With the cost of living on the rise, ensuring you have enough retirement income to live comfortably is becoming increasingly essential. And according to the National Pensions and Lifetime Savings Association, individuals need to have at least £43,900 coming in each year or £60,600 for couples.
That’s more than the £31,602 median income for full-time employees in 2024. So, how is the average person supposed to achieve this financial goal?
The good news is that while the current British State Pension is far from sufficient, it does help cover some of the distance by providing roughly £12,000 per year. That leaves a gap of £31,900 for individuals or £36,600 for couples. And by making some smart investment decisions, even modest investors can strive towards unlocking a nice retirement income. Here’s how.
Following the 4% withdrawal rule, investors seeking up to £36,600 in passive income will need a minimum portfolio size of £915,000. That’s a pretty substantial nest egg. But luckily, consistently investing £500 each month might be all that it takes when leveraging the power of a SIPP.
That’s because whenever money is deposited into a SIPP, investors earn tax relief – around 20% for the average person. And £500 after 20% tax relief translates into £625 of investable capital.
Assuming this money is allocated to a FTSE 100 (^FTSE) index tracker, and that the UK’s flagship index continues to generate its long-term average return of 8%, a £36,600 retirement income would be unlocked in just under 30 years.
Of course, in practice, investors might have to wait longer. A poorly timed market crash could temporarily derail the wealth-building process just before retirement. What’s more, if we assume inflation averages 2% over the next three decades, investors will need to earn closer to £66,000 to maintain the same purchasing power. And let’s not forget that the State Pension might also change, not necessarily for the better.
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.
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