How should I invest £100 a month for a second pension?

Investing a 100 a month to fund a second income in retirement is a good start. And its an even better start if you are young.

If you are now, say, 20, youll have almost 50 years to accumulate a savings pot before youre eligible to draw on the State pension for me, the State Retirement Age is 67, for example, but it has been creeping up.

Time is the friend of the compounder

And if you find a way to compound the returns from your money, time can be an asset to you because the biggest absolute returns arrive in the later years of a compounding journey. The other big variable that can make a massive difference to the eventual size of your retirement pot is the annualised rate of return you achieve. Small differences in that can make vast differences to the amount of money you end up with.

So its important to earn as big an annualised return as you can. Putting the money in a cash savings account with a paltry interest rate of just 1% or 2% will not help you to grow your money into a meaningful sum for retirement. Instead, Id aim to invest my 100 a month into shares and share-backed investments.

I reckon one of the best vehicles for doing that is to use your employers workplace pension scheme if there is one. The great thing about those is that your employer will put extra money in for you over and above what you pay in yourself. Its free money and could really boost your retirement pot. On top of that, contributions from both you and your employer are tax-free, which means the government effectively returns the income tax money and it ends up in your pension fund.

Usually, workplace pension schemes invest in managed share funds on your behalf, so your investment will be backed by the shares of many underlying companies. But if you cant get access to a workplace pension scheme you can contribute to a private pension scheme that will give you all the same tax advantages. Such funds usually operate in a similar manner and invest in managed funds. You wont get the advantage of extra employer contributions though. However, its a good secondary choice, in my opinion.

Striking out alone

If you want to be more independent, you could go for a Self-Invested Personal Pension (SIPP) that again gives you tax advantages but you will need to select your own investments. Youll have to do more ongoing work, but if you are interested in investing its a good choice. You can choose between managed funds, passive tracker funds, and individual company shares. However, with a regular investment of 100 a month, Id be inclined to look at funds rather than individual stocks. You can always add some shares later.