According to a recent survey, approximately 50% of future retirees are unsure of how pensions work, how much money they will receive in retirement, and how often. What’s more, nearly two-thirds of respondents said they didn’t know at what age they would be able to access their pension pot.
When asked if they thought the current full basic UK State Pension was enough to live off, almost 90% of respondents said they didn’t think so. Some 46% also said they didn’t think this amount would be enough to cover their monthly outgoings.
Fortunately, the State Pension is forecast to increase in the years ahead. But it’s only set to increase in line with the cost of living. The State Pension age is also going to increase over the next few decades. At the time of writing, that age is gradually increasing for men and women and will reach 67 by 2028.
The State Pension increases every year under the triple-lock guarantee. This ensures it will rise every year by inflation, by 2.5% or average earnings, whichever is higher.
On that basis, it’s guaranteed to increase by at least 2.5% every year for the foreseeable future. At the beginning of April, the New State Pension increase by 2.6% to £168.60 for the 2019/20 tax year. The old Basic State Pension is £129.20 per week.
Based on these figures, according to my calculations, assuming the government doesn’t change the triple-lock in 10 years, the New State Pension will be £215.82 a week. By 2039, pensioners will be entitled to £276.27 a week, according to my numbers.
Start saving for the future
If you are one of the people who doesn’t think this level will be enough to cover your expenses in retirement, then now’s the time to take action. Your best option is to start saving yourself to prepare for the future. Luckily, there are plenty of different options available to savers today. Almost all of them have tax benefits.
My favourite is the Self Invested Personal Pension (SIPP). Not only are SIPP funds protected from capital gains and income tax, but the government also gives you a tax bonus for investing. For basic rate taxpayers, every £80 you contribute, the government will provide you with an extra £20, helping you kickstart your savings journey.
How much you need to contribute in total really depends on the quality of life you want in retirement. For an average annual income of £25,000 a year after retirement (excluding State Pension income) I calculate you will need to put away £625,000. That might seem like a lot, but I calculate a deposit a £360 a month (£450 including the government top-up for 30 years) invested in a low-cost FTSE 100 tracker (with an average annual return of 8%) would get you to this target.
If you’re happy taking on more risk, you could also buy a FTSE 250 tracker, or a basket of dividend stocks such as BP, Vodafone and BT.
So, if you’re worried about what the future holds for your State Pension, the best way to prevent any negative surprises is to start saving and investing your money today.
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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.