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10 Important Things You Need To Know About Pension Saving In Your 40s & 50s

Pensions are a staple of retirement planning in the UK.

By the time you’re in your 40s and 50s, you need to be fully acquainted with pension planning so that you can make the most of your retirement.

Here are 10 important things you need to know about pension savings once you’re in your 40s and 50s.

1. The State Pension will provide you with a base

The State Pension is essentially the government’s retirement saving scheme, giving you money to live off during retirement.

To receive the full amount, you need to have made at least 35 years of full National Insurance Contributions during your working life.

If you have a full National Insurance record then, as of July 2021, the full amount you can receive is £179.60 a week – that’s £9,339 a year of guaranteed income.

You’ll start receiving it when you reach the State Pension Age of 66. The State Pension Age will rise to 67 in 2028 and could become even higher if future governments decide.

You can check your National Insurance record and what your State Pension Age will be using the gov.uk website.

Why does the State Pension matter to you?

The State Pension provides a great base for your retirement savings.

You could use it to pay for household essentials such as your food shopping, allowing you to spend your disposable income on the things you really want.

It’s worth noting that the money you receive does count towards your taxable income.

Get a FREE Pension Review

Get a free no obligation pension review today from a qualified financial adviser.

2. You should increase your pension contributions when you can

When you start saving towards your retirement in your 20s and 30s, your pension contributions will likely reflect your lower salary and other expenditure.

But, by the time you reach your 40s and 50s, you’re likely approaching your greatest earning potential. That means you should be putting away as much as you can, so you can continue living your current lifestyle when you retire.

As Interactive Investor client Jatinder Dhanoa told the platform: “Start saving for a pension as early as possible… and learn to live within your means while saving for your retirement.”

Tax relief on your contributions

In your 40s and 50s, you’re moving towards your last chance to make the most of the tax relief on offer.

Tax relief is calculated at your marginal rate of Income Tax. So, if you’re a basic-rate taxpayer, that’s an extra 20% into your pot. In real terms, that means every £100 pension contribution only costs you £80.

For higher and additional-rate taxpayers, you’ll receive tax relief of 40% or 45% respectively. So, a £100 contribution only costs £60 or £55.

The pension Annual Allowance

As you increase your contributions, be aware of the pension Annual Allowance.

The Annual Allowance is the maximum amount you can receive tax relief on in a tax year.

As of July 2021, the Annual Allowance is £40,000 or up to 100% of your earnings, whichever is lower.

You can carry forward unused Annual Allowance for up to three years.

The Tapered Annual Allowance

If you earn a high salary, you may be subject to the Tapered Annual Allowance.

The taper comes into effect if you have either:

  • A threshold annual income of £200,000 or more.
  • An adjusted annual income of £240,000 or more.

For every £2 you exceed either of these limits your Annual Allowance will be reduced by £1, down to a minimum of £4,000.

So, if you have an income of £312,000 or more, your Annual Allowance could be as low as £4,000.

3. Your pension savings might be approaching the Lifetime Allowance

If you’ve saved into your pensions for many years, you may need to watch out for the Lifetime Allowance (LTA).

What is the Lifetime Allowance?

The LTA is the maximum amount you can receive tax relief on in your pension pot across your lifetime. Since March 2020, the LTA has been £1,073,100.

Lifetime Allowance tax rules

You’ll be subject to strict tax rules if the value of your pensions exceed the LTA when you come to retire.

If you draw your pension as income when it exceeds the LTA, you’ll be subject to a 25% tax charge, on top of your marginal rate of Income Tax.

If you draw your pension as a lump sum when it exceeds the LTA, you’ll be subject to a 55% tax charge.

4. You can take 25% of your pension when you turn 55

Thanks to the introduction of Pension Freedoms, you can access up to 25% of your defined contribution pension tax-free when you turn 55.

What is Pension Freedoms?

Introduced in 2015, the Pension Freedoms legislation gives you more flexibility in how you access your funds.

