Five financial decisions to make in your 40s

A dilemma faced in your 40s is how to strike a financial balance. Saving for retirement, paying down debt and the needs of a growing family may all be on the agenda - and that's before the demands of the day job.

This makes it a good time to take stock of your situation, and your financial needs and goals. To simplify matters, here are five considerations to help 40-somethings prepare for the future.

1. Is it time to pay of your debts?

Debt

If you're still saddled with debt, it's vital to get to grips with it. The last thing you want is to reach the end of your working life with a huge mortgage or pile of credit to your name. Yet research from the Post Office reveals more than a third of homeowners expect to be nearly 70 before they pay off their mortgage, compared to the average mortgage-free age of 51 a generation ago.

This may mean shifting your focus off saving. There's no point building up savings if you're paying more in interest on your debt than you can earn in a savings account, which, let's face it, is typically the case - particularly with interest rates at rock-bottom. So make a list of any debts you have, whether overdrafts, personal loans or credit card debt, and work out a strategy to whittle this away.

If you're living with credit card debt with a high rate of interest, it's well worth looking for cards with long interest-free periods, then paying them off as quickly as you can.

The secret to using these deals is always to make sure you pay off the balance before the 0% deal expires, or shift the balance on to another 0% card that has a low balance transfer fee.

Mortgage

Turning to your mortgage, if you have a repayment mortgage, then hopefully the term to repay your loan coincides with your retirement date or earlier. If it doesn't, you might want to consider reducing the term or overpaying. If you have an interest-only mortgage, then you need to make sure you have your own repayment plan in place so that when you retire you don't find you have a large outstanding sum to pay.

It's also important to plan ahead if you want to move home in later life. Darius McDermott, managing director of Chelsea Financial Services, adds: "A lot of people look at their home as their retirement fund and think they will 'downsize' when the time comes, but remember, it can take time to sell a house and if you have outstanding mortgage debt it will affect what you can then buy."

However, there are solutions if you have the means. By increasing your monthly repayments, you can shave years off your mortgage and save thousands of pounds. Say, for example, you are 42, have 10 years left on your mortgage and owe £50,000 on a home worth £150,000. If you are on a rate of 2.59%, your monthly repayments would be £473. But if you overpaid on your mortgage by £110 a month, giving a total monthly payment of £583, according to broker London & Country, you could pay off your mortgage two years early, becoming mortgage-free at age 50 and saving £1,461 in interest payments.

Or another option is to opt for an offset mortgage to help pay off your loan quicker. These work by offsetting a borrower's savings against the amount they owe, so they only pay interest on the difference between the two.

For example, if you had a mortgage of £150,000 and savings worth £20,000, you would only pay interest on £130,000 of your mortgage balance. However, you could continue to make the same monthly repayments based on the full amount of your mortgage, so the balance reduces faster and you pay off your mortgage earlier.

2. Am I under-insured?

If you're in your 40s, it's a good time to consider your insurance needs. If you have a mortgage or children, at the very least you should have life cover in place for you and your partner, if you have one, that will pay off the mortgage as well as provide some money to help maintain a reasonable standard of living if you or your partner were to die.

"You should also consider what would happen if you or your partner were to be struck down with a serious illness or injury that prevented you from working long term," says Ray Black from IFA Money Minder. "In these circumstances, your life insurance is unlikely to help, but your family income may be drastically reduced."

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Danny Cox, head of financial planning at Hargreaves Lansdown, says: "The majority of people are under-insured." Think about the 'what if' scenarios, he stresses. "What income would your spouse need should you die? How much income would you need if you were unable to work due to accident or illness?" This is a useful strategy for working out how much insurance you need, and it's vitally important if you have a young family to consider.

Cover such as income protection could provide an income if you were unable to work due to long-term sickness or disability. Speak to an adviser at a broker such as LifeSearch.co.uk to see what policies might suit and their price.

You may get some cover from your employer, such as death-in-service benefits, but make sure to buy more if this isn't sufficient.

Another consideration is drawing up a will at this stage. "Many people assume that if they die, their pensions, investments and other assets automatically pass to their spouse," adds Cox. "This is not always the case and if you are not married, a so called 'common-law' partner has no rights in law to your estate so you'd need to draw up a will."

