This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
There are many reasons why people may have left their pension planning until their 40s. Maybe you spent much of your adult life raising young children, not building a career (a noble thing). It might simply be that you delayed thinking about it. The good news is, your 40s still gives plenty of time to start moving towards your retirement goals. Below, our financial planners in Padiham, Burnley offer some ideas to help you. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 01282 772938
Start your State Pension
A key part of any UK retirement plan is the State Pension. This is an important source of income in your old age, and is guaranteed until you die. It also rises each year – at least with inflation – so its spending power rises with the cost of living. In 2021-22, the full new State Pension grants £179.60 per week – or, £9,339.20. Given that single people today need at least £20,200 per year to live a moderate retirement lifestyle, the State Pension could comprise nearly half this income.
To get the full new State Pension, you need at least 35 years of “qualifying” National Insurance (NI) contributions on your record. Those in their 40s may already have some complete years under their belts already (due to past employment). If you have little/no complete years on your record, then you still have at least 25 years ahead of you to start building this up.
Another option is to check over your NI contributions and look for any “incomplete” years. By “topping these up” with voluntary contributions you may be able to reduce the future years you need to work to get the full 35 years. In 2021-22, the “cost” of 1 week of NI contributions (Class 3) is £15.40. So, to pay for a missing year (52 weeks) could be about £800. This might sound like a lot, but remember this would more than pay for itself in your future retirement.
Gather existing pensions
Most people in their 40s will have at least one pension pot lying around somewhere from past employment (where you likey were put on a workplace scheme). You may even have more in pension savings than you realise. Therefore, make it a priority to track down your pensions(s) and establish their value. Here, you can use a resource like the government’s pension tracing service, talk to old employers and work with a financial planner.
If you are married, in a civil partnership or other long-lasting relationship, then it may now be time to sit down together and go through your partner/spouse’s pension(s). Since you likely plan on sharing a life in retirement, you should both understand what you have saved and how this affects your future goals. It may be that you have no idea about your significant other’s pension savings, having left the finances to him/her in the past.
We encourage you to avoid this, as it can cause serious problems later if your breadwinning partner/spouse dies prematurely and leaves you to try and sort through everything. Moreover, understanding, together, where your pensions stand will help you determine how much more you personally may need to save to reach your future goals.
A quick note of caution. Bear in mind that State Pensions are built up by individuals and cannot be “inherited” by a surviving spouse or partner. Additionally, unmarried couples may face an inheritance tax (IHT) liability if their partner leaves anything from their estate to the surviving partner when they die. Whilst pensions are not subject to IHT in 2021-22, other assets such as property, ISAs and valuable personal possessions are.
Start a new pension?
Depending on your financial situation and goals, it may be appropriate to think about starting your own private (personal) pension in your 40s. If you have multiple pensions from past jobs, for instance, then this could be a good place to consolidate them and put future retirement savings into. Even those in stable, long-term relationships can benefit from having their own pension since this gives you a personal stake in your own future finances. It also provides a degree of protection if your relationship does not last into retirement.
It can also be far more tax-efficient to not solely rely on your spouse’s/partner’s pension(s). In 2021-22, each person has their own pension allowances which they must adhere to. Notably, you are limited to saving a maximum of £40,000 per year (the “annual allowance”) and you can save a total of £1,073,000 in your pension pots (the “lifetime allowance”). If two people in a couple save into pensions, then these allowances can effectively be doubled.
Your pension income is also subject to income tax when you start receiving it in retirement. Again, this is done on an individual – not household – basis, where each person in a couple receives a £12,570 tax-free personal allowance each year. So, imagine a couple receives £30,000 per year in retirement; all of which comes from one spouse’s pensions. Here, the overall income tax for the household would likely be higher compared to, say, a couple where each person generates £15,000 in pension income. This is because in the first example only one £12,570 personal allowance applies, whilst in the second two apply (£25,140 total).
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
