It isn’t uncommon for people to start seriously thinking about their pension in their 40s or beyond. By this time, many families are earning more, are starting to pay down the mortgage and have children going through school. It’s natural, therefore, to start thinking about your longer-term future. The unfortunate reality, however, is that starting a pension strategy at 40 will likely require a bigger financial commitment compared to your 20s or 30s.
After all, that’s potentially 10 to 20 years of pension contributions, compound interest and investment growth which have been missed. Yet the good news is that it is not too late to start planning for your retirement in mid-life, but the earlier you start the better. Here at Vesta Wealth, we wanted to offer this summary of the key areas which may affect people here in Cumbria, Teesside and across the North of England.
We hope you find this content useful and we would be delighted to answer any questions you may have about how this could affect your financial plan, via:
t: 01228 210 137
e: [email protected]
Time is of the essence
As a simple example, suppose you started saving into a pension from the age of 20. If you had the means to put in £250 per month until the age of 68, then your pension pot could be worth around £790,000 by the time you retire, assuming a 6% yearly compound return over 48 years, ignoring fees or the effect of inflation. However, imagine you started saving this monthly amount by the age of 45. That gives you 23 years to save and grow your pot (compared to 48), which could result in around £144,000 at age 68, based on the same assumptions.
You may find the difference startling, but our Financial Planners often say that it serves as an important reminder of two things. First, it shows the power of compound interest and how this can radically change your future retirement lifestyle. Second, it reminds us of the importance of starting to save into a pension as soon as possible.
Yet for those in their 40s who have left things a bit late, you are where you are, and it’s better to start planning for your future now, than never. So, what are some of your options?
Leveraging tax reliefs
Although there is currently some doubt over the future status of tax reliefs on pensions in light of the 2020 recession, the 2020-21 financial year still offers some powerful tax incentives to help maximise your pension contributions. For a higher rate taxpayer, for instance, it only ‘costs’ you 60p to put £1 into your pension (as you get 40% tax relief). Each financial year, you can put a maximum of £40,000 into your pension or up to 100% of your salary, whichever is lower. You can also add any unused allowance from the previous three tax years.
So, if you did not contribute anything towards your pension in 2017-18, 2018-19 and 2019-20 and found yourself as a higher rate taxpayer in 2020-21, you could, theoretically, put £160,000 into your pension in one tax year. Imagine, for a moment, how a sum like this could grow over 23 years. Even if you never put another contribution into your pension over that period, the total could be over £611,000 based on the earlier assumptions.
Review contributions, fees and performance
If you are aged at least 22 and are a worker under the PAYE system, then your employer should automatically be putting some of your salary into your workplace pension. In 2020-21, your contribution should be at least 5% and your employer at least 3%. To get more out of this scheme, you might consider checking whether your employer offers a higher contribution percentage option, and possibly even increasing your own. Here, a Financial Planner can help you make the best choice.
Another good use of your Financial Planner is to use their skills and knowledge to look at the performance, fees and underlying investments of your pension. It is possible, for instance, that you are paying excessively high investment management fees which are eating into your investment returns. Moreover, perhaps you could increase your chances of achieving higher performance by rebalancing the assets in your pension portfolio.
Get the best state pension
Finally, another area you will want to consider is your state pension. In 2020-21, you need to build at least 35 qualifying years of national insurance contributions (NICs) to be entitled to the full new state pension, which is £175.20 per week i.e. £9,110.40 per year. For a 40-year-old, therefore, there is still time to build up the maximum amount before you reach your state pension age, even if you have never achieved a qualifying year of NICs. Again, here a Financial Planner’s help would be very useful. It could be, for instance, that making some voluntary NICs is the best way to make up for lost time over the past 7 years or so. In other cases, however, this might not be necessary to get the best state pension by the time you retire.
Invitation
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.