Workers in their 40s are on course for a £250,000 deficit in the savings they need to fund life after work – unless they take action
Hundreds of thousands of workers in their 40s are on course for a £250,000 deficit in the savings they need to fund life after work – unless they take action now to plug the gap.
Nearly 140,000 of today’s 40-year-olds are expected to live to see their 100th birthday, which means 33 years’ worth of income will be needed if they give up work at age 67.
Though the shortfall in funds appears bleak, financial experts are keen to point out there is both time and opportunity for reluctant savers to turn around their fortunes.
HOW TO FUND A HAPPY RETIREMENT
Insurance giant LV= has conducted extensive research into the particular pension challenges facing those in their 40s.
Its work shows that this age group believes it will need some £1,454 a month to give themselves a financially secure retirement. Yet the value of their pension funds is currently little more than £50,000, hence a potential savings deficit in retirement of £250,000 after the state pension is factored in.
John Perks, a director at the insurer, says: ‘While we would always encourage people to take control of their pension savings as early as possible, it is important that people in their 40s realise it is not too late to make changes.’
The key is to continue saving into a pension, especially if you are a member of a work scheme or have recently been auto-enrolled into an employer sponsored pension.
You will benefit from both your employer paying into your pension as well as the Government via tax relief.
Andy James, of wealth manager Tilney, points out that workers who have been ‘auto-enrolled’ into a workplace pension will see their contributions continue to increase – to 4 per cent after April 2019. But he warns it will not be enough and you should be aiming to contribute between 12 and 15 per cent of your gross income into a pension.
On hold: Laura Reeve’s pension savings have not been a priority
He adds: ‘Such a high contribution is likely to be beyond many who are struggling with other financial commitments, so increasing payments little by little is a good approach. Think about upping contributions when you get a pay rise, so you are less likely to notice the extra cost. Tax relief on money put in a pension will also help increase the amount saved.’
The over-40s should also spend time tracking down old, lost pensions – and investigate whether consolidating multiple pensions into one fund could save both money and hassle. Perks says: ‘Everyone, not just the over-40s, should be checking their pension pots on an annual basis. We also strongly recommend they speak to a professional financial adviser to help them make the most of their hard-earned pension savings.’
CASE STUDY: I am worried about being ‘pension light’
Although heading towards 40, estate agent Laura Reeve has put pension savings on hold for many years.
Since buying a house and recently having a baby son, pensions have not been a financial priority. Though she has an old pension from a previous job, she admits it will have ‘pathetically little’ in it and she has not kept track of where the money is held.
Laura, 36 and living with her husband in Wanstead, East London, says: ‘I have probably only got about £30 a year in the form of a works pension coming my way at this rate.’
She adds: ‘I never seem to have enough spare money. But I definitely need to do something on the pension front before I turn 40. It is on my radar and it does worry me that I am pension light.’
She says she is ‘pretty nervous’ thinking about the possibility of living to age 100 – and how she will fund a long retirement. But she is determined to continue working part-time for as long as possible.
It is also wise to review whether or not a full state pension at retirement is likely, or whether a National Insurance record needs to be built up further. The self-employed or workers ineligible for auto-enrolment can still open a personal pension and benefit from tax relief on their savings.
Using tax-efficient Isas to help build retirement funds complements pension saving. Currently, you can save a maximum £20,000 a year in an Isa. Although there is no tax relief boost on contributions, all the proceeds from an Isa are tax-free and there are no constraints on when withdrawals can be made.
OTHER AGE GROUPS
Pensions can seem complex, littered with rules and jargon. But irrespective of age or financial circumstance there are some simple steps you can take to set yourself up for the best possible retirement.
The Department for Work and Pensions advises employees in their 20s to stick with auto-enrolment and increase contributions when they can.
Workers a decade older who decide to add more to their pension each month might find their employer is willing to match their contributions, so it is worth checking.
People nearing retirement should seek advice – or at least guidance from the Government’s Pension Wise service.
They should also check their state pension entitlement and pay attention to any ‘wake-up packs’ landing on the doormat from private pension providers, which contain important information about how they can turn their pension into retirement income. Retired people should claim any extra help they are entitled to.
People nearing retirement should seek advice – or at least guidance from the Government’s Pension Wise service
Four in ten pensioners are thought to be missing out on Pension Credit – a non-taxable benefit for those on low incomes. More than £3 billion goes unclaimed every year. Visit gov.uk/pension-credit to find out more.
People still in work should also find out what help might be available if they need it.
A freedom of information request to the Department for Work and Pensions by insurer Royal London indicates that the majority of carers looking after disabled people are not claiming special credits that would boost their state pension.
Many carers will be upward of the age of 40, including those looking after elderly parents. For more information about Carer’s Credit visit gov.uk/carers-credit.
The tools that can help plan your future
The Government-backed Pension Tracing Service database lists 320,000 pension schemes. Searchers can type in the name of former employers to track down any workplace pension they have paid into. Visit gov.uk/find-pension-contact-details or call 0800 731 0193.
Such a financial tool enables you to get a forecast of your likely income in retirement. You can find one at moneyadviceservice.org.uk/en/tools/pension-calculator
Pension Monster is a free online tool from Selectapension. It can help you plan and weigh up options for retirement. Visit pensionmonster.com.
7IMagine is a smartphone app from Seven Investment Management (7IM). Its advanced technology helps you map out your financial future taking into account all expenditures at each key stage of life. It can highlight whether you need to either adjust your savings habit or your expectations for retirement. It is available to download on the App Store, Windows Store and Google play.
Websites such as unbiased and VouchedFor can help you find a professional financial adviser.
Pension Wise is the official hand-holding service that can walk you through your options before accessing a pension. Appointments last 45 minutes and can be over the phone, online or face-to-face. Call 0800 138 3944 to get booked or visit pensionwise.gov.uk.
You can check how much State Pension you are on course to receive and how you might be able to increase it by calling 0800 731 0175 or by using the online tool at gov.uk/check-state-pension.
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