While the promise of a State Pension is appealing to most people, the amount it pays per year is unlikely to be viewed as generous. It currently stands at £8,546 per year, which is less than a third of the average UK annual wage. As such, it’s unlikely to be sufficient to provide financial freedom, or even allow an individual to pay for life’s necessities, in retirement.
While the State Pension may be a source of disappointment for many, there are a number of means by which it can be improved. Here are three simple steps which could be worthy of consideration for a variety of individuals, helping to boost income in older age.
Lifetime ISA
While a Lifetime ISA is only available to individuals under the age of 40, it could provide a significant return in the long run. Even if the investments made here don’t generate high returns themselves, the government bonus, which is available up to the age of 50, could make a significant contribution to an individual’s nest egg.
For example, if the maximum £4,000 per annum is paid into a Lifetime ISA from age 18 to 50, it could lead to an additional £32,000 in government bonuses. Even if it’s not possible for an individual to pay in that amount per year, a 25% government bonus could enhance their State Pension to a large degree. With the cost of having a Lifetime ISA relatively low and simple to set one up, it could be a means of accessing ‘free’ money in the form of a government bonus.
SIPP
For individuals above the age of 40, a SIPP may offer a similar impact to a Lifetime ISA. Since contributions to a pension are tax-free, it may be worth paying in as much as possible from an annual salary in order to reduce an individual’s tax liability. Clearly, there must be enough left over from an annual salary to pay for life’s necessities in the short run, but improving an individual’s tax efficiency could have a significant impact on the amount of capital available in retirement.
With SIPPs being easy to set up and administer, they could become an increasingly popular choice among individuals seeking to enhance their income in retirement. They offer greater control than an employee pension, and could therefore be used to provide a more tailored pension profile.
Invest for growth
While investing in shares carries risks, it can lead to high returns in the long run. For an individual who has a long-term time period until they reach retirement age, the stock market could produce a sizeable nest egg. This could significantly improve upon the State Pension in terms of the income available in older age.
With shares becoming increasingly accessible through online accounts and mobile apps, it has never been easier to benefit from the long-term growth of the economy and the companies that contribute to it.