Financial planning in your 40s

According to the Office for National Statistics (ONS), your earning capacity peaks between the ages of 40-49, and – between juggling all your responsibilities – you’ll be able to start spending more of your time doing what you love.

You may be looking to pay off your mortgage and buy a second property. Perhaps you already have young grandchildren and are making plans to help provide for their future.

It’s unlikely you’ll be in any rush to slow down – in fact, you might just be getting started on some of life’s big goals. Many people in their 40s are looking to buy their first home or start a family, while others might be ready for a complete career change or aiming to launch a new business. And if you’re really lucky, you could be thinking about retiring early to pursue ambitions outside of the workplace.

Unlike the experience of past generations, turning 40 today really does open up a world of opportunities. So, whatever life has in store, your financial plan to accommodate your specific needs, whilst remaining flexible enough to adapt.

If you have children, you’ll probably spend much of your 40s balancing their financial needs with your own. Childcare costs, school and university fees can all drain your wealth during those peak earning years, and chances are your children will still need a helping hand as they get older.

Your 40s are therefore a good time to start setting aside some of your wealth for their future. This might involve setting up trust funds, boosting your own investments, or building investments in their name (such as a Junior ISA or even setting up a junior pension).

After potentially spending around two decades in work, you may start to think more clearly about the kind of retirement you want. Even though that’s likely to be over 20 years away, your 40s is an excellent time to reinforce plans that will ensure you’re on track to retire comfortably.

For most people, their pension is the most tax-efficient way to save for retirement. And if you can increase your pension contributions now, it could make a big difference to your retirement pot later. Your pension provider should be able to give you an illustration that shows how much pension you have, and what it could grow to in the future.

If you’ve built up a handful of different pension pots over the years, you might find it’s more efficient and cheaper to consolidate these pensions into one. This should make it easier for you to keep track of your pension investments, give you more control over how your money is invested, and help keep pension management fees and charges to a minimum. You’ll need to seek professional advice before making any changes, though, to ensure you don’t incur penalties or lose any special benefits.

If you’ve not managed to build up the pension savings you’d hoped for, then it’s certainly not too late – but now is the time to start making additional contributions.

It’s worth remembering you will earn tax relief on the pension contributions you make. For basic rate taxpayers tax relief is 20%, paid automatically by the government into your pension. An additional 20% or 25% can also be claimed by higher rate taxpayers. There’s an annual pension contribution limit of £40,000, which means that any contributions made over this amount won’t be eligible for tax relief.

Because the amount you can contribute to your pension while still claiming tax relief is capped at £40,000 per year, it’s a good idea to build up other tax-efficient investments outside of your pension.

For example, you can invest up to £20,000 each year in an Individual Savings Account (ISA), which allows you to grow your investment free from capital gains tax and income tax. With inflation rates high and interest rates low, a Stocks & Shares ISA offers the potential to achieve better returns than a Cash ISA, albeit in exchange for greater risk.
You might also want to consider investing in Venture Capital Trusts (VCTs) or the Enterprise Investment Scheme (EIS), both of which offer some significant tax breaks in return for accepting the higher risk that comes with investing in early-stage companies.

Of course, when you invest your money, it’s essential to know that the value of your investments can go down as well as up, and that you could end up with less than you paid in. For that reason, it’s important to seek professional advice before making any investment decisions.

Whatever your life situation, it’s important to think about what would happen to the people closest to you if the worst happened.

For example, a life insurance policy would give your family financial protection if you passed away. It could be used to pay off an outstanding mortgage or leave a lump sum to help your loved ones maintain their lifestyle.

But as you go through your 40s, it’s just as important to think about what could happen if you were no longer able to work, through accident or illness. Taking out policies such as income protection and critical illness cover can offer a financial safety net – and provide valuable peace of mind for the future.

While you’re putting protection policies in place, it’s also worth thinking about the legacy you’re hoping to leave behind for those you care about.
If you’ve managed to accumulate significant assets, you should start by looking at your estate, and who you want it to be left to. Planning ahead will help you reduce the risk of your loved ones being lumbered with an unexpected Inheritance Tax bill when you die, and ensure your wishes are respected.

For those reasons, people in their 40s should have written their will, and should also consider arranging a Lasting Power of Attorney. This lets you appoint someone you trust to make financial and medical decisions on your behalf, should you one day become unable to make those decisions yourself.

Life in your 40s should be a time of greater financial freedom, or at least greater control over where your money goes. But if you need help with coming up with the steps you need to take on your life journey, it’s a good idea to talk to a professional financial planner.

Everyone has a different idea of what their future should look like. It’s what Amber River calls Life Landscaping®, where we work with you to create a bespoke financial life plan that will help you to achieve the goals you have for yourself and your family – now and well into the future.