Overcoming an inadequate State Pension could prove to be a challenging task. Low interest rates mean that the returns on cash savings accounts have been very disappointing over recent years. That situation could continue over the years ahead as an uncertain outlook for the UK economy may mean that the Bank of England takes a cautious stance when it comes to raising interest rates.
As such, investing in the stock market rather than holding cash could prove to be a worthwhile move. It could deliver significantly higher returns that ultimately provide the opportunity to make a passive income in retirement that reduces your reliance on the State Pension.
A challenging future
Beating the State Pension may become increasingly challenging over the coming years. The age at which it starts being paid is expected to rise to 67 over the next decade, with further increases anticipated after that. This means that many people of working age may find they are almost 70 years old before they start to receive their State Pension!
And while saving up for retirement was feasible while interest rates were higher before the financial crisis, the outlook for cash savings seems to be negative today. The pace at which they rise in the coming years could prove to be slow, and they may even fall before they start to increase due to an uncertain outlook for the wider economy.
A potential solution
As such, investing in the stock market could be the obvious solution to improving your income in older age. Through buying a diverse range of shares in a tax-efficient account such as a Stocks and Shares ISA or a SIPP, you could generate a surprisingly large nest egg from which a passive income can be drawn.
For example, investing £200 per month in the FTSE 100, rather than holding it in a savings account, could produce a nest egg of £203,000 over a 25-year period. This assumes a 9% annual total return, which is the same return as the index has posted since its inception in 1984. Assuming cash savings offer an interest rate of 1.5% over the same period, they would be worth just £72,000.
A rising passive income
Of course, it may be possible to obtain a higher rate of return than that offered by the FTSE 100. If you buy shares that offer good value for money and strong growth prospects relative to the wider index, you may be able to beat the index’s return and produce an even larger nest egg.
With there being a number of large-cap shares at the present time that appear to offer wide margins of safety and improving financial outlooks, now could be the right time to start buying FTSE 100 shares. Investor sentiment may be relatively downbeat due to risks such as the coronavirus and geopolitical uncertainty in Europe. But by building a diverse range of stocks in an ISA, you could improve your retirement prospects and overcome the challenges posed by a rising State Pension age.