It’s easy to forget all about the State Pension and assume that it will take care of itself. But, sadly, not everyone will get the full State Pension when they retire because it depends on your National Insurance record.
It’s worth checking the government website to see where you stand with your State pension and to find out how many qualifying years of paying National Insurance you have under your belt.
It’s common for people to skip a year because of things such as low earnings, unemployment and illness. But in many cases, you may be eligible for National Insurance credits, so it’s important to make sure you get them if you’re entitled because it will keep your National Insurance record complete.
You can also pay voluntary National Insurance contributions to make up for any years you didn’t qualify, if you want to. And that could be a good idea because the ‘investment’ would be relatively risk-free and backed by the government.
Building a second retirement fund
But I’d also aim to build a second retirement fund and, for me, the best way to do this is by investing in the stock market. I’m a big fan of shares and share-backed investments because, over the long haul, they’ve outperformed all other major classes of asset, such as cash savings, bonds and property.
You only need to look at the long-term price chart of London’s lead FTSE 100 index to see how well shares can perform. Since the Footsie started in January 1985, it’s up almost 650%. And you don’t even need a complicated investment strategy to harvest decent returns from the stock market. For example, you could put regular money into a low-cost index tracker fund that mechanically follows an index such as the FTSE 100.
If you do that, as well as gains from any rises in the index, you’ll also receive a regular stream of shareholder dividends. And if you choose the accumulation version of your fund, rather than the income version, your dividends will automatically be ploughed back into the fund for you. In that way, your dividends will be compounding, and the effect of that will likely lead to your overall investment out-performing the index as it shows on the chart.
The choices are plenty
Effective investing can be that simple. You can choose between many index tracker funds or managed funds, and you can even invest in a few carefully chosen shares of individual companies. I would be inclined to spread my money between trackers that follow several indices, such as the FTSE 250 and America’s S&P 500, as well as the FTSE 100.
And I’d shelter my investments from tax by holding them in a Stocks and Shares ISA or a Self-Invested Personal Pension (SIPP). Over time, it’s possible for a well-diversified portfolio of shares and share-backed investments to compound nicely. And if you invest regularly for decades, there’ll probably be a good chance you can build a pot large enough to double your income in retirement when added to the State Pension. Good luck in your investing journey.