Think you might not need to invest in a Stocks and Shares ISA or Self-Invested Personal Pension (SIPP) for retirement? It might be time to reconsider.
You may have missed fresh research from the Pensions Commission last month. If you read it, you’re unlikely to have forgotten its shocking findings. It found that up to 19m people in the UK are not saving enough for retirement.
Even more alarmingly, it said this number could be even higher…
What did it say?
According to the Pensions Commission:
Many people are not saving enough for retirement, particularly among low and middle earners, the self‑employed and women… leaving large groups across the UK facing a severe cliff-edge when they retire
The Commission’s findings included:
- Only half of low-to-middle earners save at minimum Auto Enrolment levels for their workplace pension.
- Eighteen million people (equating to 45% of working-age adults) aren’t contributing to a pension at all.
- Just 4% of self-employed people are saving for retirement.
It left Minister for Pensions Torsten Bell to comment: “Tomorrow’s pensioners [are] on track to be poorer than today’s.”
Different ISAs
Times are tough, and setting extra money aside for retirement is difficult for many people. It’s not just that millions are ‘sleepwalking’ into pensioner poverty as a lot can’t afford to save or invest as the cost of living rises.
But it isn’t impossible to build a healthy nest egg for retirement, even if you’re starting your journey late. It depends on where you put your money, and whether you’ve come up with a well-rounded investment strategy. It’s possible that simply saving in a low-yielding Cash ISA won’t get the job done.
Why? The returns here have averaged just 1.21% a year over the last decade. If you want to get serious about building a financial buffer for retirement, you should consider focusing on a Stocks and Shares ISA.
A better strategy?
During the last 10 years, these products have provided an average annual return of 9.64%. They offer the same tax advantages of the Cash ISA, but by harnessing the power of the stock market they can generate significant retirement wealth.
Even someone who invests £250 a month could build a pot of £181,213 after just 20 years, based on that 9.64% figure. That would then generate a £12,685 passive income if invested in 7%-yielding dividend shares.
To put that in context, that’s more than the full UK State Pension currently provides.
A top fund
On the downside, the Stock and Shares ISA carries higher risk than its cash equivalent. But investing in a wide range of stocks significantly reduces the danger.
Funds such as the iShares FTSE 100 ETF (LSE:CUKX) are a simple way to achieve this, by instantly spreading investors’ cash across hundreds of companies. It’s also a pretty cheap one to consider — the ongoing charge here is 0.4%.
Over the last decade, the FTSE 100‘s delivered a robust average annual return of 9.4%. This is thanks to solid capital gains and the passive income provided by dividend heroes such as Legal & General, HSBC and National Grid.
Even well-diversified funds like this aren’t immune to certain pressures. This fund could, for instance, drop if a global economic downturn dents the earnings of FTSE-listed shares. But looking long term, I’m expecting its diversified collection of blue-chip companies to keep rising and generating big returns for ISA investors.
Should you invest £5,000 in Rolls Royce right now?
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Royston Wild owns shares in Legal & General and HSBC.
