The more I look at the State Pension, the worse it gets. The new pension now pays £168.60 a week, which sounds even more desperate when you convert it into an annual figure, as that totals just £8,767.20 a year.
This is less than a third of the average annual salary, which means most of us are heading for a massive drop in income once we stop working.
Incredibly, you may not even get that much. You have to make the full 35 years of National Insurance contributions to secure the full amount, otherwise you will get less. If you are relying on the State Pension alone, your final years may be a struggle.
You can beat the State Pension
Personally, I’m getting round this by investing in the stock market, because over the longer run, this will generate a superior return to almost any other form of investing. If you put money into a Stocks and Shares ISA, you can take those returns free of tax as well, for life.
Lots of people start by investing in FTSE 100 stocks, which is fine. However, I worry too many fail to look beyond this, and miss out on an opportunity to make their money work even harder.
The FTSE 250 index is made up of the next largest 250 companies listed in the UK. Typically, they have market caps of between £500m and £4.5bn, which means some are very sizeable. Once they top £5bn, they are on course to enter the FTSE 100.
The big attraction is that companies of this size have more scope to grow. To a degree, it is simple mathematics. It is much easier for a company with a market cap of £1bn to double or triple in size, than one with a market cap of, £10bn or £100bn.
So for example, Royal Dutch Shell is the largest company on the FTSE 100, with a current market cap of £143bn. I don’t expect that to double in size, so the main reward comes from the company’s generous dividend. By contrast, some FTSE 250 stocks can double your money in a year.
Smaller is beautiful
This means you are investing in the FTSE 100 giants of the future, rather than yesterday’s heroes. You can do this simply and cheaply, through a tracker fund such as the Vanguard FTSE 250 UCITS ETF.
While smaller companies can be riskier, the FTSE 250 has been outperforming lately. It has delivered a total return of 48.9% over the last five years, beating the FTSE 100 at 32.3%.
Another interesting feature of the FTSE 250 is that it has a much greater domestic focus. While the big blue-chips generate three-quarters of their earnings overseas, medium-sized companies have greater focus on the UK. As Brexit uncertainty lifts, and Prime Minister Boris Johnson prepares a spending splurge, the UK economy could race ahead.
This makes now the perfect time to invest in the FTSE 250, and put your State Pension worries behind you, I believe.
