Even if you get the full State Pension, it isn’t enough to retire on comfortably. Far from it, I’m sorry to say.
In the current financial year, the full new State Pension is worth a fraction over £12,547. Unfortunately, that’s £1,353 below the £13,900 a year required to bag the basic ‘minimum’ lifestyle, according to the latest updated Retirement Living Standards survey (below).
As my table below shows, it’s nowhere near big enough to fund a moderate lifestyle, let alone a comfortable one.
| Lifestyle target | Single person | Couple |
| Minimum | £13,900 | £22,500 |
| Moderate | £32,700 | £45,400 |
| Comfortable | £45,400 | £62,700 |
Source: Retirement Living Standards survey from Pensions UK.
A popular way to make up the shortfall is to build a balanced portfolio of UK shares from the FTSE 100 and FTSE 250.
These reward you in two ways. First, by building up your capital as their share prices rise. And second, by paying investors regular dividends. Best of all, both the growth and income is entirely free of tax inside a Stocks and Shares ISA.
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, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and obtaining professional advice before making any investment decisions.
How much do you need in your ISA?
Now let’s say an investor is targeting a passive income of £995 a month. That works out to £11,940 a year. That still won’t be enough for a ‘moderate’ lifestyle, even after it’s added to the State Pension. But it will nudge you closer. With luck you’ll have other sources of retirement savings, such as a company or personal pension. The more the merrier, frankly.
How much you need in your pot to generate that £995 depends on the underlying yield from the shares you own.
- With a 4% yield, you’d need £298,500 invested.
- At 5%, the required total falls to £238,800.
- And at 6%, the figure drops to £199,000.
Those look daunting, but can be achieved over longer periods such as 30 years. Let’s say somebody invests £200 a month, and it grows at an average annual rate of 9.64%. That’s the average annual return on a Stocks and Shares ISA over the last decade, according to advisory group Unbiased. By the end of that term, they’d have £404,396. Which is way more than my target.
Here’s why I bought Standard Life shares
One dividend share I rate right now is FTSE 100 insurer Standard Life (LSE: SDLF), which sells protection and retirement products. Today, it has a trailing dividend yield of 6.5%, one of the most generous on the blue-chip index.
Standard Life doesn’t just pay investors a high income. It aims to increase it every year. The board has increased shareholder payouts for the last 10 years in a row, at an annual average annual rate of 3.18%. Better still, investors have got some pretty decent growth on top. The Standard Life share price is up an impressive 30% over the last year.
Dividends aren’t guaranteed, and Standard Life has to generate enough cash to fund them. And after a strong run, its shares may idle for a while. They might even fall. That’s investing. But over the long run, I think a balanced portfolio of stocks like this one make a tempting option to top up the State Pension.
Should you invest £5,000 in Standard Life right now?
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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Standard Life made the list?
Harvey Jones owns shares in Standard Life.
