For decades, retirees were able to rely on the State Pension to provide an income in retirement. However, this is changing. An ageing population, coupled with the increasing burden of retirement benefits on the UK’s finances, have forced policymakers to bring in some changes.
These include increasing the State Pension age and tinkering with the benefits retirees are entitled to receive.
I don’t think these are going to be the last of the changes. That’s why I’m working on my own retirement plan. I believe anyone can follow this straightforward approach and beat the State Pension.
State Pension protection
For the first stage of my plan, I’ve set up a Self-Invested Personal Pension (SIPP). These retirement products are perfect for individual investors. Most online stock brokers offer SIPP wrappers, and managing them is just like operating a traditional dealing account.
There are two main benefits compared to a traditional dealing account however. The first is that any contributions are entitled to tax relief at a marginal tax rate. That’s 20% for basic rate taxpayers. So, for every £80 contributed, the government will add another £20 to take the total up to £100.
The second benefit is that any income or capital gains on money invested in a SIPP are not taxable. These benefits make SIPP wrapper the perfect tools to save for the future.
The investment plan
After setting up a SIPP, the next stage is to decide on an investment plan. There are many strategies to choose from. One low-effort strategy is to set up a regular investment in a low-cost index fund. Many online stockbrokers offer this service from investments starting at just £25 a month.
For example, over the past three decades, the FTSE 250 has produced an average annual return of around 12%. An investment of £250 a month (or £312.50 after tax relief) could grow to be worth £1.1m over 30 years at this rate of return, according to my figures. That would be more than enough to yield a State Pension-beating income in retirement.
Another way is to buy a diversified basket of high-quality blue-chip stocks. Investors who want a more hands-on approach may favour this method. It may also be possible to generate higher returns than the rest of the market. Indeed, over the past decade, shares in health and safety group Halma have produced an average annual return for investors of 23%.
That said, picking stocks can be challenging, and might not be suitable for all investors. As such, I’m using a combination of both strategies. A selection of high-quality blue-chip stocks alongside low-cost index funds has allowed me to benefit from the best of both worlds. It has also cushioned the impact of any mistakes, helping my hard-earned money produce a higher return.
So, that’s the approach I’m using to beat the State Pension. According to my figures, this approach should be enough to turn an investment of just £250 a month, before tax relief, into a sizeable financial nest egg for retirement.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Halma. 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.