Why investing in UK stocks for passive income could be more important than ever!

Over the years I have built a balanced portfolio of growth and dividend stocks. Doing so can help me earn a healthy passive income when I finally retire.

I build my investment plan around equities because of the strong returns that long-term investors tend to get. History shows that UK stocks provide average annual returns of between 8% and 10% over a decade or more.

The latest news on the State Pension suggests that buying shares for second income may be more critical than ever.

A toxic mix

Britain is facing a demographic time bomb. The population is rapidly aging and the cost of supporting them financially is rising.

The Office for National Statistics predicts the number of over-65s in the UK will increase by 50% between 2016 and 2035. At the same time, structural problems in the UK economy mean the public purse may struggle to support this age group.

Issues like low productivity, labor shortages and post-Brexit trade rules all threaten GDP growth in the long term. Worryingly, the country also has huge debt levels.

Change the State Pension age?

That is why the government is planning to raise the State Pension age sooner than expected. At least that’s according to yesterday’s media reports.

Word has it that the retirement age could rise to 68 by the end of the 2030s under new Treasury plans. This will bring the date forward from 2046.

Such a move would not come as a surprise in my opinion. Secretary of State for Work and Pensions Mel Stride previously suggested the increase could be implemented.

And the economic news has been pretty grim since then. Economists have cut their UK GDP forecasts for the next few years. Also yesterday there was news that government debt reached a record high for December last month.

How I will invest for retirement

I believe anyone relying on the State Pension to fund their retirement could be disappointed. Given these demographic trends, pressure to delay or reduce real pension benefits will grow rather than recede, regardless of the party in power.

My plan is to use the State Pension as a way to supplement my retirement income. In addition, I control my destiny by investing in UK stocks.

The good news is, I don’t think I need to spend any money to have a comfortable retirement. If I were to invest £250 a month in UK shares, I could – based on an average annual rate of return of 8% – have made a cool £407,820 after 30 years.

If I then apply the 4% withdrawal rule (which allows me to take my income out of my pension fund without it getting worse over time), I will have an annual passive income of £16,313 for life. When added to the State Pension I can have a healthy total income to lead a comfortable retirement.

Pensioner poverty is on the rise again in the UK. By taking steps today, we hope to avoid the same fate in retirement.