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Saving for retirement in your 40s

Worrying about your financial security in retirement can be a big cause of stress for families, but it doesn’t need to be with careful financial planning. This is how to save for retirement in your 40s.

Whether you’ve already built up a decent pension pot, or have had to delay starting due to competing priorities, the fear of affording retirement might be creeping in.

However, at 40, you’ve probably achieved most of your long-term savings goals and have hit your peak earnings years, which means you’re in a pretty good place. So, how should this impact the way you save for your pension?

Competing priorities   

You’re probably still paying off your mortgage and have a young family that needs supporting financially. Big chunks of your after-tax earnings might be earmarked for private education, tutoring or sports clubs.

Paying off debts should always be a priority – especially expensive loans. The quicker you can pay your mortgage off, the more you can put into your pension at a later date. It also means that you avoid carrying mortgage payments into retirement – which can be a big financial burden.  

Then look to save up at least three months of your outgoings – you never know if you or your partner might unexpectedly become unemployed, or ill.

Once you’ve got this security, you can make your pension savings work harder for you on the financial markets, to protect it from inflation and grow it for your dream retirement.

How a personal pension can help

Luckily, the government wants to encourage you to save for retirement and there are generous tax incentives to investing into a defined contribution pension.

When you save into a personal pension, you get tax relief relative to your band of income tax. If you’re a higher rate taxpayer, you’ll pay £6,000 for £10,000 contribution, and just £5,500 as an additional rate taxpayer.

A basic rate taxpayer will pay £8,000 for a £10,000 contribution. Investors are usually able to receive this basic relief immediately through their pension provider. Higher and additional rate taxpayers will need to go through HMRC for their extra relief.

These tax benefits really add up over time. A higher rate taxpayer will only need to pay in £300,000 over their working career for a £500,000 pension pot, for example.

Once you reach 55, you can take 25% of your pension savings tax free. You can decide what to do with the remainder of your money, whether you swap your pot for regular income from an annuity, or opt for the more flexible option of income drawdown.

After you’ve taken your 25% tax free lump-sum, your pension withdrawals will be taxed in line with your income tax bracket. If you decide not to take your tax-free lump-sum, you’ll get 25% of each withdrawal tax free and pay income tax of the remainder.

Saving for your dream retirement in your 40s

When it comes to achieving your retirement goals, the allocation of assets in your pension portfolio and diversification of your investments will be crucial.

By understanding what you’re investing for, your time horizon and financial background, you can build an investor profile that will include your tolerance to risk. Your tolerance to risk should shape exactly what you invest in.

The more risk you can take with your investments, the higher your scope for returns – but also the further your investments have to fall.

When you’re in your 40s, you might still have two-three decades until you draw your pension, which means you can take risk with your money in the hope of getting higher returns.

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By making an investment, your capital is at risk.

Although guidance varies, most advisers suggest that savers should look to put around 10-15% of their monthly income into their pension savings.

It all depends on how much you will need. You’ll need around £26,000 a year for a comfortable retirement – by then you’ll have paid off your mortgage and your children will hopefully be financially independent.

If you fancy a more lavish retirement, you’ll need to be able to afford around £39,000 a year.

How much you need to put away each month depends on how much you’ve contributed already and your retirement goals.

If you and your partner started saving in your 20s, you’ll have needed to earmark £131 a month for a comfortable retirement, or £198 if you’d started in your 30s.

You can use Moneyfarm’s Pension Calculator to help you work out how much you need to be saving a month to get the income you want in retirement, or start one of Moneyfarm’s regular investment plans.

Is it too late to save for retirement at 40?

If you both start saving for retirement in your 40s, you’ll need to put away £338 a month to ensure you’re financially secure during retirement. This will probably impact your monthly budgeting, but the sooner you start the better.

The earlier you can start, the more chance your money has to benefit from one of the most powerful forces when investing – compounding. This is where the returns you earn on your money gets reinvested and earns their own returns.

It’s never too late to start saving for your pension. Simple changes to your personal budgeting can make all the difference, and ensure you achieve the financial confidence and security you deserve.

How to invest a lump sum in my pension

You might inherit a lump-sum, or find yourself with a windfall that you want to put to work and invest in your pension. Make sure you know the rules of pension tax relief to ensure you maximise your returns.

There’s a limit to how much you can put into your pension to receive tax relief. In the 2017/18 financial year, that’s £40,000 or your annual salary – whichever is lower.

Say you earn £60,000 and have just inherited £75,000. You’ll be able to put £40,000 of this lump-sum in your defined contribution pension – as long as you’ve made no other contributions in the tax year.

After this, you might want to make the most of your annual ISA allowance. You can invest up to £20,000 each tax year and any growth in the value of your investment and any income will be tax free.

ISAs are more flexible than pensions, and your withdrawals will be tax-free – although you don’t receive any tax relief on your investments.

You may want to keep the remainder of your money in a cash saving account until the next financial year, or invest in a general investment account.

If you have any questions on how to save for retirement in your 40s, speak to your financial adviser.  

Tips for saving in your 40s

  1. Prioritise paying off any expensive debt and building up your three month cash buffer
  2. Take stock or what you’ve got, where you want to be, and whether you’re on track
  3. Adjust your pension contributions, making the most of any pay rises and bonuses
  4. Invest in a personal pension and ensure your investments are suited to your investor profile
  5. Don’t forget to claim back your higher or additional tax relief
  6. Transfer your pension into one place to keep on top of your savings
  7. Make the most of your ISA allowance

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