The current State Pension of £168.60 is 70% less than the average UK earnings of £569 per week, according to government figures. Indeed, the State Pension is equivalent to a full-time wage of about £4.50 per hour — much less than the current minimum wage of £8.21/hr.
If you’re planning to retire on the State Pension alone, then I think you need to look at where your current salary sits on this scale. Could you manage on the State Pension alone, or are you likely to need an additional income?
Here, I’m going to run over some income figures and suggest a couple of tips that could help to boost your future retirement income.
How much does everyone earn?
For a couple with a modest house, one car and no mortgage, the State Pension might not be so bad. Assuming no other income, you’d get a tax-free payment of £337.20 per week, or £17,534 per year.
However, even this is still 26% less than the average disposable income for retired households of £23,900. This figure is calculated after direct taxes such as income tax and national insurance.
If you think you’ll struggle to manage on the State Pension alone, then here are a couple of suggestions on how to build a second income for your retirement.
Do you have any ‘free money’?
If you’re less than 10 years from retirement, then personally I don’t think the stock market is the best place to put your cash. Although history has shown shares to be a good way to generate long-term wealth, over short periods, returns can be unpredictable and may include sharp falls.
What I’d do instead is to make sure you’re maximising your current resources. One area where people can often find unexpected windfalls is company pensions. If you’ve worked for a number of employers in the past, you may well have paid into their company pensions. As a result, you could have several stranded pensions that are now worth thousands of pounds.
If this is the case, you may need professional advice on the best way to access this cash. But in many cases, it should be possible to transfer them all into a single low-cost personal pension. I’ve done this myself. When you reach retirement age, you will then have easy access to this cash and full control over how it’s used.
Another way to boost your cash reserves before you retire is to review every item of your current spending. Making cuts can free up a surprising amount of cash. At this point, I’d put as much of my spare cash as possible into fixed income investments. I’d choose products that will provide guaranteed returns and protection from capital losses.
Long-term saving
If you still have at least 10 years until you expect to retire, then I would open a Self-Invested Personal Pension or a Stocks and Shares ISA and start investing in the stock market. In my experience, the simplest and cheapest way to do this is to put cash into in a FTSE 100 tracker fund, selecting accumulation units to maximise your returns.
When you reach retirement, you can switch your fund to income units and receive regular dividend payments, or you can withdraw lump sums as and when needed. Having this flexibility could make a big difference to your future comfort.