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How little your State Pension could be worth, and what to do about it

The current UK State Pension, if you qualify for the full amount, will get you a very modest £8,767 per year, or just £168.60 per week.

Now, even if you don’t have any mortgage or rent to pay, once you take off the costs of energy bills, council tax, and necessities like food and clothing, there won’t be a lot left for any kind of luxury there.

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It’s an urgent requirement today, I say, for us to make extra provisions for our old age. A lot of people will have company pensions schemes that will help them out, and an increasing number are seeing the benefits of making private provision too – in SIPPs and ISAs, for example.

Expect the worst

But one thing that I think is very important to keep in mind is that we’re not investing for today’s retirement conditions, but for the conditions that will be around at the time we retire in the future.

Be that another 10, 20, 30, or even 40 years or more, one thing I am confident of is that the State Pension will be even less appealing then than it is today.

For one thing, the qualifying age is rising. The retirement age stood at 65 up until December 2018, when it started on a rise taking it to 66 by 2020. There are currently plans to lift the retirement age to 67 between 2026 and 2028, with a likely further rise to 68 between 2037 and 2039.

That’s bad enough, even if you trust governments not to bring those dates forward – already the suggested rise to 68 is a full seven years earlier than originally envisaged. And do we trust them to leave it at that and not raise the age bar even higher in the future? I don’t.

The cost

Suppose you live to the age of 85. That would get you 20 years of State Pension under the old rules, but by the time the 68-year rule is in place, retirees will get three years less. That’s a full 15% less cash until age 85, which is a big drop.

There is a bit of good news, at least for now, on the pension increases front, as rises are tied to what is called the triple lock system. That means pensions rise by the highest of annual earnings growth, inflation, or 2.5%. With decent earnings growth this year, pensions will go up by 3.9% in 2020.

The downside is that for the triple lock to continue, we need to trust politicians again, and we’ve heard threats to break the lock a number of times. How long it will last is anyone’s guess.

Do it yourself

So what should you do? I’ve already suggested investing in a SIPP or an ISA (or both). And I mean a Stocks & Shares ISA, certainly not a Cash ISA. SIPPs and ISAs can be set up to take regular transfers, and then you can just let the cash accumulate until you have enough for a cost-effective share purchase.

Which shares to buy? That might seem like a tough question, but I reckon if you stick with dividend-paying FTSE 100 stocks you should do just fine. I recently explained my retirement investing strategy in a little more detail, and I encourage you to have a read of that.

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Views expressed 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.