At the time of writing, the State Pension provides an income of less than £9,000 a year. According to several studies, this token annual income isn’t enough for many retirees to live off comfortably.
What’s more, according to the government, only around 50% of retirees actually qualify for the full State Pension. This suggests that if you do want to retire in comfort, you’re going to need to start your own pension savings plan.
The good news is, an investment just £20,000 could help you beat the State Pension. Today, I’m going to explain how this is possible.
Investors have a range of options when it comes to saving for the future. They can either open a self invested personal pension (SIPP) or Stocks and Shares ISA. Due to the tax benefits offered, SIPPs appear to be by far the best option.
Further, unlike ISA’s, you can contribute up to £40,000 a year to a SIPP. ISAs are limited to contributions of £20k per annum.
Any money deposited in a SIPP is entitled to tax relief at your marginal tax rate. That’s 20% for basic taxpayers. This means for every £80 you contribute to, the government will add £20 extra to take the total up to £100.
So, on a lump sum of £20,000, the government would contribute an additional £5,000 to take the total up to £25,000.
When you’ve topped up your SIPP, the next stage is to start investing your money. There are many options when it comes to choosing investments. However, the most straightforward option is a low-cost tracker fund.
The FTSE 100 and FTSE 250 are both great indexes to track because they have produced attractive results for investors over the past few years. Since its inception, the FTSE 100 FTSE 250 have returned approximately 9% and 12% per annum respectively.
There’s no guarantee the indexes will continue to produce these kinds of returns over the next few years. Nevertheless, over the long term, it seems highly likely UK stocks will continue to generate attractive profits for investors.
The stock market could turbocharge the growth of your nest egg. Assuming an average annual rate of return of 12%, an investment of £25k would grow to be worth £1m after 31 years.
A passive income
If you use the FTSE 250 to grow your money and then switch this investment to the FTSE 100, it’s possible to generate a substantial passive income stream. Indeed, the FTSE 100 currently supports a dividend yield of 4.3%. Therefore, £1m invested in the index would throw off an income of £43,000 a year.
Even if you don’t have three decades to put money away, it’s still possible to beat the State Pension with £25,000 worth of savings.
This lump sum invested in the FTSE 250 for 20 years would grow into a savings pot worth £270,000. If it’s then invested in the FTSE 100, it could yield an generate an income of around £11,600 a year.
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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.