Can you really survive on the State Pension alone?

Rupert Hargreaves
Young casual man and girl using laptop while looking at invoice and plan the budget to save.

Every pensioner is afraid of running out of money in retirement. Unfortunately, many retirees do encounter financial problems, despite the State Pension safety net.

According to various studies and surveys, the average retiree needs more than £20,000 a year to live in comfort. That’s assuming they own their property and live a modest life.

This year, the full new State Pension stands at just over £9,100 a year. That’s less than half the figure most retirees believe they would need to live in comfort.

These figures suggest most pensioners cannot afford to survive on the State Pension alone. As such, the best way to avoid financial hardship in old age could be to start your own private pension today.

State Pension alternative

One alternative to the State Pension is to set up a SIPP. These products are fantastic because, unlike workplace or government pension schemes, the owner has complete control. To put it another way, a pensioner should get out as much or more than they put in, and that’s a big positive.

SIPPs also come with significant tax benefits. SIPP contributions attract tax relief at your marginal tax rate. That’s 20% for basic rate taxpayers. So, for a basic rate taxpayer contributing £80, the government will add an extra £20 to take the total to £100. Additional tax reliefs are available for higher rate taxpayers.

Another benefit of using a SIPP, rather than relying on the State Pension, is the fact that SIPP owners can invest their cash in the stock market. This is a huge bonus.

Investing for the future

Investing your hard-earned money in the stock market could turbocharge the growth of your financial nest-egg. Over the past three-and-a-half decades, the FTSE 250 has produced an average annual return of around 12%.

On average, over the past 120 years, UK stocks have yielded an average yearly return of about 7%. This period has included multiple economic depressions and recessions as well as two World Wars. To put it another way, despite encountering multiple setbacks over the past century, UK stocks have produced a steady return for investors.

This trend will likely continue during the next few decades. A combination of income and capital growth from UK shares could produce high total returns for investors over the long run.

Therefore, by using a SIPP to invest in the stock market, future retirees can decrease their reliance on the State Pension. A contribution of just £80 a month into a SIPP (or £100 including the government top-up) could help build a pension pot worth more than £1m in 40 years. That’s assuming an annual return rate of 12%. This would be enough to provide a yearly income of £40,000 in retirement.

All in all, figures suggest the state pension alone may not be enough to live off in retirement. The best way to get around this problem could be to open a SIPP and invest in the stock market.

The post Can you really survive on the State Pension alone? appeared first on The Motley Fool UK.

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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