I can’t imagine having to survive solely on what the State Pension provides. I plan to retire in comfort when I hang up my proverbial work apron for the last time. Living on the basic amount, as many UK pensioners do today, isn’t something I’m prepared to sail blindly into.
I’m buying UK shares in a tax-efficient Stocks and Shares ISA to help me build a nest egg for retirement. The new full State Pension provides an annual income of £9,339.20. This is some way short of the £21,000 which (according to Standard Life Aberdeen research) people intending to retire in 2021 wish to spend each year.
It’s clear then, people who wish to retire comfortably like me need to take their future into their own hands.
Why I worry about the State Pension
Many retirees who plan to stop working this year and rely solely on government benefits are putting themselves at risk of having less money than they’d like. And things could get harder for future generations should the ‘triple lock’ guarantee — the mechanism that dictates the degree to which the State Pension should rise — ever be stripped down.
I’m also mindful that I might not be eligible to receive the State Pension until I’m approaching my 70s. The age at which Britons can claim state benefits is gradually increasing under current legislation and will hit 67 years by 2028. I think the huge stress that Covid-19 has placed on the public purse could even drive the age threshold higher, although there’s no hint of that at the moment.
Stocks and Shares ISAs vs Cash ISAs
This is why I buy UK shares in my Stocks and Shares ISA at every opportunity. The pitiful sub-1% interest rates, which traditional savings products like Cash ISAs offer, isn’t likely to help me offset the impact of a paltry State Pension when I retire.
According to moneysupermarket.com, the best-paying easy-access Cash ISA is offered up by Paragon Bank. The rate here sits at a paltry 0.55%.
If I invested £300 a month for 30 years in this product I’d have just £117,421 to show for it. To break this down I’d have earned just £9,420 in interest on a total contribution of £108,000. This sort of return is unlikely to allow me to spend what I plan to throughout my retirement.
Now let’s compare what I could make by spending that £300 a month on my Stocks and Shares ISA. History shows the average long-term UK share investors makes an average annual return of 8%. Based on these past figures I can realistically expect to make £425,284 in my ISA after three decades of investing. I’d have made a return of more than £317,200 on combined contributions of £108,000.
Of course, there’s no guarantee share investing will deliver me those sort of returns. Share prices can go up as well as down, of course. But I believe the sort of rewards I could realistically make with a Stocks and Shares ISA outweigh the risks. And there are plenty of quality UK shares to help me retire in comfort.
