40,000 annually into your SIPP.
To make a gross pension contribution of £40,000, you only need to pay £32,000. On top of this, the government will add 20% basic tax relief of £8,000. If you’re a higher rate taxpayer, you could be entitled to extra tax relief as well (claimed back through self-assessment).
So, contributing money to my SIPP is the first stage of my State Pension-beating trick. The next step is to invest the money I contribute.
Time to start investing
I currently use a straightforward investment strategy for my pension. Every month I invest the same amount in a low-cost index tracker fund. Research shows that UK stocks have returned around 5% a year after inflation for the past 100 years, which is a perfectly acceptable return for long-term investors.
The most important thing you can do when saving for the future is to make sure you have a regular savings plan in place. Picking stocks is not as important as making sure you are contributing every month, and that’s the primary aim of my current strategy. I know that the index will produce a steady return over the long term.
All I need to worry about is making sure I’m putting enough money away every month to meet my retirement target. I’m currently saving around £1,000 a month, which after the government contribution, means I’m adding £15,000 to my SIPP every year. Assuming my savings grow at an inflation-adjusted rate of 5% per annum for the next three decades, I estimate I will be able to retire with a pension pot of more than £1m.
