The State Pension is changing. Is it time to think differently about retirement wealth?

The role of the State Pension in retirement is once again under discussion.

Speaking yesterday, Prime Minister Andy Burnham announced changes to the UK’s Triple Lock, with the current system set to remain in place until April 2030. From then, the State Pension will continue to rise by at least inflation or 2.5%, while a new earnings link is intended to ensure its value keeps pace with average earnings over time.

For those planning for retirement, the announcement is a useful reminder of something that has always been true: the State Pension is only one part of the retirement picture.

Building retirement wealth beyond the State Pension

For many investors, the question is not simply how much the State Pension will be worth in the future, but what they can do alongside it to build additional wealth over the longer term.

Starting early can make a significant difference. Regular investment contributions benefit from compounding, allowing returns to generate further returns over time.

For example, a hypothetical £250 monthly investment growing at an illustrative 6% a year could grow to around £58,000 after 12 years, £116,000 after 20 years or £208,000 after 30 years, before charges and tax.

These figures are purely illustrative. Investment returns are not guaranteed, actual returns will vary from year to year and investors may get back less than they originally invested.

Investing for the long term

This is where investment funds can play a role within a broader retirement strategy.

The MGTS IDAD Future Wealth Fund, for example, was launched in 2021 with a long-term objective of providing capital growth over a seven-year period. It takes a diversified thematic approach across Digital Industry, Healthcare Innovation, New Energy and Online Life, seeking exposure to the industries and technologies expected to shape the future.

The Fund has experienced periods of strong performance since launch, including particularly strong relative performance over the one- and three-year periods according to Trustnet. However, past performance is not a guide to future returns, and the value of investments can fall as well as rise.

The wider point is not that investors should attempt to replace the State Pension with investment returns. Rather, retirement planning can benefit from having more than one source of financial security.

The value of starting early

A long investment horizon gives investors more time to benefit from compounding and to ride out periods of market volatility.

Someone investing £250 a month for 30 years would contribute £90,000 in total. At an illustrative annual return of 6%, the resulting pot could be around £251,000 before charges and tax.

That is the potential power of giving investments time to grow. It also demonstrates why retirement planning is about more than the income available at retirement itself. The decisions made decades earlier can have a meaningful impact on the capital available later in life.

A changing retirement landscape

The State Pension will remain an important part of retirement income for millions of people. But yesterday’s announcement highlights the importance of understanding how State provision, workplace pensions and personal investments can work together.

For investors with a long-term horizon, the focus may therefore be less about predicting exactly what the State Pension will look like decades from now, and more about building a diversified portfolio that can complement it.

The future of retirement income may not come from one source. It may come from building several.

The MGTS IDAD Future Wealth Fund is designed for investors seeking capital growth over the medium to long term. The value of investments can fall as well as rise and investors may get back less than they invest. Past performance is not a guide to future performance. This article is for information only and does not constitute investment advice. Investors should seek professional financial advice before making investment decisions.