Don’t qualify for the full State Pension? This is what I’d do
At just £164.35 per week, the State Pension is not a lot of money. A retirement on the equivalent of £8,546.20 per year most likely won’t be a retirement that includes exotic Mediterranean holidays or regular meals at fancy restaurants. In fact, research from charity group the Joseph Rowntree Foundation (JRF) recently revealed that the income needed for a single retired person to live a minimum acceptable standard of living (more than just housing and food) is around £10,000 per year – 17% higher than the State Pension.
Yet, to make matters worse, millions of people across the UK don’t even qualify for the full State Pension. For example, last year we had a reader write in to tell us that he had recently found out that he was only due around £120 per week – significantly less than the full amount.
Lower payouts
There are a number of reason why many people don’t qualify for the full State Pension. Some don’t have enough ‘qualifying years’ on their National Insurance (NI) record and are therefore only entitled to a smaller payout. Others were ‘contracted out’ at some point in time in the past, meaning they paid lower NI contributions in exchange for a higher private pension, and now don’t qualify for the full amount of State Pension.
What I’d do
Finding out that you’re not entitled to the full State Pension can be frustrating. However, it’s important to understand that receiving a lower State payout is not the end of the world. There are definitely strategies that could help boost your income in retirement and, with a little planning, a lower payout could be offset with income from other areas. One such strategy that could be worth considering, in my view, is dividend investing.
Passive income
Dividend investing is the process of investing in companies that pay out a proportion of their profits in cash (dividends) to shareholders, on a regular basis. Essentially, companies pay you for being an owner of the business.
It’s a popular strategy among retirees because it’s a really easy way to generate a passive income. Simply invest in a selection of established dividend-paying companies, and regular cash payments are likely to hit your bank account in no time at all.
Large cash payouts
Here in the UK we’re lucky, because there are many fantastic dividend stocks listed on the London Stock Exchange. For example, there’s Royal Dutch Shell, which hasn’t cut its dividend since World War II. It currently offers a yield of around 6%. Or there’s tobacco giant Imperial Brands, which has increased its dividend by 10% per year for 10 years now, and currently yields around 8.5%.
With these kinds of stocks, you could easily put together a little portfolio yielding around 6% per year. And with an overall investment of say £25,000, you could be looking at dividend income of around £1,500 per year, which could certainly help offset a lower State Pension payout.
Finding out that you’re not entitled to the full State Pension can be daunting. However, there are definitely ways to boost your income in retirement. Dividend investing is one such strategy that could be worth considering.
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Edward Sheldon owns shares in Royal Dutch Shell and Imperial Brands. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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