The full new State Pension is £175.20 per week, or £9,110.40 a year. However, the actual amount a pensioner receives will vary from person to person, based on different factors.
Many pensioners will not receive the full amount, and even if they do, it’s unlikely to be enough to cover living expenses. Surveys suggest the average pensioner needs at least £20,000 a year to cover all living expenses and little luxuries.
With that in mind, I’ve been building my own private pension to complement the State Pension in later life. I’ve started with an investment of just £25 a week.
Private pension
The best method to beat the State Pension, in my opinion, is via a Self-Invested Personal Pension (SIPP). There are two key advantages to doing this.
Firstly, any money contributed to this pension attracts tax relief at your marginal tax rate. That’s around 20% for basic rate taxpayers.
Secondly, any income or capital gains earned on money held with inside one of these pension wrappers doesn’t attract any further tax.
These two benefits will help me build my pension pot at a much faster rate than would otherwise be possible.
For example, my initial investment of £25 a week becomes £31.25 after basic rate tax relief of 20%. That’s without including any income tax or capital gains benefits.
Double the State Pension
Most online stockbrokers now offer a regular investment programme. This allows investors to set up a monthly deposit, and the platform takes care of the rest, investing the money in an investment fund of your choice.
I’m making full use of this facility. I have automated deposits of £25 a week set up from my bank account. After tax relief, this works out at roughly £135.42 a month.
This is then invested into a low-cost index tracker fund regularly by my online broker. I’ve chosen a low-cost FTSE All-Share tracker fund to start, as I believe this gives me the most bang for my buck.
In the future, I plan to add some international stock indexes to increase diversification. However, I believe the FTSE All-Share is a good place to start.
Over the past 100 years, UK stocks have produced an average annual return for investors of around 7%. Assuming this return continues for the next few decades, I reckon I can build a pension pot worth around £360k with an investment of £25 a week.
This pension pot could provide an income of £14,800 a year in retirement, according to my figures, comfortably outpacing my State Pension income.
Just the start
I plan to increase my pension contributions over the long term, so £25 a month is just the start. By increasing contributions by just 10% a year, I think it could be possible to build a million-pound pension within four decades.
Put simply, it’s relatively straightforward to beat the State Pension by making the most of a savings and investment plan.