The prospects for the State Pension are relatively disappointing. Not only does it currently amount to just £730 per month, the age at which it is paid is expected to rise to 68 over the next couple of decades.
Therefore, relying on it to fund your retirement could be an unwise move – especially for anyone who wants to experience financial freedom in older age.
In order to do so, it may be worth considering the purchase of FTSE 100 dividend shares at the present time. Not only do they offer long-term total return potential, they could prove to be a tax-efficient means of building a retirement nest egg when purchased through a Stocks and Shares ISA or a SIPP.
State Pension challenges
While plans for the State Pension age to rise to 68 over the next 20 years may sound highly unfavourable, it could increase to an even higher age in the long run. Life expectancy continues to rise, while an ageing population could mean that the cost to fund a State Pension from age 68 becomes unpopular among the working population.
As such, for many people currently of working age, the State Pension may become increasingly insufficient to fund their retirement. This could mean that working into your 70s becomes the norm – unless you are able to build a nest egg that provides a passive income in older age.
One means of building a nest egg for retirement is through buying FTSE 100 income shares. At the present time, the FTSE 100 offers a dividend yield that is in excess of 4%. This suggests that it offers good value for money when compared to its historic price levels. As such, its potential to post improving total returns over the long run seems to be high.
Furthermore, dividend shares could offer relative stability when compared to their index peers. In many cases, dividend stocks are mature businesses that have track records of improving financial performance. A rising dividend that is well-covered by net profit can indicate that a company has financial stability, as well as a management team which is upbeat about the future prospects of the business. Moreover, a rising dividend can lead to improving investor sentiment that helps to push a company’s share price higher.
In order to maximise your returns when building a retirement portfolio, using financial products such as a Stocks and Shares ISA or a SIPP could be a shrewd move. They offer tax advantages versus bog-standard share-dealing accounts that could lead to a lower retirement age than would otherwise be the case.
Since it is easier than ever to open and administer such accounts, they could be worthwhile for a wide range of investors. Buying FTSE 100 dividend shares through them may allow you to boost your chances of retiring early and becoming less reliant on the State Pension.
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Peter Stephens has no position in any of the shares 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.