Relying on just one income in retirement isn’t enough these days, it makes sense to generate a second on top. And ideally, a third or fourth.
Even if you get the maximum new State Pension, it’s worth just £12,547 this year. That’s below the income required for the ‘minimum’ acceptable lifestyle, according to the Retirement Living Standards survey. For a comfortable lifestyle, a single person needs £45,400. It’s a huge gap to plug.
| Lifestyle target | Single person | Couple |
| Minimum | £ 13,900 | £ 22,500 |
| Moderate | £ 32,700 | £ 45,400 |
| Comfortable | £ 45,400 | £ 62,700 |
Source: Pensions UK
I’m building my second income from investing in a spread of FTSE 100 and FTSE 250 shares, across both a tax-efficient Self-Invested Personal Pension (SIPP) and Stocks and Shares ISA.
See how FTSE 100 shares build wealth
I also plan to work on in retirement, on a part-time basis. So that’s three sources of income. But the bulk of my retirement earnings should come from dividend-paying UK stocks.
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FTSE companies pay some of the most generous dividends in the world. Lately, the headline yield has been around 3.3%. That’s triple the yield on the US S&P 500, which is around 1.1%. It’s possible to get a much higher rate of income, by buying individual UK income stocks. Some yield as much as 5%, 6% or 7%.
While of working age, I’ll reinvest every dividend I receive. Once I phase into retirement I’ll draw some of them as income and continue to reinvest the rest.
Now let’s say I use this year’s full £20,000 ISA allowance and generate an annual return of 9.64%. That’s the average total return from a Stocks and Shares ISA over the last decade, according to Unbiased. After 25 years, I’d have £199,643. Not bad, from just £20k. Of course, investment returns aren’t guaranteed. I could get less. But I might get more.
With a 5% average yield across my portfolio, that would generate a pretty handy passive income of £9,982. Naturally, that isn’t guaranteed.
Here’s one dividend star to consider
One dividend stock I rate today is Standard Life (LSE: SDLF). The FTSE 100 retirement specialist and life insurer, formerly known as Phoenix Group Holdings, manages around £300bn for 12m customers.
Its shares have done well, climbing 38% in the last year. But for most investors, the real attraction is the trailing dividend yield of 6.2%. Standard Life has a solid track record of increasing shareholder payouts year after year. The board plans to increase them by 2% a year in future.
As with every stock, there are risks. The pensions and savings market is highly competitive, and the board has to work hard to win new business, generate cash, fund dividends and impress shareholders. It’s also at the mercy of events beyond its control such as interest rates, inflation, consumer confidence, the jobs market and a potential stock market crash.
But Standard Life’s done well and I think it’s well worth considering for both growth and second income, as part of a balanced SIPP or ISA portfolio.
Should you invest £5,000 in Standard Life right now?
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Harvey Jones owns shares in Standard Life.
