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Starting a pension at 40?

Category: Retirement
Author: Tim Leonard
Updated: 05/04/2019

While 40 might be a more advanced time of life to be thinking about your retirement plans, it's by no means too late. According to the Government's state pension age calculator, you've still got another 27 years before you are eligible for a State Pension, based on current legislation (and we'd better not rule out that age increasing either).

They say that life begins at 40 and if you started work at the age of 18, that means you're not even halfway through your working life! That might be a sobering fact, but it does reinforce what we said earlier: it's never too late!

Having said that, starting later obviously isn't as good as starting earlier when it comes to saving for your retirement, as it doesn't give your money as long to grow.

The Government places so much importance on private pensions that all workers (except those on very low incomes) will be automatically enrolled in a pension by their employer.

How much will you need when you retire?

It's surprising how many people don't actually think about how much they'll need for a comfortable retirement. While we all must acknowledge that we're going to be receiving less in terms of income, comfort is probably going to be linked to the lifestyle to which you've become accustomed.

Think about what you might need or want as a proportion of your salary, and think about your current bills as well (and what they may be in 30 years – hopefully you won't have that mortgage, but your energy consumption is likely to be higher).

Draw up a list of what your expenses might be, and consider where you might be living – has it always been the intention to downsize the family home after the kids have flown the nest? As well as freeing up some extra money (we'll talk about this more later), a smaller home doesn't cost nearly as much to run.

Once you have a rough figure based on today's prices and your income, you have an income goal to aim for.

When will you retire?

It might have always been your intention to retire when the state pension kicks in, but you don't have to retire at this point – and you don't have to take your state pension straight away, either.

Your employer can't terminate your contract when you reach state retirement age, leaving you free to continue in your job for as long as you like (subject to your health and ability to do the job in question). This means you don't have to take any income from your pension and you can carry on building your retirement pot for longer as well.

Retiring later means you can maintain your quality of life for longer and could allow for a greater income when you finally do retire - if you opted for an annuity when you retire it may provide you with a higher income as you'll have more in your pot to convert, and if you use another method to take your pension income (such as drawdown) you may be able to take more each year.

As previously mentioned, you can also defer when you start to receive the state pension. When you finally do take your state pension you will receive an additional amount on top of your regular state pension payment.

What have you already got?

Over the course of a lifetime you'll probably collect many things, and pensions are no different! You might have pensions that are still accumulating from previous, long-forgotten employers – do you know what they're worth?

Make it your business to find out what you've got, how much it's worth, how well it's performing and how much the charges are. Transfer any pensions that aren't pulling their weight. We recommend you seek independent financial advice before making any decisions.

Have you got any money tucked aside in savings and investments?

You've got two options here. The first is leave the money where it is so you have more flexibility (if this is the case make sure your savings account, cash ISA or investments are performing competitively – switch them if they're not). The other option is to pay surplus savings into your pension. You can pay up to a maximum of your annual employment income or £40,000 per year (if less) into your pension and claim income tax relief on this amount.

You should also consider any debts you have – paying off expensive credit card and overdraft debt in the near term will free up more money to pay into your pension in the long term – so prioritise this first (transferring expensive balances onto a 0% balance transfer credit card is a good idea as well).

Look at your mortgage: will the term extend into retirement? Can this be reduced so you're mortgage-free earlier? Don't sit on the time bomb and expect it to defuse itself – take action now.

Start a pension

Your employer's pension scheme is always a good starting point. If your firm is already subject to the auto-enrolment rules, your employer is required to pay in, unless you have opted out of the scheme. Saving into a pension is tax-free as contributions are deducted straight from your wages, so coupled with any employer contributions, this means that you can accumulate a much bigger pot than you could get when investing in normal savings or investment products – even ISAs! See this guide for more information.

You can contribute up to 100% of your earnings into a pension tax-free (subject to the annual allowance of £40,000) but any savings above this are taxed.

Save as much as you possibly can into your pension. Taking a detailed look at your current finances and budget can really help here. Review your outgoings, including your mortgage (even if it doesn't cost a great deal), to make sure you're repaying debts as cheaply as you can. Reviewing your insurance and utilities can save money as well.

For example, even if you can only free up £50 per month, an extra £50 into your pension would be an extra £16,200 you could contribute to your pension over the next 27 years. And that's before any investment gains or tax relief you may qualify for over that period!

Using your home to fund your retirement

More and more of us who are approaching retirement are considering using property to help fund life after work. Partly, this is due to spectacular gains in property prices over the past few decades, meaning many homeowners are sitting on pots of cash in the bricks and mortar of their own homes (if we use the Halifax House Price Index as a guide, the average house price 28 years ago, in March 1990, was nearly £68,500. In December 2018, this average has skyrocketed by more than 300%, to £230,000!).

However, although property has performed well over the past 28 years, this is no guarantee that it will perform well over the next 28.

When it comes to using your home to fund your retirement, you have two options open to you: downsize to a smaller house, bungalow or flat, or take out a lifetime mortgage (otherwise known as an equity release scheme) on your existing house.

Both of these options could seriously impact any inheritance you leave behind, so think carefully about this decision and involve your children as well as your financial adviser.

  • Downsizing

Selling up and moving to a smaller property can free up tens or even hundreds of thousands of pounds for your retirement. If you own a house worth £300,000 for instance, and you downsize to a bungalow worth £150,000, you've freed £150,000 to put towards your retirement fund. Not only does this option release money, but it can also mean that you're in a property that's easier to move around in, and more economical to run – not to mention clean – than the family home where you currently reside.

However, downsizing will depend on you owning a property big enough to downsize from, as well as your own feelings – you may not want to move from the home you raised your children in. If these are concerns you have, maybe a lifetime mortgage, or equity release scheme, could be a way for you to stay in your home, while unlocking some money for retirement.

  • A lifetime mortgage (or equity release plan)

A lifetime mortgage is basically a type of financial product where you 'borrow back' some of the equity, or cash, you have tied up in your home. While you are borrowing, interest is charged, although you won't have to make repayments as the lifetime mortgage provider typically gets their money when your house is sold, usually on your death, or if you have leave to go into permanent residential care.

The advantage of a lifetime mortgage is that you can release money whilst staying in your home (without paying any rent), although it is a complex option and must be considered very carefully as there are considerable risks.

Finally, when considering your retirement strategy it is best to seek independent financial advice. Professional guidance can really help you make sense of the options available to you and can help put your mind at rest if there's something you don't understand or are worried about.

What Next?

Learn about your pension options

Find an old pension – contact the Pensions Tracing Service on 0845 600 2537

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.