Everybody knows the UK’s basic State Pension isn’t up to much. Last year, OECD data suggested it was the worst in the developed world.
What people often fail to realise is that in practice, the State Pension adds up to even less than you think. That’s because fewer than half of the country’s pensioners will actually get the full amount, which is an incredible figure.
The State Pension we’re in
Given that the full annual basic State Pension for those who retire after April 2016 is just £8,767.20 a year, many of these people will be retiring on a pittance, unless they have built a pot of savings under their own steam as well.
Of the 1.1m people who receive the new State Pension, only 44% receive the full amount of £168.60 a week, the remainder get less.
To qualify for that, you need to have made 35 years of qualifying National Insurance contributions. If you have fewer, you will get a proportionally reduced amount. If you make less than 10 years of contributions, you get absolutely nothing at all.
Start saving now
To avoid ending up in such a miserable position, you need to start saving the maximum possible amount you can afford. If you discipline yourself to do that, you won’t have to scrape by on whatever the State provides, or carry on grinding away at your job into your late 60s or 70s, simply to keep the money coming in.
Your first step is to work out what pension provision you already have. If you have a workplace scheme, with employer contributions, then make the most of it. Do not opt out, whatever you do, as then you are turning down free money. Pay more in if your employer will make additional matching contributions.
Tax-free savings
Next, explore other tax-efficient saving schemes, such as a Stocks and Shares ISA. This allows you to invest up to £20,000 in the current tax year, and take all your future returns free of income tax and capital gains tax.
You should aim to invest as much as you can afford each month. If that isn’t enough, then go through all your monthly spending, and look for ways of cutting back to free up some extra money. If you’re not getting maximum value out of your gym subscription or streaming service, cancel it then invest the money instead. If you remortgage, invest the money you save every month, and so on.
Get back on track
I suggest you shun the Cash ISA, except for short-term savings, and put your long-term retirement wealth into the stock market. You could keep things simple by investing in a FTSE 100 tracker, such as the iShare Core FTSE 100 ETF, otherwise you could start by investing in individual stocks like these two, then start building up your portfolio.Â
The younger you are, the better. Too many people do not take investing seriously until their 40s and 50s, but you ideally need to start in your 20s and 30s. That way your early pension or ISA contributions have much longer to grow in value. In contrast to the State Pension, they could end being worth a lot more than you think.