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It’s no secret that the UK State Pension is far from sufficient to maintain a decent lifestyle. Even after it gets a boost in April, thanks to the triple lock, Britons will only receive up to £12,547.60 each year – firmly behind the estimated £43,900 needed to live comfortably.
To make matters worse, there are growing fears that the State Pension could be a ticking time bomb.
A combination of lacklustre economic growth, an ageing population, and concerningly high levels of youth unemployment is creating a potential nightmare where tax receipts can’t cover pension payouts.
Consequently, the Office for Budget Responsibility has highlighted that the current trajectory is unsustainable in the long run. And that puts the State Pension at risk for even 40-year-olds today.
But by taking the right steps today, investors can protect themselves and aim to secure a better future. Here’s how.
Building retirement wealth
With the sustainability of the State Pension in doubt, investors who build an additional private pension pot with a Self-Employed Personal Pension (SIPP) could be far better protected in the long run.
Even following a simple index tracker strategy yielding an average of 8% a year could make an enormous difference.
Let’s say a 40-year-old investor in the Basic rate income tax bracket puts £600 each month into their SIPP and intends to retire at age 68. Each deposit gets automatically topped up by 20% through tax relief to £750. And investing this money at an 8% rate for 28 years translates into a £936,423 pension pot.
Following the 4% withdrawal rule, that’s enough to generate a £37,450 retirement income. That’s a significant improvement versus the current State Pension. But investors can potentially do even 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.
Aiming higher
By investing exclusively in the best businesses, a portfolio can go on to earn significantly higher returns than 8% a year. And looking back at the last 28 years, a perfect example of this is Chemring Group (LSE:CHG).
Since March 1998, the specialist defence group has delivered a 3,903% total return, averaging 14.1% on an annualised basis. And anyone whose been drip feeding £750 each month along the way is now sitting on close to £3.2m – enough for a £126,770 passive income!
Still worth considering?
With defence spending now entering a new supercycle, Chemring has unsurprisingly seen its order book surge, providing both a structural tailwind and exceptional revenue visibility for the future.
That’s a pretty rare advantage for management, enabling far more intelligent capital allocation for fuelling long-term growth. And it’s why all six institutional analysts tracking this business current rate the stock as a Buy or Outperform.
However, this surge in new orders hasn’t gone unnoticed. And at today’s valuation, it leaves little room for error.
A de-escalation of the geopolitical landscape could result in a spending slowdown and lofty investor expectations being missed. Even if this doesn’t happen any time soon, ongoing investments to expand manufacturing facilities could put downward pressure on earnings, especially if these projects fall behind schedule or suffer from cost overruns.
Nevertheless, with an exceptional track record, Chemring shares merit a closer look, in my opinion, especially for investors seeking to build their own retirement wealth against a potential future cut in the State Pension.