Under these new rules, you can take 25% of your defined contribution pension as a tax-free lump sum when you turn 55. The government has announced that this age will rise to 57 in 2028.

Using income drawdown

Instead of taking a lump sum, you could consider flexi-access drawdown instead.

Drawdown allows you to keep your funds invested, meaning they can continue to benefit from potential growth while you access your funds.

You can take a lump sum or take the money as income.

5. Your retirement savings will likely need to last 20 years or more

It’s important to remember that you need to save in a way that ensures you’ll have access to funds for your entire retirement – however long it lasts.

Working out what kind of lifestyle you want

To work out how much you’re going to need to retire, you need to know what your goals are.

Do you want to go on a cruise, or travel around the world? Or would you rather spend time at home with your grandchildren, content with a few UK holidays a year instead?

Once you know what you’re working towards, it becomes far easier to find ways to make your pot last as long as you need.

Drawing your funds in the most tax-efficient way possible

As part of making your pot last, you could think about methods that allow you to draw your pot tax-efficiently.

This could be making the most of your tax-free lump sum, or simply just thinking about how much you withdraw in order to reduce how much Income Tax you pay.

Whatever you choose, make sure it’s in line with your goals.

Changing your strategy

Your 40s and 50s are arguably the last chance you’ll have to make changes to your strategy that will ensure you’ll have enough to live on in your later years.

Leaving it any later could mean you don’t have enough time to make the changes you need to achieve your goals.

6. Your investment risk needs to suit your age and goals

Your pension provider will invest your savings in a range of investment trusts, funds, bonds, and equities from the London stock exchange and beyond.

And, just like any investment portfolio, the amount of risk you take on needs to suit your age and your retirement goals.

Reducing investment risk

As you reach your 40s and 50s, check that your investments still suit your tolerance for risk.

If your investments have performed well and you’re confident that you’re on the road towards a comfortable retirement, you could reduce your risk profile.

You may be able to simply choose funds that target slower, steadier returns, rather than actively seeking growth.

Increasing your risk profile

On the other hand, as you get closer to your retirement, your pot will likely be approaching its largest value. Therefore, there’s a potential for even greater returns.

If you have a large enough risk appetite, you could increase the risk of your investments in the pursuit of higher investment returns.

Bear in mind, the value of investments can fall as well as rise. This could make a big difference to your retirement lifestyle if your pension loses value at this critical juncture.

7. Make sure you’re investing your self-invested personal pension in the right place

You may already have a self-invested personal pension (SIPP) to save towards retirement. Or you may be concerned that your pensions aren’t producing the right returns, and you want to start investing in a SIPP as an alternative.

What is a SIPP?

A SIPP is a pension pot that allows you to choose your own stocks, shares, funds, commercial property and other investments, rather than a manager investing them for you.

In the same way as any other pension, SIPP contributions also benefit from tax relief.

Investing your SIPP in the right way

To make the most of a SIPP, you need to make sure it’s producing enough to support you in retirement.

In your 40s and 50s, you should have seen returns in your investment by now. So, if your SIPP hasn’t returned what you expected, you might want to consider changing your strategy to target the returns you need.

However, as with any investment, the value of your pot could go down as well as up.

8. You might want to consider consolidating your pension pots

By the time you’re in your 40s and 50s, you may have accumulated several pensions.

This could even include old pensions that you’d entirely forgotten about and are now barely contributing towards your retirement.

If you have multiple pots like this, it may be worth consolidating them under one scheme.

Pros of consolidation

  • Having all your pensions in one pot makes it easier to review your retirement savings, and potentially make changes if necessary.
  • Some providers tier their fees depending on how much you have in your pot. As a result, it becomes cheaper to hold more money in one, rather than across multiple pots.

Cons of consolidation

  • You may end up with multiple investment strategies that don’t complement one another. For example, one of your pots may provide you with a return, while another loses you money, meaning you don’t see any returns at all.
  • You may have benefits from your current provider that you don’t want to lose, such as guarantees.

