The full new State Pension is £164.35 per week, which works out at £8,546.20 a year (although the rate is set to increase to £168.60 a week from April).
For many retirees, this income alone may not be enough to achieve a comfortable retirement. Indeed, according to various surveys, most couples need an income of around £26,000 a year to retire in comfort. This leaves a gap of £8,907.60.
Today, I’m going to explain how you can increase your pension income by this amount to achieve a suitable income in your twilight years.
How much do you need
The easiest way to increase your income is to build a retirement savings pot. To estimate how much you will need to put away, we can use the multiply-by-25 rule.
The rule gives a rough estimate of how much money you’ll need and does what it says on the tin by multiplying your desired annual income by 25. In this case, the figure I’m going to use is £10,000, slightly above the £8,907.60 required to generate a yearly salary of £26,000.
Multiplying £10,000 by 25 gives an estimate of £250,000 — that’s how much a couple will need to save to realise an income of just over £26,000 in retirement (£27,815.20 to be exact).
Building the pot
The best way to save a quarter of a million pounds by the time you retire is to invest. But you don’t have to be an investment genius to generate the kind of returns that are required to build these funds.
According to my calculations, over the past decade, the FTSE 100 has generated an average annual total return for investors of 8%. Because the market hasn’t been particularly buoyant over the past decade, I think this number can be used as a conservative projection of the long-term returns possible from the FTSE 100.
My figures suggest a couple would need to save £400 a month together, or £200 a month each for 20 years at an average annual interest rate of 8% to build a pension pot worth £250,000. That is excluding tax benefits, particularly the tax benefits available to investors using a SIPP.
Tax benefits
Contributions into a SIPP are topped up by 20% by the taxman. Higher or additional-rate taxpayers can claim back a further 20% or 25% respectively.
Assuming a basic rate top-up of 20%, a couple would only have to contribute £160 a month each or £320 together before tax relief over a period of 20 years, at an average annual rate of return of 8% to build a pension pot of £250,000 at the time of retirement.
If you’re planning on retiring sooner than 20 years, the bad news is you will have to save more, but it is still possible to hit this £250,000 target.
My figures suggest a couple would have to put away £1,100 a month (£550 each) before the tax credit, and £1,375 after the credit to save £250,000 in the space of a decade (assuming an annual rate of return of 8%).
That’s how you can increase your State Pension by £10,000 a year with minimal effort. And if you’re looking for more tips on how to boost your retirement income, keep reading.