3. Should I begin investing for the long term?

When you're in your 40s, you've still got some time to invest aggressively for growth, compared to those around retirement age who are likely to be turning to cautious investments to reduce risk.

The sum can mount up. An investment of £50 a month, assuming a return of 5% after charges, would amount to £17,533 over 18 years, according to calculations from IFA Chase de Vere. So if you want a better return from your savings, now is the time to act - especially if you have children with future costs to take into account, such as university or helping them get on the property ladder.

You can pick from a wide range of investments, but make sure to diversify, and remember to wrap your investment in an Isa. You can invest up to £15,000 in an Isa, free of capital gains and income tax. You can hold unit trusts and open-ended investment companies, individual shares, investment trusts, corporate bonds, gilts and exchange-traded funds (ETFs), which track the performance of a market or index and are traded like individual stocks.

If you have a lump sum to invest, think very carefully about what you want from your investment - is it all-out growth or is it really important that the original lump sum you invested is still available to call on when you need it? The answer to this question helps to determine your attitude to risk and will drive the type of investment strategy that will be best for you.

The majority of advisers favour equity income funds as a staple in any portfolio. They claim these funds can squeeze out greater returns and spread risk for investors by pooling money into a wide range of companies that tend to pay consistently higher dividends. Jason Hollands, managing director of communications for IFA Bestinvest, favours Threadneedle UK Equity Income, for example, while Patrick Connolly, IFA at Chase de Vere rates Artemis Income.

If you are just starting to invest, watch out for initial charges on managed funds. These are typically around 5%, but easy to avoid. Discount brokers and advisers including Bestinvest, Chelsea Financial Services, and Hargreaves Lansdown refund you most, if not all, of this charge when you invest.

If you are investing for young children, you can use the junior Isa, which allows you to invest in the market for long-term goals.

4. Have you got a sensible retirement plan in place?

By the time you reach your 40s, you'll probably already have built up some retirement savings in the form of ISAs or a company or personal pension scheme, and if you haven't, it's time to get your skates on.

Hopefully, you've also got greater disposable income than you had when you started your career, although this could be being eaten up by childcare costs. If possible, now is the time for you to be increasing payments into investments for retirement.

If your pension has grown, check it to establish an estimated annual income from it and to see if you're comfortable with this.

Questions to ask yourself include: could you live on that now? Or more to the point, could you live on it in 20 years' time, taking into account inflation? After all, you still have a few decades to go before retirement, giving time to boost your pot.

"You should also take advantage of any workplace pensions available if you haven't yet - especially if your employer will also contribute to your pension if you do. If you don't want to depend solely on the state-provided old age pension, you need to take control of your retirement planning as soon as possible," says Black. If you are a higher-rate taxpayer, pension contributions can be very worthwhile as they can be made from pre-taxed income or a 40% uplift can be added at a later date.

In addition, request a state pension forecast to see how much you will receive. Visit gov.uk/state-pension-statement to do this online. However, remember that retirement planning doesn't just mean pensions.

"Most people's income in retirement comes from a combination of state pension, private and company pensions, Isas, cash and, in some cases, buy-to-let property, and diversification is a good strategy," says Cox.

This is the time to take your retirement planning seriously. So consider what kind of lifestyle you want to have at that stage and what you can do to meet this goal.

5. Am I happy in my job or should I re-train?

If you dread the daily grind at work, now may be a good time to consider changing career paths. You have probably given plenty of years to your current role, but perhaps it's not offering the work-life balance you're looking for with family to consider, or you no longer require for the salary level you've achieved.

These days, we have a long working life, and you still have several decades or longer to go before retirement. The good news is there is also a wider career choice than ever with the variety of jobs that can be done from home and part-time. However, getting new qualifications will require some commitment, and usually a financial cost, so you need to make sure it's the right decision for you.

As a starting point, do your research and speak to people who already work in the field you're interested in. There are plenty of online forums offering advice to steer you in the right direction. Check out job profiles on sites such as prospects.ac.uk and nationalcareersservice.direct.gov.uk. It can take a while to get your qualifications and contacts in order and although it is exciting making such a significant change, your employer may not share your enthusiasm if you're keen to leave, so keep your head down while they're paying your salary.