While 40 might be a more advanced time of life to be thinking about your retirement plans, it's by no means too late. With the recent increase in State Pension age you now have another 28 years until you’re eligible for a State Pension, so you’ve still got time to save for a comfortable retirement.
They say that life begins at 40 and if you started work at the age of 18, that means you're not even halfway through your working life! That might be a sobering fact, but it does reinforce what we said earlier: it's never too late!
Having said that, starting later obviously isn't as good as starting earlier when it comes to saving for your retirement as it doesn't give your money as long to grow. What it does mean is that you need to be savvy with your retirement savings and make sure any investments will provide you with the best returns.
Most people plan to retire as soon as they can receive the State Pension, but the reality is that even if you are eligible for the full State Pension it is unlikely it will be enough for a comfortable retirement. You can find out more about the State Pension here. Legislation from April 2011 means that your employer can’t terminate your contract when you reach state retirement age, leaving you free to continue in your job for as long as you like (subject to your health and ability to do the job in question).
While you will likely have established your career and will be reaching peak salary, life in your 40s can still make it financially difficult to save for your retirement. Normally, those in their 40s have managed to get on the housing ladder, so while this means no longer having to save for a house deposit it does mean having to pay a mortgage each month. And while you might not have to pay higher rental fees, with many couples putting off having children until later in life you may have childcare costs to pay. Statistically mid-40s is the average age for divorce, so you might not have to be saving for a wedding but going through an expensive divorce instead. Despite this, when you’re in your 40s it is still important to put saving for your retirement high on your priority list, because while it’s not yet too late to save for your retirement, if you leave it too long it soon could be.
When planning for retirement, make sure you assess what you’ve already got. This might include considering releasing equity from your home or downsizing in the future, as well as tracking down previously held pension schemes.
While you might not yet have saved specifically for your retirement, if you own or have a mortgage on your own home then downsizing when you retire could be an option.
Indeed, many homeowners choose to increase their retirement income by selling up and moving to a smaller property, which can free up tens or even hundreds of thousands of pounds for your retirement.
If you own a house outright that’s worth £300,000 and you downsize to a bungalow worth £150,000, you’ve freed £150,000 to put towards your retirement fund.
Not only does this option release money, but it can also mean that you’re in a property that’s easier to move around in, and more economical to run – not to mention clean – than the family home where you currently live. If you are planning to downsize it is important to remember that there is no guarantee that the housing market will work in your favour and you might not make as much as you initially planned from your home.
If your house is not large enough to downsize or you simply want to stay in your home but still need to fund your retirement, then an equity release scheme could be an option. Equity release is a type of financial product where you ‘borrow back’ some of the equity, or cash, you have accumulated in your home. Interest is charged on the amount of equity you have released until the loan is repaid, usually from the sale of your home after your death or when you go into permanent residential care.
The advantage of an equity release scheme is that you can release money while staying in your home without paying any rent or mortgage. If you still have a mortgage on your home you might be able to release equity to pay off your mortgage, which will reduce your monthly outgoings – you will only be able to do this if the equity from your home matches or is more than the amount you have left to pay on your mortgage. For example, if you have a mortgage of £100,000 but the equity on your home is £50,000 you won’t be able to use the equity to pay off your full mortgage amount. You will need to get professional financial advice as part of considering equity release.
Whether you choose to sell or use equity release depends on your personal circumstances, but if you are planning to leave behind an inheritance then choosing to sell your home is normally a better option. This is because with equity release the equity provider has to be repaid after your home is sold, including any accumulated interest – which can add up over the years – potentially resulting in reduced inheritance for your loved ones.
Along with looking at your current assets, you might also be able to increase your retirement funds by tracking down pensions from previous jobs that you’ve forgotten about. Your 40s is the time to take action and find these pensions, which can be easily done through the Government website.
Once you’ve tracked down any pensions make sure to review their value, performance and costs, and consider moving them to another pension scheme if they haven’t been performing well. Professional financial advice could help to maximise your pension pots through consolidation and review of the funds they are invested in, along with reviewing associated management costs.
One of the easiest ways to start a personal pension is to join your workplace pension scheme. Automatic enrolment was set up a few years ago and, as long as you earn over £10,000 per year and haven’t opted out, you will already be enrolled into your workplace pension by your employer. The benefit of this is that it provides you with an easy way to save for your retirement (your contribution is taken directly out of your wages) and your employer also contributes into your pension each month, and there’s the added bonus of Government tax relief, too.
If you have already been enrolled into your workplace pension you need to ensure you manage it effectively to get the best return on your savings. This is particularly important when you are in your 40s as you will have less time than someone in their 20s or 30s to make sure that your pension has time to grow. To help you manage your pension and make the right investment choices for your personal circumstances it is always advisable to speak to an independent financial adviser.
If you are self-employed, earn less than £10,000 or have extra money that you can put into retirement savings each month, looking into opening your own personal pension can help to increase your retirement funds. Again, your 40s is not too late to make substantial retirement savings, however to make sure you have a significant amount in your pot you will have to put more in each month than if you were younger. You can pay up to a maximum of your annual employment income or £40,000 per year (if less) into your pension and claim income tax relief on this amount, though anything saved above this is taxed. Ideally you should save as much as you can into your retirement savings, but even if you can only save a small amount each month it will provide a boost to your retirement income. For example, even if you can only free up £50 per month, it could add up to an extra £16,800 in your pension over the next 28 years. And that’s before factoring in any investment gains or tax relief you may qualify for over that period.
Finally, when considering your retirement strategy, it is best to seek independent financial advice. Professional guidance can really help you make sense of the options available to you and can help put your mind at rest if there's something you don't understand or are worried about.
Tracking down old pensions is a great way of boosting your retirement funds and at 40 it is more than likely that you have a pension from a previous job that you’ve forgotten about.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.