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The State Pension is shocking. But here’s how you can protect yourself

The UK State Pension – the income the government pays to those in retirement – is pretty lousy, whichever way you look at it. For starters, it’s just £168.60 per week. And that’s if you qualify for the full amount. Many people don’t.

That figure equates to just £8,767 per year, which isn’t enough to live even a basic UK retirement lifestyle. Indeed, according to the Joseph Rowntree Foundation, for a single person in the UK to live a ‘minimum acceptable standard of living’ (i.e. more than just housing and food) they require income of at least £10,000 per year.

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The UK State Pension is also the worst in the developed world, as it pays out less than 30% of average earnings. By contrast, the US government pays its retirees around 50% of average earnings, while in Europe, Italy and the Netherlands pay out 93% and 101% of average earnings, respectively.

Yet the real shock for me is the age at which you can claim your State Pension benefits. In the past, this was 65 for men and 60 for women. However, the State Pension age is gradually rising and could hit 68 within the next 20 years.

Stop and think about this for a second. Currently, the average life expectancy in the UK for men is just 79.2 years and 82.9 years for women, according to the World Bank. This means if you’re planning to retire on the State Pension, you’re not going to enjoy a very long retirement. Work for the best part of 50 years, and you may get around 11 years in retirement as a male. That doesn’t sound like a good deal to me.

How to protect yourself

Luckily, there are ways to protect yourself from the State Pension. While the government receives a great deal of criticism over the lousy amount of money that it provides retirees, what many people don’t realise is that if you’re willing to save for retirement yourself, the government will actually reward you by giving you bonus savings. This is called tax relief.

All you need to do to pick up your share of tax relief is either set up a private pension account, like a Self-Invested Personal Pension (SIPP) and pay into it, or make contributions to a workplace pension. The government will then top up your contributions with some of the money that you would have paid in tax on your earnings.

Basic-rate taxpayers are entitled to 20% tax relief, which means if you put £800 into a SIPP, you’ll receive a bonus of £200, taking your total contribution to £1,000. Higher-rate and additional-rate taxpayers can claim even more tax relief. Tax relief really is a super deal and if you take advantage of it, it could help you build up a nice little nest egg for retirement.

Of course, you’ll also want to make sure that your money is working for you within your pension. This means investing it in assets that will generate healthy returns over time. If you leave your money sitting in cash, its purchasing power will be eroded by inflation over time.

Ultimately, your asset allocation is likely to make a big difference to your overall pension savings when it comes time to retire. If you’re looking to learn more about investing for retirement, you’ve come to the right place.

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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.

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