2 smart things you could do to overcome State Pension woes
While the State Pension is unlikely to disappear over the next few decades, it is set to become far less appealing for most people. With an ageing population, the cost of providing for people in older age is set to rise. As such, there are already plans in place to raise the age at which an individual can receive their State Pension.
With it already being tough to survive on what the state provides, it may seem as though retirement is becoming less attractive for many people from a financial perspective. However, by planning early and investing in the right stocks while taking advantage of tax breaks, it may be possible to overcome pension woes.
Pension age
From no later than 2028, the age at which an individual will receive their State Pension will rise to 67, and there are plans for it to move to 68 in the mid-2040s. Given the challenges that may be ahead for the economy, it would be unsurprising for the timetable to be brought forward, with a pension age of 70 now not being such an unrealistic assumption over the next few decades.
However, just because the age at which an individual will receive their State Pension is rising does not mean that retirement must wait until that date. It is possible to generate a sizeable nest egg before the time an individual reaches the current retirement age. Assuming a career commences at age 21, nearly 40 years of investment returns could be sufficient to allow an individual to retire at age 60. For example, investing £50 per week in the FTSE 250 for 39 years could generate a nest egg of over £1m.
This assumes an annualised total return of 10%, which has been achieved by the index over the last 20 years. And with ISAs and pensions allowing an individual to not only benefit from tax breaks, but to also have a significant amount of flexibility in terms of when they draw on their pension, it is possible to retire far earlier than the current age at which a State Pension starts being paid.
Income challenges
Of course, it could be argued that the State Pension is insufficient even at its current level. It amounts to £164.35 per week, which for many people will not cover basic living costs. As such, it may be best viewed as a top-up to a private pension, with the latter providing the bulk of income in retirement. With the costs of providing for retirees as a whole set to increase, the basic pension may become even less generous over the coming decades.
As such, buying higher-yielding shares could be a smart move. Not only could they offer impressive total returns when dividends are invested during the working phase of an individual's life, in retirement it is very possible to achieve an income return of over 5% from FTSE 100 shares. In fact, the index itself yields almost 4%, which suggests that while the prospects for the State Pension are in decline, investing in a private pension is becoming more appealing.
Our top analysts have highlighted five shares in the FTSE 100 in our special free report "5 Shares To Retire On". To find out the names of the shares and the reasons behind their inclusion, simply click here to view it right away!
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