You might find this guide helpful: How to start a pension

9. Your workplace pension scheme might need reviewing

If you’re employed, you should check how far your employer’s pension scheme goes in providing you with enough money to live off in retirement.

How does a workplace pension work?

Employer pensions typically take one of two forms:

  • Defined contribution (DC) scheme – in which a set amount is paid into the pot each month. This normally comes from your contribution, a contribution from your employer, and tax relief.
  • Defined benefit (DB) scheme – also known as a “final salary” plan, in which your employer will pay a retirement income based on your salary and the number of years you worked for them.

Most schemes are now DC, with few DB schemes available. Employers now legally have to offer workplace pension plans to staff aged 22 and over who earn more than £10,000 a year.

The money in a workplace scheme is then invested by a manager on your behalf.

Under auto-enrolment rules, in a DC workplace scheme, at least 8% of your salary must go into your pension. Of that 8%, your employer must pay at least 3%, with the final 5% coming from you.

A workplace pension is a great way to save for the future as you’ll benefit from employer contributions, tax relief, and potential investment growth.

Get a FREE Pension Review

Get a free no obligation pension review today from a qualified financial adviser.

Choosing a different fund

By the time you reach your 40s and 50s, you’ll likely have been investing in workplace pensions for many years. As a result, you’ll have a long-term view of whether it’s been working as hard as you need it to be.

If you’re concerned your scheme isn’t producing the returns you need, you could choose a different fund to invest your money in.

Most workplace pension plans offer multiple pension funds containing different investments and levels of risk that might be more suited to you.

Transferring your pension

Alternatively, you could transfer your workplace holdings to a different provider or scheme.

You may have a SIPP that’s performing well, or just a private scheme that offers better returns.

Bear in mind that you may lose your employer contributions if you do this.

Self-employed workers

If you’re self-employed, you’re unlikely to have access to a workplace scheme, meaning you need to make alternative arrangements for your retirement savings.

Depending on your circumstances, you may be able to find your own pension that suits your needs. Alternatively, you could consider opening a SIPP and choosing your own investments.

You might find this guide helpful: What’s the best pension for self-employed people?

10. You should seek professional advice

When it comes to retirement planning, one of the best things you can do is seek advice from a professional financial advisor.

Advisors are able to look across your entire financial situation and design a plan that takes your individual circumstances into account, making the most of the tax benefits on offer.

If you’d like to find a financial advisor, you can use the find a local advisor tool on our website.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Best Pension Providers in the UK

Rank Pension Provider Description Link
1 Interactive Investor Interactive Investor is running a SIPP promotion where you don’t pay any fees for 6 months Open a SIPP
2 Hargreaves Lansdown Hargreaves Lansdown is a leading UK SIPP Provider for UK investors Open a SIPP
3 Fidelity Investments The SIPP from Fidelity is an easy way to start your pension as you can start with as little as just £50 per month, or with a lump sum of £1,000. The Fidelity typical service fee is a low-cost 0.35% plus ongoing charges. Open a SIPP
4 Pensionbee Pensionbee specialises in combining your existing pension schemes into one pension which you can then manage and contribute too in an easy to use interface. They offer a fantastic service for anyone who has accumulated different work pension schemes over a career. Please note you need to move at least one existing pension in order to use the service Transfer your Pension
5 Nutmeg A Personal Pension investment platform that marries the shiny new robo advisor platform with the trappings of a more traditional stockbroker. For new accounts, Nutmeg is offering 6 months 0% Portfolio Management Fees Open a Personal Pension
6 Saxo Markets Excellent, user friendly trading platform and extensive product portfolio
Visit Site
7 IG Investments Multiple options for funding and withdrawing money and great educational tools Visit Site
8 AJ Bell Youinvest One of the cheapest options for small and medium portfolios with an easy to use platform phone, ipad and laptop Visit Site
9 Penfold Specifically aimed at self-employed people looking to start a new pension Visit Site
10 Moneybox Track down your old workplace pension pots and combine them into one simple Moneybox Personal Pension Visit Site

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