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.
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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A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
A tax-efficient way of receiving staff benefits, where an employee agrees to forego a proportion of their salary for an equivalent contribution into their pension scheme or in exchange for company car, gym membership, childcare vouchers or private medical insurance. A salary sacrifice scheme is a matter of employment law, not tax law, and is often entered by an employee who is about to move into the higher 40% tax bracket.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
A property chain is a line of buyers and sellers (the “links”) who are all simultaneously involved in linked property transactions. When one transaction falls through – for instance, someone can’t get a mortgage or simply withdraws their property from sale, the entire chain breaks and all the transactions are held up or even fail entirely.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.