The annual rate of State Pension currently sits at less than £9,000 a year. What’s more, according to figures from the Department for Work and Pensions, only around half of retirees receive the full amount.
With this being the case, if you want to retire in comfort, it could be better to set up your own pension savings pot. The good news is you could potentially double your State Pension in retirement with just £5 a week.
Slow and steady
Saving £5 a week might not seem like much, but these small deposits add up over the long term. This is called the £5 ‘trick’ because the method makes it easy to trick yourself into saving money. Saving £5 a week works out at just 71.5p per day.
If you put this in a self-invested personal pension (SIPP), you can claim extra tax benefits at your marginal tax rate. That is 20% for basic rate taxpayers. Including the additional tax benefit of 20%, the daily and weekly savings increase to 89.4p and £6.25 respectively. That gives a total contribution of £325 per annum.
The best way to make the most of these savings is to invest your money. A low-cost passive index tracker fund could be the best way to do this. For example, since its inception, the FTSE 250 has produced an average annual return for investors of 12%. That’s significantly above the rate of interest most cash savings accounts offer today.
Savings of £325 a year compounded at 12% could grow into a sizeable nest egg over the long run. At this rate of return, it would take 35 years to accumulate a savings fund worth £241,000. That’s assuming monthly contributions of around £27.10 (including tax relief) and a starting fund of £1,000.
A pot of £241,000 would provide an income of £9,000 a year in retirement, potentially doubling the State Pension.
Long term focus
While it’s difficult to tell what the future holds for the stock market in the short-term, over the long run, it’s highly likely the market will produce returns in line with its historical average. That said, due to economic headwinds, the index could underperform in the near term.
As such, it’s essential to maintain a long-term outlook when saving for retirement. It’s possible to build a substantial retirement nest egg with just £5 per day if you make the most of the stock market’s wealth-creating potential and the tax benefits available for savers. However, it does require time and patience.
The good news is today most online stockbroking platforms offer regular investment plans. These allow you to invest a lump sum every month and are entirely automated.
So, all you need to do is set up the direct debit and the order to buy a fund and sit back and relax. As the figures above show, this simple strategy and £5 ‘trick’ and could help you beat the State Pension and retire in comfort, with almost no effort whatsoever.
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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.