Turning 40 can be a bit of a financial wake-up call. When it suddenly hits home, you may find yourself starting to realise that retirement isn’t all that far away. So, are you heading for a comfortable retirement, or do you need to increase your contributions to achieve the retirement you want?

Up until recently, saving for a pension may not have felt like a top priority. The cost of housing, childcare – and perhaps even school fees – take a sizeable chunk out of the monthly household budget, as do holidays, cars, and expensive hobbies combined with an active social life. It’s not cheap being a Millennial, and as a result, your pension pot might not be quite as healthy as it should be.

If that all sounds worryingly familiar, the good news is that it’s not too late to get back on track – but you need to start planning now.

What kind of retirement do you want?

Setting retirement goals

The first question to ask yourself should be: “what kind of retirement do I want?”

Some people are planning for adventure, luxury travel, fine dining and fast cars. In which case, you may need to start saving hard.

But others are happy to downsize and reduce their outgoings, simply enjoying the fact that they have more time to spend with friends and family, close to home.

You also need to consider when you want to retire. You won’t be able to claim your state pension until you’re 67, and this is under constant review, so it could be even later by the time you retire. But a State Pension alone will only give you a very basic income, so you’ll need to supplement it with funds from another pension or other income streams.

You can access a personal pension when you reach the age of 55 – but you will need to have accumulated enough in your pension pot to see you through for the rest of your life. And based on current life expectancy projections, that could be 30 to 40 years – or even longer!

Make sure you take full advantage of any contributions your employer is offering

Why save for retirement with a pension?

There are many ways to save for your retirement – but for most people, a pension is a good option. Here’s why:

Pension Tax Relief

One of the best things about saving into a pension is that you will receive tax relief on everything you pay into it, up to £40,000 per year (as long as you earn under £150,000).

So, if you are a 20% taxpayer and pay £100 per month into your pension directly from your bank account, the government will top this up with another £20. But, if you are a 40% taxpayer, you’ll receive a £40 top up.

Employer contributions

If you’re employed, your employer must enrol you into their workplace pension if you’re eligible. You can opt-out of the scheme, but because your employer has to make a minimum contribution of 3% of your salary (alongside your minimum contribution of 5%), that would mean you miss out on a free source of pension funding.

You can, of course, contribute more than the minimum 5%, and many employers choose to increase their contribution as part of your overall benefits package.

You can also choose to set up a personal pension alongside your workplace pension, but do make sure you take full advantage of any contributions your employer is offering.

The effects of compounding

Compounding is a factor in any long-term investment scheme. It’s basically interest that you earn and reinvest year-on-year, which builds up in your account over time. The longer your investment is given to grow, the greater the effect.

If left untouched, the effect of compounding can help turn a small pension pot into a significant amount. This is why it’s best to start saving as young as possible because you’ll need to save less money than someone who starts later, in order to achieve the same size pot when you retire.

But if you’ve reached 40, don’t despair. Twenty to thirty years is still enough time to benefit from the compound effect.

Tax-free lump sum

At the age of 55, your pension is your own. Up until 2015, savers looking to retire only had the option to buy an annuity, giving them a regular monthly income for life. The problem was that the annuity rates were poor, and if you were to die, once you had purchased the annuity, your pension would die with you (in most instances).

These days, not only can you access your entire pot when you reach the age of 55 (increasing to 57 in 2028), but you can also take a 25% lump sum from it entirely tax-free.

But be careful – you will want to ensure you leave enough in your pot to fund you through all of your retirement.

How much you need depends on the age want to retire and the kind of retirement you’re hoping for

How much should you save each month?

The answer to this question will be different for everyone, but largely depends on the age at which you want to retire and what kind of retirement you’re hoping for. But as a general rule of thumb on how much you should save, take the age at which you start saving and then halve it. So, if you start saving at 40, you should aim to put away at least 20% of your income.

It may seem like a large chunk of your monthly income – but as the government looks to save money where it can, it’s unlikely the state pension will give you the income you need. So, it’s up to each of us to look after our own provision for retirement.

When planning how much you should save, and what you’re likely to need in retirement, it’s essential to seek the advice of a financial planner. They will be able to factor in all of your unique needs and circumstances, provide a projection based on your existing position, and advise on the amount you need to be putting aside each month to reach your goals.

Do bear in mind, though, that the value of pensions and any other investments, and any income you take from them, can fall as well as rise, and you may get back less than you invested.

Should I consolidate my pensions?

This is another question our financial planners are often asked. Combining pensions can make it easier for you to keep track of exactly how much you’ve saved, and you may find consolidating into a single fund saves on management fees.

But there are instances where it’s not advisable, especially if you have a final salary or defined benefit pension from a previous employer, or where any hefty exit charges might apply.

See our The Pros and Cons of Combining Multiple Pension Pots article for more information.

Amber River Financial Planning

Have you reached a stage in your life when the thought of retiring has begun to come into view? If so, you will need to take stock of what you have now, and work out what more you need to do to plan for retirement you want.

If you would like advice on how much you have and how much more you need to put aside, we can put you in touch with an Amber River financial planner in your area.

Get in touch

To speak to one of our team, arrange an appointment or find out more, call 0800 915 0000, or alternatively use our contact form here.