With the value of the State Pension declining and the retirement age edging upwards, the idea of trying to live on £8,546 per year doesn’t look so thrilling. So what can you do about it, especially if you’re running out of time?
Start now
The longer you don’t do anything because you think you don’t have enough time, the less time you’ll have. So start now, and tot up the things you spend money on every month that aren’t essential.
Full satellite or cable telly package? I know people spending close to £100 a month for sports, movies, and all kinds of stuff all in HD — I’m a cheapskate and watch Freeview. Do you go out evenings or weekends? I have friends who go out every weekend and think nothing of blowing £100 on a night out with taxis in both directions.
Takeaway food? A couple of mid-week cans of beer? New clothes that take your fancy when your wardrobe is already full? I know ordinary working people who, by my standards, waste at least £500 a month.Â
What if you put that much into shares and manage a total return of 6% per year, which I think is achievable? Even if you only have 10 years until retirement, you’d still end up with more than £80,000 added to your pension pot.
Work longer
This might sound obvious, but if you work longer, you’ll be better off still. I enjoy what I do and I want to keep doing it as long as I can, but plenty of people heave a happy sigh of relief on their last day at work… then soon get bored and start looking for part-time jobs.
Suppose you can work for a further five years beyond your pension-qualifying retirement date, and carry on investing that £500 per month. What difference would the extra time make to the £80,000 that 10 years of investment could have earned for you?
You might be surprised to learn that, with the same annual return, your nest egg would have risen to £144,000. If you then switched that to high dividend shares, you could easily be earning an extra £7,000 a year in spending money to add to your State Pension.
Take control
So far I’ve ignored company pensions. They can be great to have, but these days it’s possible to take control yourself and get a better deal.
Because of government rules on allocation of funds, company pension schemes almost invariably end up investing your final retirement pot in what’s called an annuity, guaranteeing you a certain income for life. But there are two distinct disadvantages to annuities.
Firstly, I’m not too impressed by the returns they offer. The very best ones seem to manage around 4%-5% per year — but there’s no guarantee your pension scheme will come close to that, and many don’t. The other biggie is that if you die the day after your annuity starts, you don’t get a penny back to leave to your family.
Much better, I think, to transfer a company pension to a Self Invested Pension Plan (SIPP) and invest it in high-dividend shares. That should get you a decent income, and your capital can be left to help your loved ones deal with the pain of your passing.