Passive Income in retirement

Worried about the State Pension ? Here’s what I’m doing about it

The Triple Lock that protects the State Pension looks expensive. But Stephen Wright plans to build his own source of passive income in retirement.

Posted by Stephen Wright

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

It seems – to me anyway – that everyone thinks the Triple Lock that makes the State Pension rise every year is going to have to go sooner or later. So people like me need to take action.

The Triple Lock isn’t up to me directly. But I’m looking to act now to try and reduce the effect any changes might have on my retirement when the time comes.

Triple Lock

The full State Pension right now is £11,973 a year. And the Triple Lock means it increases each year by whichever’s highest out of inflation, average wage increases, or 2.5%. That’s a pretty nice deal, but it’s expensive. There’s disagreement about why and what to do about it, but I’m sensing a growing acceptance that it’s becoming hard to sustain.

If I’m right, thinking about other sources of income in retirement has never been more important. And the stock market’s top of my list.

There’s nothing quite like a government guarantee. But in the best cases, the income generated by owning shares in businesses can even outperform the Triple Lock.

Pension maths

Right now, I think an investor needs a portfolio worth around £299,325 to earn £11,973 a year. That’s based on a 4% average dividend yield, which looks realistic in today’s market.

Projecting ahead 30 years to when I retire, I think the State Pension could reach £29,061 a year (if the Triple Lock stays in place). That’s based on a 3% annual increase. 

Assuming a 4% dividend yield, someone looking to retire at the same time as me will need a portfolio worth £726,525 to have a realistic shot at this. And that might be achieveable.

Starting from scratch, someone who invests £1,000 a month needs a 4.5% average annual return to reach £726,525 within 30 years. And that’s well below the 6.8% FTSE 100 has produced over the long term.

A stock to consider

In terms of specific names, Informa‘s (LSE:INF) stock I like a lot. The firm’s a leader in the trade show industry and high intangible assets mean these events have very attractive unit economics.

With one important exception, the firm’s increased its dividend at a rate above the Triple Lock each year for the last 10 years. In other words, it’s been a growing income stream for investors.

The exception is Covid-19. Remote working proved challenging for live events and this kind of disruption (though hopefully not this specifically again) is a risk for Informa’s trade show business.

Every business however, goes through difficult times and the firm’s rebounded strongly. In a lot of ways, this highlights the company’s resilience, which is crucial for a long-term investment.

Independence

Ultimately, I – and others like me – have a choice when it comes to retirement. We can either hope for the best with the State Pension, or we can think about trying to build our own income streams.

Relying on the State Pension looks risky to me. It’s expensive and decisions about it aren’t in my hands, which is why I’m looking at shares in companies like Informa..

The business made £800m a year in free cash last year with a market value of less than £12bn. It’s firmly on my radar at the moment, but it’s not the only one.