While few people under the age of 40 may have sleepless nights about the State Pension, now could be the right time to start focusing on building a second income in retirement. After all, the State Pension age is set to increase to 68 over the next two decades. It currently amounts to just £164.35 per week and this is unlikely to sustain even the most frugal of retirees. That means building a nest egg for retirement may become increasingly important.
Lifetime ISA As it’s currently possible to invest up to £4,000 per annum in a Lifetime ISA, it could prove to be a sound means of overcoming the unappealing prospects for the State Pension. With the government topping-up Lifetime ISA contributions through a 25% bonus, it may be easier than many people think to generate a sizeable pension pot from which a second income can be drawn in older age.
As well as the tax advantages offered, their simplicity could also make them appealing to a variety of individuals. No tax is paid on withdrawals, which may make budgeting for retirement a lot simpler when compared to a pension plan or a SIPP. Furthermore, there’s no 25% penalty payable on withdrawals made to fund the purchase of a first home. This may afford individuals greater flexibility than they would have with a pension plan.
Investing While setting up a Lifetime ISA may be straightforward, some may be unsure in what to invest. This may be why cash ISAs continue to be significantly more popular than Lifetime ISAs (or Stocks and Shares ISAs) despite the paltry rate of interest generally available on cash savings at present.
However, investing in a variety of shares doesn’t need to be a daunting experience. Starting off with tracker funds could be a good idea, with it possible to set up regular direct debits and regular investing in specific funds. This could be a sound means of diversifying among a number of different companies, and could help to reduce overall risk. And with the UK stock market generally offering a high single-digit annual total return, it could produce a significantly larger nest egg than that provided by investing through a cash ISA.
Financial priorities Of course, there are a number of other areas which may be more pressing than retirement planning in the short run. However, there’s rarely the perfect time to start investing for the future. Today though, there are financial products available, such as a Lifetime ISA, which make it easier to become less dependent on the State Pension in older age. And with the stock market appearing to offer good value for money, now may be the right time to overcome what’s becoming an increasingly inadequate State Pension.
Motley Fool UK 2019