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How I plan to beat the State Pension with the FTSE 100

The current full rate of State Pension is £175.20 per week. This weekly payout, which adds up to £9,110.40 a year, only provides a small percentage of the annual living costs for most retirees.

While the actual level of State Pension most retirees receive varies from person to person, most surveys show a retiree needs at least £20,000 a year to retire in comfort.

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The best way to meet this goal could be to invest in the FTSE 100.

Building your own State Pension

Over the long term, the stock market has produced a fantastic amount of wealth for investors. While the market might have experienced some volatility over the past few weeks, this is all part of investing.

Indeed, since its inception three-and-a-half decades ago, the FTSE 100 has been through many peaks and troughs. On every single occasion, the index has recovered its losses and come back stronger.

Since its inception to the beginning of 2020, the index had produced a compound annual return of 9% for investors. Considering its track record, I think it is highly likely that over the next few decades, the FTSE 100 will revert to the long term average growth rate.

Setting a plan

One of the easiest ways to beat the State Pension in retirement is to set up a private pension. Today there are many ways you can do this. One of the best is to open a SIPP.

SIPPs are great because they have significant tax benefits. Any income or capital gains earned on money held within one of these products does not attract further tax.

What’s more, any contributions attract tax relief at your marginal tax rate. That’s 20% for basic rate taxpayers. For every £80 you contribute, the government will add another £20 to take the total up to £100.

These additional contributions can turbocharge your pension savings, and put you well on the way to beating the State Pension.

Hitting the target

To achieve an annual income of £20,000 in retirement, a saver will need an additional annual income stream of £10,889.60 on top of the State Pension.

According to my calculations, to generate this annual level of income, an initial savings pot of £272,240 is required.

By using the FTSE 100, it is relatively straightforward to hit this target. At an annual rate of return of 9%, it would take 27 years of saving £200 a month to build a pension pot worth £275,000. That’s excluding any tax relief received on SIPP contributions.

Including this tax relief, a saver would only need to put away £160 a month. The government will add £40 to take the total up to £200 a month.

So, if you want to beat the State Pension in retirement buying the FTSE 100 in a SIPP could be the best way to do it.

While the index has suffered some setbacks over the past few decades, it has always come out the other side in a stronger position, which is highly encouraging for long term investors.

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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.