BLOG: Investing through the ages – Your late 30s and 40s
It’s also a time to look beyond your career and consider what your retirement might actually look like.
After all, you’ve probably been paying into a pension for quite some time now – whether that’s a company pension, personal pension such as a Self-invested personal pension (SIPP), or a combination of the two. You may even have several pension pots out there.
First, ask yourself: how much money will I need? The answer will depend on when you want to retire, how you want to live and what your financial circumstances are.
Second, find out – perhaps with the aid of a pension calculator, a financial adviser or by looking at your various pension statements – just how much retirement income you’re on course to generate for yourself.
And third, don’t panic if you find yourself falling short. You have plenty of time to double-down on your efforts or even change course.
Think about where you can make sacrifices to potentially add more to your pension pot. Alternatively, you could consider raising your targeted retirement age, or even lowering your targeted retirement income.
Bolstering what you have
Let’s look at how you can make the road to retirement clearer, smoother and, in the end, more rewarding.
Unlike your 20s and 30s, you may find that the time-rich, cash-poor formula is turned on its head. You’re drawing a bigger salary than you used to, but work and family commitments may take up most of your time.
So, you may have spare cash to bolster your overall pension pot. You could contribute more to a workplace pension to take advantage of employer matching or – if this avenue has been exhausted or you are self-employed – opening or contributing more to a low-cost SIPP.
A SIPP is like a workplace pension scheme insofar as you don’t pay tax on the money you pay in1 nor on what is earned when it is invested.
Remember, you can carry forward pension allowances from up to three previous tax years so, in theory, you may be able pay up to £160,000 in a SIPP in any one year to make up for any shortfalls.
During this time, your earnings are probably moving towards their peak as your career matures, allowing you to save more. Your mortgage may also be getting smaller. And for those with children, they may start to become less dependent on you.2
Crucially, the more money you put into pension investments, the more you could benefit from the compounding of your returns over time. And you still have plenty of time left for even small amounts to make a sizeable difference through the power of compounding – and more so when you consider the tax-relief you can earn on your contributions.
Remember, don’t just rely on your employer. The bigger your pension pot, the better your retirement will be!
Consolidate to better accumulate
Lowering your investment costs can help to reinforce this effect too.
The annual cost of keeping money in a workplace pension can range from 0.28% a year to up to 0.68%3, depending on scheme type and size.
If you have several pension pots scattered about the place from your youth, now may be an opportune time to consider consolidating them.
With almost one in nine people changing jobs in both 2017 and 2018, there are lots of workplace pension pots potentially floating around. By the age of 40, it’s highly likely that many of us will have several pots sitting in different investment products, some of which may have long been forgotten. One recent survey suggested nearly a quarter of UK adults aged under 55 have lost track of old pensions worth an estimated £37bn in total4.
If you think you may be one of them, it may be worth using the government’s pension tracing service.
Consolidating these products within a low-cost SIPP can help make these pension savings last longer. It can also help you take greater control by enabling you to see all your pension investments in one place, so you can find out what’s working, what’s not working, and whether too many of your investments are concentrated in one area.
It can help you focus more on your retirement goals and cut down on the administration too.
If you have a defined benefit scheme that pays a guaranteed retirement income, they are usually best left alone. If in doubt, speak to a financial adviser.
Visualise your retirement
There are some key questions every 40-something should be asking. What is it I want from retirement? What kind of retirement can I afford? And when will it start? By consolidating your pension assets and establishing how much in extra payments will help and where you can make savings, you can have the retirement you deserve after years of hard work.
Your transitional 40s may be a busy time and include their fair share of stress – you could be balancing the needs of kids in full-time education and elderly parents who may need your support. But things will look very different a decade or two from now, so it’s time to picture what your retirement might actually be like.
Statistically, your 60s are a happier time than your 40s. Make sure you have the pension income to enjoy them!
Zoe Dagless is senior financial planner at Vanguard, UK