How I’d invest £250 a month in UK shares to make a passive income that doubles the State Pension

Peter Stephens
·3-min read
Retirement saving and pension planning
Retirement saving and pension planning

Investing money in a selection of UK shares each month could lead to a surprisingly large portfolio over the long run. From it, a generous passive income could be obtained that’s at least as much as the State Pension.

With many FTSE 100 and FTSE 250 shares currently trading at low price levels after the 2020 stock market crash, now could be the right time to buy a diverse range of them. Over time, they may improve an investor’s retirement prospects.

Investing money in UK shares to double the State Pension

A monthly investment of £250 in UK shares could lead to a worthwhile passive income in older age. For example, the FTSE 100 has produced an annual total return of around 8% since its inception in 1984. Assuming the same rate of return in future, it would provide a portfolio valued at £240,000 over a 25-year time period.

From that portfolio of £240k an annual withdrawal of 4% would mean a retiree can enjoy an income return of around £9,600. The State Pension currently amounts to around £9,100. So that would mean a doubling of the income received in retirement for anyone who relies on the State Pension in older age.

Investing today to obtain a larger passive income

Of course, not all investors will have 25 years through which to allow UK shares to produce a passive income that doubles the State Pension.

However, the low prices on offer across the FTSE 100 and FTSE 250 suggest it’s possible to obtain even higher returns than the stock market has achieved on average in the past. After all, buying assets at low prices can mean there’s scope for significant capital appreciation over the long run.

As such, buying stocks such as Taylor Wimpey, Vodafone and Tesco could be a shrewd move. All three companies have been disrupted by the coronavirus pandemic. But they appear to have the financial strength to overcome short-term challenges to benefit from a likely stock market recovery. Similarly, companies such as Lloyds and easyJet, while at the riskier end of the investment spectrum, could deliver sound recoveries in the long term after what has been a difficult 2020.

Taking a long-term view

Clearly, UK shares will take time to produce a passive income that reduces a retiree’s reliance on the State Pension. However, the past performance of indexes such as the FTSE 100 and FTSE 250 suggests a stock market recovery from present woes is very likely. That’s despite continued economic uncertainty that may be ahead in the short run.

By investing money in undervalued shares today, and holding them even during challenging economic times, an investor can enjoy a growing passive income. One that means they can enjoy greater financial freedom in retirement than that provided by the State Pension.

The post How I’d invest £250 a month in UK shares to make a passive income that doubles the State Pension appeared first on The Motley Fool UK.

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Peter Stephens owns shares of easyJet, Lloyds Banking Group, Taylor Wimpey, Tesco, and Vodafone. The Motley Fool UK has recommended Lloyds Banking Group and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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