According to the Organisation for Economic Co-operation and Development (OECD), the UK’s State Pension is the poorest in the developed world, with pensions equating to only around 29% of average earnings. It’s currently just £8,546 per year if you qualify for the full amount, and to get that you’ll need to have paid at least 35 years of National Insurance.
Pensioners in the Netherlands top the league with the full whack, while the Portuguese state pension comes second at 95% — and the OECD average amounts to 63% of average wages.
On top of the real value of official pensions declining compared to average wages, there’s also the double whammy of having to wait longer and longer before we qualify for it — and I dread to think how soon we’ll be having to wait until we’re over 70 before we get anything. You could be forgiven for thinking that successive governments have been trying abolish state-funded pensions by the back door, by making it worth less and less and less.
And though we’ve been protected by the so-called triple lock which pegs annual pension increases to the highest out of consumer price inflation, average earnings growth or 2.5%, if you don’t think a government will break that lock before too long then you’re far more optimistic than I am.
What should you do?
As an ageing nation, we’re becoming increasingly dependent on company pensions, private pensions, and other personal savings and investments. And no matter how much you might dislike that, or who you vote for, that’s the new reality that’s here to stay.
If you investigate personal pensions and investments, you’ll find plenty of information on the workings of Self Invested Personal Pensions (SIPPs) and Individual Savings Accounts (ISAs) — how they work, what the tax rules are, how much you can invest every year, and so on. But those are just wrappers for your investments, and you’re still left with having to decide where to actually invest the cash.
My choice every time would be shares listed on the FTSE 100, and here’s why. For one thing, even though the index of the UK’s biggest public companies is in a bit of a flat phase at the moment, the value of the FTSE 100 has grown six-fold since its inception in 1984 — while state pensions have dwindled. Over the same period, interest rates on savings accounts (and on cash ISAs too) have fallen to today’s pitiful lows.
Not complicated
So if you just buy a low-cost FTSE 100 tracker fund with your pension savings, you’re likely to get a decent long-term rate of growth. And thats ignoring what’s surely the Footsie’s biggest attraction — dividends.
Most of the FTSE 100’s constituent companies offer dividends, with the really big ones like Royal Dutch Shell paying them quarterly — which is a help if you want to take regular income. Oh, and Shell is offering yields of around 5.5% at the moment.
In fact, according to AJ Bell’s latest Dividend Dashboard, the FTSE 100 as a whole is offering a forecast yield of 4.1% for 2018. That means you could be set for 4.1% in income, with any share price rises added as a bonus.
As long as I have a minimum of around 10 years before I’m likely to retire, the bulk of my pension savings is staying in FTSE 100 shares.