Retirement can feel like a distant prospect when you’re in your 40s. It’s far enough away that other priorities tend to jump the queue, but close enough that it occasionally keeps you awake at night.
That’s understandable. This decade is often the busiest of your life. You may have a mortgage to pay, children to support, parents who need help and a career that sucks up plenty of your time. Saving for retirement can easily slip down your list or priorities.
The good news is that your 40s can also be one of the most productive decades for retirement planning. Your earnings are likely to be at or near their peak, and you still have 20 years or more for your money to grow. So, the steps you take now can make a real difference.
This blog looks at practical steps you can take in your 40s to strengthen your retirement plan and how to keep them going over the long term, so you can look forward to a comfortable retirement.
Find out where you stand
You can’t plan a route without knowing your starting point. So, begin by taking stock of what you already have.
Make a list of every pension you’ve built up, from workplace schemes to personal pensions, along with any ISAs and other savings or investments you’re earmarking for later life. Your latest statements will show what each pot is worth today and how it’s invested.
Next, check your state pension forecast on the gov.uk website. It will show you how much you can expect to receive and when. Many people in their 40s will have a State Pension age of 67 or 68, so it’s worth knowing the date that applies to you.
Then, think about what kind of retirement you want. Pensions UK publishes its Retirement Living Standards every year, showing what minimum, moderate and comfortable lifestyles might cost for singles and couples. They’re a useful starting point, although your own picture will be more personal.
Will you travel? Stay in Leicester close to family? Downsize?
If you have a partner, do this exercise together. Compare your pensions, your goals and your expectations. Planning as a household will give you a much clearer picture than having two separate retirement plans that never meet. It can often highlight any gaps or opportunities you’d both missed.
Bring your pension pots together
If you’ve changed jobs a few times, you may have several small pensions scattered across different providers. It’s very common, and it makes life harder than it needs to be.
Old pots can carry higher charges than newer ones, sit in investment funds you’ve never reviewed, or get forgotten when you move house. Bringing them together into one place can cut your costs, make your investments easier to monitor and give you a single figure to track as you plan.
Consolidation isn’t always the right answer, though. Some older pensions come with valuable benefits, protected retirement ages or lower charges than you might find elsewhere. Moving them could mean losing benefits you can’t get back. Exit fees can also apply.
Because of these risks, it’s worth getting advice before you transfer anything. A financial adviser can compare the charges, features and investment options of each pension and tell you whether combining them will help or hinder your plans.
Increase your contributions as your earnings grow
For many people, the 40s are the decade when they can afford to save more. Your income has probably risen, and some of the costs that squeezed you in your 30s may be levelling off.
The simplest habit to build is increasing your pension contributions whenever you get a pay rise. If you put half of each increase into your pension, you’ll barely notice the difference in your take-home pay. It’s also worth checking whether your employer will match any higher contributions, because that’s effectively free money you’d otherwise miss out on.
Tax relief makes saving into a pension even more attractive. When you pay into a pension, the Government adds tax relief at the basic rate of 20%. If you’re a higher-rate taxpayer, you can claim back additional relief through your tax return or by contacting HMRC. That means £100 in your pension can cost you as little as £60.
To see what a difference this can make, imagine paying an extra £150 a month into your pension for 20 years. You’d contribute £36,000 yourself, and with average investment growth of 5% a year, that could grow to around £61,000, before charges and before counting any tax relief or employer contributions. Growth isn’t guaranteed and your pot can fall as well as rise, but the principle holds. Regular extra contributions over two decades can add up.
You can normally pay in up to £60,000 a year (or 100% of your earnings, if lower) and still receive tax relief. If you’ve been unable to save as much as you’d have liked in the past, you may be able to carry over any unused allowances from the previous three tax years. That can be very useful if you receive a bonus or a lump sum.
Review your investments and your attitude to risk
With 20 years or more until retirement, you still have time to benefit from investment growth. That doesn’t mean you should leave your pension on autopilot.
Many workplace pensions place you in a default fund unless you choose otherwise. Default funds can work well for some people, but they’re designed for the average saver rather than for you. It’s worth checking that the level of risk suits your circumstances, your other savings and how you’d feel if the markets fell sharply.
You may also want to think about how your approach should change as you get older. Rather than switching to lower-risk investments overnight when you reach your 60s, many people reduce risk gradually over several years as they wind down towards retirement. This can help protect your pot from a big fall shortly before you need it.
Diversification is just as important. Spreading your money across different types of investments, sectors and regions means you’re not relying on any one of them to deliver. An adviser can review your portfolio, explain what you’re currently invested in and suggest changes if it no longer matches your plans.
Make the most of allowances and windfalls
Your pension isn’t the only way to save for retirement. Individual Savings Accounts (ISAs) can sit alongside it, with an annual allowance of £20,000. Money in an ISA grows free of Income Tax and Capital Gains Tax, and you can take it out when you like, which gives you flexibility that pensions can’t. Many people use both, with the pension providing long-term tax relief and the ISA offering a bridge to fund early retirement or unexpected costs.
Your 40s are also when windfalls tend to arrive. It might be an inheritance from your parents or grandparents, a bonus at work, or proceeds from a business or property sale. It’s tempting to spend it all, and you should enjoy some of it, but putting a portion towards your retirement can have a lasting effect.
You may also be weighing up whether to overpay your mortgage or add to your pension. The answer depends on your mortgage rate, your tax position and any employer contributions on offer. Tax relief and employer matching often make pension contributions the better choice compared with overpaying a low-rate mortgage, but it’s worth running the numbers for your situation.
Protect the plan you’re building
A good retirement plan relies on you continuing to earn and contribute for many years. If illness, injury or death interrupted that, the impact on you and your family could be significant.
Income protection can replace part of your salary if you can’t work because of illness or injury. Critical illness cover pays a lump sum if you’re diagnosed with a specified serious condition. Life insurance provides financial security for your family if you die. The right mix depends on your circumstances, your dependants and any cover you already have through work.
Your 40s are also a good time to check that your will is up to date and to consider putting lasting powers of attorney in place. These allow someone you trust to make decisions about your health or finances if you’re ever unable to do so yourself. It’s a task that’s easy to put off, but it can take a great deal of stress out of a difficult situation for your loved ones.
Make it a habit to review
Retirement planning is an ongoing process. So, set aside some time each year to look at your contributions, your investments and your goals. A change in your circumstances is also a good prompt, whether that’s a promotion, a new baby, a house move or a change of relationship. Small adjustments made regularly are far easier than a big overhaul in your late 50s.
How can BDWM help?
Your 40s offer a great opportunity to strengthen your retirement plan. You have time on your side, your income is probably at its highest and each step you take now, from pulling your pensions together to increasing your contributions, can add up over the years.
At BDWM, our qualified financial advisers in Leicester can help you take those steps with confidence. We’ll review your existing pensions and savings, produce retirement forecasts that show what your current plans could deliver, and help you decide whether consolidating your pensions makes sense. We can also look at your investments, your protection needs and how your plans fit with your family’s wider goals.
Just as importantly, we’ll stay with you as your life changes, with regular reviews to keep your plan on track.
Contact us today to arrange a no-obligation consultation, and take the first step towards a more comfortable retirement.