From April 5, the rate of the new State Pension will increase from £168.80 to £175.20 a week, or to £9,110.40 a year. This regular payment is only designed to cover basic needs. Indeed, surveys show that retirees need around £20,000 or more a year to live a comfortable retirement.
With that in mind, here are five smart ways you can get more than the basic State Pension in later life.
Set up a SIPP
The first strategy you can use is to set up a Self-Invested Personal Pension (SIPP). Private pension products like SIPPs can be a great way to boost your income in later life. Any money contributed is entitled to tax relief at your marginal tax rate. That’s 20% for basic rate taxpayers.
A deposit of £100 a month in a SIPP could grow to be worth £650k after 35 years of saving. That’s assuming the money is invested in the FTSE 250 tracker fund.
The index has returned around 12% per annum since inception. This would be enough to produce an annual income of £26,000 in retirement, excluding tax benefits and the State Pension.
Working from home
Another strategy anyone can use to boost their income in retirement is to start working from home. The internet has opened up the employment market for hundreds of thousands of people around the country, who can now make a steady income from their living rooms.
Applying for pension credit is another income-boosting strategy. Pension Credit is an income-related benefit made up of two parts — Guarantee Credit and Savings Credit. Retirees who quit the workforce after April 2016 are no longer entitled to Savings Credit.
Still, Guarantee Credit tops up your weekly income if it’s below £167.25 (for single people) or £255.25 (for couples). This is useful if you don’t have enough years of National Insurance contributions to qualify for the full State Pension amount.
There’s a range of other offers Pension Credit provides as well. These include a free TV Licence (after 1 June) and rent as well as disability benefits.
Buy an annuity
Buying an annuity is another strategy retirees can use to boost their income above the basic State Pension rate. Annuities give you a guaranteed income for the rest of your life, although, with interest rates where they are today, they’re not particularly attractive. You might get a better return by setting up a SIPP instead.
Invest for the future
One of the best ways to boost your income in retirement is to start investing for the future as soon as possible. As noted above, an investment of £100 a month in an FTSE 250 tracker fund for 35 years would be enough to produce a savings pot of £650,000.
And the FTSE 250 isn’t the only option available to investors. An investment of £100 a month in the FTSE 100 for 35 years would be worth £181k today. That might seem like a lot less than the FTSE 250 option, but the latter is a much more volatile index because it has a higher weighting to mid-cap businesses.
International stocks are also an option. For example, £100 a month invested in the S&P 500 index for 35 years would be worth £382,000 today. That could be enough to produce an annual income of £15,300 a year in retirement, excluding other pension income.
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Rupert Hargreaves 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.