The effectiveness of the State Pension in providing a comfortable retirement continues to wane. Over the next couple of decades it’s expected to be paid to men and women above the age of 68. Since the UK has an ageing population, it wouldn’t be a major surprise for this figure to increase – especially since life expectancy continues to rise.
Alongside this, the State Pension’s ‘triple lock’, which states that it must rise by the largest of wage growth, inflation, or 2.5% each year, could come under pressure. A higher burden on taxpayers may mean the political consensus changes in the long run, which could make the growth rate of the State Pension less appealing.
Of course, even as things stand, the State Pension amounts to just £164.35 per week. Anyone seeking to live off that amount of income is likely to find it extremely challenging. This means that relying on the State Pension in retirement may not be a shrewd move.
Fading investment opportunities
For many people, investing in products such as a Cash ISA, or taking more risk through property investing, have been obvious solutions to retirement planning in the past. Both of these opportunities have, and still are, very popular.
The problem with a Cash ISA is, put simply, its returns are exceptionally low. Over the long run, it’s likely to lose value in terms of its spending power, since the interest rate on even the top-paying Cash ISAs amount to less than inflation.
With buy-to-let, it is becoming increasingly challenging to turn a large net profit. House price growth has slowed, while obtaining a buy-to-let mortgage has become more difficult. Alongside this, tax changes mean that the gross return on property is significantly higher than the net return.
Accessible growth
In contrast, accessing the growth provided by the stock market has become increasingly easy. Online sharedealing means that a direct debit can be set up each month to send money to an ISA or a SIPP.
Regular investing can cost as little as £1.50 per trade, with it being possible to invest in tracker funds that spread the risk among a variety of companies. And with ISAs and SIPPs offering significant tax efficiencies, they may be able to generate high net returns over the long run.
While the stock market may be a previously untrodden path for many, it’s becoming the most obvious choice when it comes to retirement planning. While risks are present, it’s possible to moderate them through diversification. And with retirement often being something which is a long way off for most investors, there’s generally time available for shares to recover, should they experience a downturn in the short run. As such, now could be the time to start investing, and reduce the reliance on the State Pension.