The current rate of State Pension is around £9,100 a year. Unfortunately, the amount each retiree receives may vary significantly from this headline number.
The exact weekly State Pension will differ from person to person, depending on their retirement date, and National Insurance contribution record.
As such, I believe the best way to produce a guaranteed income stream in retirement is to set up a private pension. Today, I’m going to describe how I plan to do this with an investment of just £2 a day.
Beat the State Pension
An investment of just two quid a day might not seem like much. But this small daily contribution could grow into a significant lump sum in the long run. Indeed, £2 a day works out at £730 a year.
That’s not all. The best way to set up a private pension is to open a Self-Invested Personal Pension (SIPP). Any money contributed to one of these products is entitled to tax relief at your marginal tax rate. That’s 20% for basic rate taxpayers. So, after tax relief of 20%, the annual contribution of £730 could grow to be worth £913.
SIPPs also offer other tax benefits. For example, there’s no further income tax or capital gains charged on investment profits earned within one of these wrappers.
Most investors can set up one of these products relatively easily today. Most online stock brokers offer SIPP wrappers as standard. And, in recent years, the costs of operating these products have dropped dramatically.
Vicious competition in the online stockbroker market has forced many providers to slash their fees. This goes for both SIPP management charges and commissions on stocks and shares.
What’s more, managing these products is very similar to any other online trading account. The provider deals with all the back-end paperwork, and all investors need to do is decide where they’re going to invest.
The power of compound interest
I believe the best way to make the most of these pension contributions, and beat the State Pension, is to invest the money in the stock market. Over the past 35 years, the FTSE 250 has produced an average annual return for investors of 12%.
On that basis, over three decades, my numbers show that a weekly contribution of £25 could grow into a total pension pot of £270k. This would be enough to provide an annual income of £10,800 in retirement.
These figures are only supposed to be a rough guide. The actual return and annual income possible will depend on many different factors. However, I think they clearly show how easy and straightforward is to build a steady, predictable income stream in retirement with a private pension.
The bottom line
That’s the simple strategy I plan to use to double my State Pension in retirement. By following a strict savings plan and making the most of compound interest over the long run, I reckon any investor should be able to copy this approach.