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By Rupert Hargreaves, The Motley Fool
Every pensioner is afraid of running out of money in retirement. Unfortunately, many retirees do encounter financial problems, despite the State Pension safety net.
According to various studies and surveys, the average retiree needs more than £20,000 a year to live in comfort. That’s assuming they own their property and live a modest life.
This year, the full new State Pension stands at just over £9,100 a year. That’s less than half the figure most retirees believe they would need to live in comfort.
These
figures suggest most pensioners cannot afford to survive on the State
Pension alone. As such, the best way to avoid financial hardship in old
age could be to start your own private pension today.
State Pension alternative
One
alternative to the State Pension is to set up a SIPP. These products
are fantastic because, unlike workplace or government pension schemes,
the owner has complete control. To put it another way, a pensioner
should get out as much or more than they put in, and that’s a big
positive.
SIPPs also come with significant tax benefits. SIPP
contributions attract tax relief at your marginal tax rate. That’s 20%
for basic rate taxpayers. So, for a basic rate taxpayer contributing
£80, the government will add an extra £20 to take the total to £100.
Additional tax reliefs are available for higher rate taxpayers.
Another
benefit of using a SIPP, rather than relying on the State Pension, is
the fact that SIPP owners can invest their cash in the stock market.
This is a huge bonus.
Investing for the future
Investing
your hard-earned money in the stock market could turbocharge the growth
of your financial nest-egg. Over the past three-and-a-half decades, the
FTSE 250 has produced an average annual return of around 12%.
On
average, over the past 120 years, UK stocks have yielded an average
yearly return of about 7%. This period has included multiple economic
depressions and recessions as well as two World Wars. To put it another
way, despite encountering multiple setbacks over the past century, UK stocks have produced a steady return for investors.
This
trend will likely continue during the next few decades. A combination
of income and capital growth from UK shares could produce high total
returns for investors over the long run.
Therefore, by using a
SIPP to invest in the stock market, future retirees can decrease their
reliance on the State Pension. A contribution of just £80 a month into a
SIPP (or £100 including the government top-up) could help build a
pension pot worth more than £1m in 40 years. That’s assuming an annual
return rate of 12%. This would be enough to provide a yearly income of
£40,000 in retirement.
All in all, figures suggest the state
pension alone may not be enough to live off in retirement. The best way
to get around this problem could be to open a SIPP and invest in the
stock market.
Markets around the world are reeling from the coronavirus pandemic…
And
with so many great companies trading at what look to be ‘discount-bin’
prices, now could be the time for savvy investors to snap up some
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But whether you’re a newbie investor or a
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Fortunately,
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See more at The Motley Fool
