August 15, 2022

Why I’d stop saving and start buying cheap UK shares to beat State Pension worries

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The stock market crash may have caused some investors to sell cheap UK shares in favour of using less risky savings accounts. While this may mean they don’t lose money, they’re also unlikely to generate high returns in the long run.

Similarly, low interest rates mean the passive income prospects from products such as Cash ISAs continue to be relatively disappointing.

As such, now could be the right time to buy a diverse range of British stocks. They could offer a mix of capital growth potential and dividend income that helps you to beat a disappointing State Pension.


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Making a passive income from cheap UK shares

Retirees who are seeking to make a passive income could do so from buying a diverse range of cheap UK shares. The stock market crash has caused some companies to reduce or postpone their dividends. However, there’s still sufficient choice available to build a portfolio of dividend stocks that together offers a generous passive income.

In fact, many FTSE 100 and FTSE 250 stocks currently trade at low prices compared to their historic averages. This means they also offer high yields in some cases. This could allow you to obtain a worthwhile income return to supplement your State Pension.

The difference in potential income return between a portfolio of cheap UK shares and cash savings is relatively large. A loose monetary policy means interest rates are likely to remain at low levels over the coming months. As such, retirees would need a significant amount of capital to generate a worthwhile income from cash savings. This could mean now’s the right time to buy undervalued FTSE 100 and FTSE 250 dividend stocks.

Capital returns from the stock market

Buying cheap UK shares is also a means of generating high capital returns over the long run. As such, they could improve the retirement prospects of individuals who still have several years left until they’re likely to retire.

The stock market has repeatedly experienced bear markets that have wiped 20%+ from its value in a matter of weeks or months. While it’s often taken much longer for the index to recover, it’s always recorded new highs after its downturns.

Therefore, investors who purchase high-quality companies while they trade at today’s low prices could benefit from a likely recovery in the coming years as the economic outlook improves and investor sentiment strengthens.

Purchasing cheap UK shares could eventually reduce your reliance on the State Pension in retirement. A portfolio of solid businesses purchased today at low prices may lead to a surprisingly large nest egg that ultimately provides you with a generous passive income in older age.

By contrast, holding cash in an era of low interest rates may mean you generate low returns unable to provide a nest egg capable of supplementing the State Pension in retirement.

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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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