With the State Pension amounting to around £164.35 per week, it is likely to be insufficient to provide most individuals with financial freedom in retirement. Furthermore, the age at which it starts being paid is due to rise over the next couple of decades.
As such, most individuals will need to put in place their own arrangements in order to enjoy financial freedom in retirement. However, with buy-to-let investing becoming less appealing and cash returns being low, the stock market may prove to be the best option in the long run.
Low income With average annual earnings in the UK being around £27,000, the State Pension stands at less than a third of that amount. This suggests that even for an individual who has no mortgage payments to make after having paid for their property during their working lives, the State Pension will be insufficient to fund their lifestyle in older age.
That’s especially the case since the cost of energy, leisure activities, as well as various other goods and services, have risen significantly in recent years. As such, a supplementary income appears to be a necessity in older age.
Rising age In the next two decades, the age at which the State Pension starts to be paid is expected to rise even further. Within 20 years it is due to be 68 for both men and women. It would be unsurprising if it rose even further, since life expectancy continues to increase. Furthermore, the population of the UK is ageing, which means that there will be a greater burden on taxpayers in the coming years. This could cause the electorate to demand further changes to the State Pension age, as well as the amount by which it increases on an annual basis.
Relative appeal A desire to generate a second income for retirement has led many individuals to focus on buy-to-let investing in the last couple of decades. Rising demand for rental properties, plus low interest rates in recent years, have made it a highly profitable industry. Furthermore, being able to deduct mortgage interest payments from income in order to reduce tax has led to a number of investors accumulating sizeable portfolios of buy-to-let investments.
Now, though, tax changes and the potential for interest rate rises mean that property is becoming a less appealing asset to hold. Interest rate rises could also hurt bond prices, while they may continue to be insufficient to generate a positive real-terms return on cash.
Stock market As such, investing in shares could prove to be a sound move for individuals seeking to generate a nest egg for retirement. The FTSE 100 and FTSE 250 have strong track records of growth, with a variety of tax-efficient accounts, such as a Lifetime ISA or Stocks and Shares ISA, being available in order to maximise returns in the long run.
While the risks of investing in shares remain high, the reward potential means that for long-term investors, the stock market could prove to be a sound means of planning for older age.
Motley Fool UK 2019