For people retiring this year, the UK State Pension is £241.30 a week (£12,547.60 a year). That represents a 4.8% increase applied in April, protected by the government’s triple lock policy.
But here’s the thing: that money won’t come from their historical National Insurance (NI) payments. It’ll come from those of someone else.
The reality
The UK State Pension operates on a contributory system — it’s not a savings pot, it’s a transfer from current workers to pensioners.
Every £1 you receive comes from someone else paying NI today. You generally need 35 qualifying years of NI payments to get the full amount.
The problem?
The dependency ratio is shifting. In 1960, there were roughly six workers per pensioner. By 2050, that’s projected to drop to 2.3 workers per pensioner.
More pensioners, fewer workers.
The triple lock guarantees the State Pension rises by the highest of inflation, wage growth, or 2.5% annually. This is popular, but potentially unsustainable.
The IFS warns the system faces “significant challenges given the UK’s ageing population” and calls for reform. Mercer reports the UK pension gap will rise from £6trn to £25trn by 2050.
What this means for you
Reports suggest three-quarters of UK workers aren’t on track for a moderate retirement income (£32,700 annually).
If you’re relying on the State Pension as your main retirement income, you might want to consider building an additional income stream.
Both a Stocks and Shares ISA or SIPP can help investors build a retirement pot with significant tax advantages:
- ISA: No income tax or capital gains tax on returns, £20,000 annual contribution limit.
- SIPP: 20% tax relief automatically (claim 25% more gross), up to £60,000 annual allowance, plus 25% withdrawal tax-free.
Even £200 a month invested can compound exponentially. Depending on the total return your investments achieve, here’s what that could look like:
| Monthly investment | Years | 8% return | 10% return |
|---|---|---|---|
| £200 | 10 | £37,000 | £42,000 |
| £200 | 20 | £118,000 | £152,000 |
| £200 | 30 | £309,000 | £450,000 |
This table shows the gross value before tax. Using a SIPP, you’d actually pay just £160 for £200 invested thanks to 20% tax relief.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
A good starter stock to consider
Reckitt Benckiser (LSE: RKT) is an example of a solid starter stock to look at. It’s a large, well-established UK consumer goods company with strong fundamentals and a long history of rewarding shareholders.
When building the initial foundation of a portfolio, it makes sense to consider companies you are familiar with. If the brand is well-known and you see it every day, it probably enjoys steady, consistent revenues.
As the producer of top names like Dettol, Nurofen, Lysol, and Air Wick, it’s fair to say Reckitt fits that criteria.
Here are a few quick financial points:
| Dividend yield | 4.74% |
| Dividend history | Consistent payments for at least 25 years |
| Dividend growth | 3.9% CAGR over 10 years |
| Earnings per share (EPS) | 352.8p (up 5.3% year on year) |
| Price-to-earnings (P/E) ratio | 9.32 (below market average) |
| Beta | 0.25 (defensive, less volatile than market) |
Still, risks should never be ignored. Consumer goods face stiff competition, input cost inflation, and currency volatility.
Selling healthcare products adds additional risk, exhibited recently by the legal case involving Reckitt subsidiary Mead Johnson’s Enfamil baby formula.
Final thoughts
Retirees without a private pension need to ask themselves: are you ready to rely solely on a system where the next generation supports you?
The tax benefits of an ISA or SIPP can make a huge difference. The large annual allowances and tax-free growth can compound your pot significantly.
If you’re 35 years from retirement, just £200 a month with market-average returns could grow to over £300,000 by retirement age.
Should you invest £5,000 in Reckitt Benckiser Group Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Reckitt Benckiser Group Plc made the list?
Mark Hartley owns shares in Reckitt Benckiser.
