Saving for your pension: people in their 40s

Following the pension freedoms in April 2015, savers are able to do as they wish with their nest egg when they retire. While some might take the cash and use their money to fund a buy to let or set up a business the majority are likely to stick with income drawdown, an annuity, or a combination of the two.

Whatever route you end up choosing, the challenge right now is to save as much as you can. Pensions, after all, are a hugely tax-efficient way of saving – essentially, you are getting free money. If you are a lower-rate taxpayer, for every £80 you save the government will top this up to £100; and if you are a higher-rate taxpayer, you need to put away just £60 to get the same amount.

Recent figures, however, from the Department for Work & Pensions revealed almost 12 million of us are still not saving enough, so whether you are retiring in the next year or have 20 years to go, we look at what you need to do now to ensure a prosperous retirement.

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Saving in your 40s

By the time you reach 40, this message should have sunk in. Given your 40s are likely to be the most financially rewarding time of your career, ensure that not only are you saving in a pension but also an Isa, where you can now squirrel away up to £15,000 every tax year and all gains and interest are free from the clutches of the taxman.

But it is also hugely important to tackle any burdensome debts. Putting all your efforts into saving is counter-productive if you are paying massive rates of interest on hefty credit card debts or personal loans.

While 40 is late in the day to start saving for retirement, it is, however, not too late – you will just have to save that bit harder. For example, an individual earning £60,000 a year looking to have an income of £15,000 in retirement but who does not start saving until they reach 40 would need to save around £590 a month to hit their target. In contrast, a 30-year old, earning £40,000 a year would need to save almost £200 less a month to achieve the same goal.

John Lawson, head of policy at insurer Aviva, says: "It is never too late to start saving. Whatever you can afford to put away will come in useful. Try to make the most of your discretionary expenditure by putting some money away for your future, as well as living for today."

Look at using any annual bonus payments to top up your pension and Isa savings and speak to your employer about salary sacrifice. This is a way of boosting your pension contributions while both you and your employer pay less National Insurance. You simply give up some of your future gross salary and in return your employer will pay this amount into your pension.

For example, if someone with an annual salary of £40,000 sacrificed £2,000 of their gross pay in return for their employer paying an extra £2,000 in pension contributions, the value of their total take-home package, after tax, National Insurance and pension contributions, goes from £28,555 to £28,795 – a £240 rise. However, check if this is right for you, as there can be other tax implications depending on your circumstances.

Investing in your 40s

When you hit your 40s, you should have hopefully been growing your pension for some 20 years already. But further growth and getting your cash working as hard as possible, should remain your primary objectives. There- fore you can still be fairly punchy with your investment choices. Patrick Connolly, a certified financial planner at financial adviser group Chase de Vere, highlights the HSBC FTSE All Share Index fund. He says: "This fund aims to track the performance of the FTSE All Share Index and has an annual charge of only around 0.18%."

Gavin Haynes, managing director at Whitechurch Securities, tips Templeton Growth as another fund worthy of attention. "It is a global equity fund I like, which looks for undervalued opportunities across international stockmarkets," he says.

"I've taken an active interest in my pension and pay more into it"

Claire Cole, 45, has been saving towards her retirement for almost 30 years, having started putting cash into a pension at the age of 17. The supply chain manager from Portsmouth, who also saves regularly into her Isa, is hoping to retire at 55 with an annual income of around 40% of her salary.

Claire admits she is very fortunate in that she has one long-term final salary scheme from a previous job. She says: "When I was younger, as long as I knew I had a pension in place, I never thought about the long-term requirements and what I would need from my pension.

"However, as I get closer to retirement I have taken a more active interest in my pension funds and have increased my monthly contributions."



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Your Comments

It's still to early to be giving out advice. Better wait until a few months after April 2015 and see what ha[ppens to those people who decide to take some (or all) cash from their fund.
I forsee release charges or something similar. The insurance companies are still reeling from the announcement  in the March budget and won't let anything but a change in law stop them from continuing to rip off customers now that the vast profits that they have made in the past on annuites is going to be reduced somewhat.
They can't be trusted to play fair.

Drawdown will prove to be very attractive proposition for most as long it is managed properly. It provides the flexibility, the options and the ability to pass the funds down the bloodline (that's providing there is still funds left) without IHT liability. Obviously the initial fund value needs to be sufficient for drawdown to be viable.