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How I’d invest £10k in the FTSE 100 to beat the State Pension

Most retirees struggle to live off the State Pension alone. Therefore, setting up a private pension to provide an extra level of security in retirement makes a lot of sense.

There are plenty of tools to help you do this. For example, any money saved into a Self-Invested Personal Pension (SIPP) attracts tax relief at your marginal tax rate. On top of this, any capital gains or income earned on assets held within a SIPP don’t attract further tax liabilities.

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These qualities make SIPPs the perfect tool for pension saving.

Beat the State Pension

Investing your money in the stock market via a SIPP could be a great way to beat the State Pension. And you don’t need to be a millionaire to do this either. It’s possible to achieve a passive income in retirement with an initial investment of just £10,000. A lump sum investment of £10,000 would be worth £12,500, including basic-rate tax relief. 

While there are thousands of possible investments to choose from when looking for a home for your money, it’s essential to keep things simple. With this in mind, the FTSE 100 could be the best option.

The best option

As one of the world’s largest and most liquid stock markets, there’s a range of ways investors can own the FTSE 100. A low-cost tracker fund might be the best prospect.

These passive tracker funds only replicate their underlying index, so they tend to be much cheaper than actively managed funds. The best FTSE 100 tracker on the market at the moment charges less than 0.10% in annual management fees. That’s compared to around 1% for most actively managed funds.

What’s more, since its inception, the FTSE 100 has returned around 7% per annum. At this rate of return, it would take 40 years to turn an initial pension contribution of £12,500 into a savings pot of £204,000.

Based on the FTSE 100’s current dividend yield of 4.8%, a financial nest egg of £204,000 would be enough to throw off a passive income in retirement of £9.8k per year.

From the beginning of April, the full rate of the UK’s new State Pension will rise to £175.20 per week or £9.1k per year. The actual amount received will depend on when you reached pensionable age as well as your National Insurance contribution record.

The more, the merrier

So, that’s how it’s possible to beat the State Pension with just £10k. However, savers could achieve much better returns by making small contributions along the way.

Investing £12.5k in a low-cost FTSE 100 tracker fund is a great way to start saving for the future, but it doesn’t have to stop there. Indeed, additional contributions along the way of £100 a month, or £125 after tax relief, could turbocharge your retirement savings.

A saver that makes these additional contributions could have a pension pot worth £534,000 after four decades of saving. That would be more than enough to beat the State Pension.

On the FTSE 100’s current dividend yield of 4.8%, this pot could produce an income of £25,600 a year.

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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.