Retirees receiving the full State Pension today are entitled to £168.60 a week, or £8,767.20 a year. Studies show this basic income isn’t enough for the average retiree to live on comfortably. Most retirees will therefore need to supplement this weekly payout with an additional income stream.
With that in mind, I’m going to explain how I would double my State Pension in retirement with savings of just £10 a week.
Setting a target
According to my figures, a saver would need to have put away around £220,000 at the time of retirement to be able to double their State Pension. The best way to meet this target, in my opinion, is to open and start contributing to a Self-Invested Personal Pension (SIPP).
SIPPs are a tax-efficient way of saving for the future. Any money added is subject to tax relief at your marginal tax rate, which is 20% for basic rate taxpayers. Higher and additional rate taxpayers can also claim back tax on their self-assessment form.
Thanks to these tax benefits, basic rate taxpayers will receive £2 in benefits for every £8 they contribute, taking the total up to £10. If you contribute £10 a week, the additional government bonus will boost the total up to £12.50 a week, £54.17 a month, or £650 a year.
Making the most of the tax benefits available to investors is just the first stage of my plan to double my State Pension. The next part of my plan is to invest this monthly contribution.
Investing for the future
I’m not planning to retire for several decades, so I’m quite happy to invest my money in a low-cost passive index tracker fund. I believe that over the long term, this is going to be the best instrument to grow my wealth.
Both the FTSE 250 and FTSE 100 are excellent indexes to track for this purpose. The blue-chip FTSE 100 offers more in the way of income and less volatility, but its returns have lagged those of the FTSE 250 during the past decade.
Indeed since 2009, the FTSE 100 has produced an average annual total return for investors in the region of 7%, while the FTSE 250 has returned 9%. So, if you’re willing to own the more volatile FTSE 250, it’s undoubtedly worth it for the extra returns.
According to my calculations, it would take around 38 years to hit the £220,000 savings target, assuming an average annual return of 9% and monthly contributions of £54.17. By comparison, I calculate it would take 46 years to hit the same level using the FTSE 100.
The bottom line
So that’s how I would double my State Pension with contributions of just £10 a week. Using a combination of the tax benefits available with a SIPP and the wealth-creating power of the stock market over the long term, I believe any investor can do the same.