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No retirement savings? I’d buy cheap FTSE 100 dividend shares to beat the State Pension

With the State Pension amounting to around a third of the average annual income in the UK, it’s unlikely to provide financial freedom for most retirees. Furthermore, the age at which it will be paid is expected to rise to 67 within the next decade.

Therefore, obtaining a passive income from a retirement nest egg is likely to become increasingly important for many people over the coming years. One means of doing so is to buy FTSE 100 shares. In many cases they offer low valuations and impressive income returns which could boost your retirement prospects and help you to beat the State Pension.

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Undervalued stocks

Despite experiencing a decade-long bull market, many shares in the FTSE 100 appear to be undervalued at present. This may be because the index started its current positive run from a relatively low level following the financial crisis, or it may be down to the ongoing risks facing the world economy, such as a US/China trade war.

Either way, there could be numerous buying opportunities available for long-term investors. Certainly, it may take time for the financial performance of companies trading on low valuations to show up in higher share prices. But for a retirement portfolio that has a long-term time horizon, there may be sufficient time for FTSE 100 stocks to deliver on their potential.

Income prospects

As well as low valuations across the index, there are also opportunities to generate high income returns. This could be important to both retirees and to those who are seeking to build a nest egg for their older age. Dividends have proved to be a key contributor to total returns in the index’s history, so focusing on those companies which offer relatively impressive income returns could be a shrewd move.

At the present time, around a quarter of the index’s members offer dividend yields in excess of 5%. This suggests they could provide over 50% of the index’s annualised total returns of around 8-9% per annum which have been achieved since its inception. In doing so, they may offer significant long-term return potential which boosts the performance of your retirement portfolio.

State Pension challenges

The State Pension age could continue to rise beyond 67. With life expectancy increasing and there being a relatively large number of retirees, the political consensus could move towards a higher retirement age and a slower growth rate in the amount paid as an annual State Pension.

As such, building a retirement portfolio of your own could become increasingly important to deliver financial freedom in older age. Investing in income shares that trade on low valuations could help you to fulfil this longer-term goal, with a number of opportunities to do so available in the index at the present time.

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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.