How far are you from retirement? Have you tipped the balance from thinking it’s a lifetime away, or are you counting down the days to tapping into that pension pot?
If it’s in the back of your mind, chances are you’ve had the odd Google search around personal pensions, the state pension or the classic “How much do I need to retire?”. Those tend to come after a particularly stressful day at work.
What normally follows is a look at your workplace pension pots and self-invested personal pensions (SIPP) to see exactly what you have in them. A lot of the time that’s not tremendously useful though.
A retirement savings figure on a screen doesn’t automatically tell you the best way to use your money to ensure you have the retirement you want. It doesn’t tell you if you could be doing anything better with it until then, and it might just leave you more confused than when you started.
What your future might look like
You might be reading this with a pad and a pen, looking for retirement guidance on your investments you can put to work now. But that glidepath to retirement starts away from the money. To make it all useful, you have to begin with what you want and need out of your retirement savings and that view is ripe for constant change.
Pension planning in your 20s and 30s can look very different to how you approach retirement later in life.
But, as different as we all are, we’re eerily similar when it comes to the life events we go through in our 40s and 50s. We need to pay attention to what we’re likely to encounter in order to set financial expectations.
Life moments shape retirement expectations
Going by the latest ONS report into the age we typically reach certain milestones, we’re likely to hit peak earnings aged 41. 
With the average first-time mother aged nearly 29 in England and Wales, that means their 40s will coincide with those serene teenage years and the costs that come with them. There's no ONS data for first-time fatherhood in the UK but the average age of all fathers to babies born in 2019 was 33.6 years - a figure which has steadily increased for 10 consecutive years. 
So if a lot of people’s 40s are currently about getting their kids through school, their 50s might be about getting them through university and into the working world.
That can mean supporting adult children returning to the family home before they set out fully on their own career paths.
This can coincide with elderly parents needing attention too, creating what some have labelled the ‘sandwich generation’. These are people relied upon financially to some degree by parents and children, while trying to plan their own retirement at the same time.
According to the latest ONS Milestones report, “the proportion of people providing care peaks at the age of 56 for women and 59 for men, at which point around one in four women (25%) and more than one in six men (18%) are informal carers.”
That might not be the only stress we face during these two decades either.
As of 2018, the average age at divorce for opposite-sex couples in England and Wales was 46.9 years for men and 44.5 years for women. 
With all of these possible milestones come costs, possibly both emotional and financial. On the money side of things, these are pound notes that could be flowing into the nation’s retirement savings but have a real possibility of being rerouted before they get there.
Of course, it’s hard to plan for something like a parent falling ill or requiring care, or the breakdown of a relationship. But, as unsavoury as the thought is, these are genuine life events affecting millions of Britons every year. We should at least be aware that preparing for the unexpected should play a part in our long-term investing goals.
How much pension do you need to retire?
Financial yardsticks are useful to give us an idea of how well we’re preparing for the future.
You’ll sometimes see general rules of thumb that say you need somewhere in the region of seven to ten times your income at the point of retirement.
But it’s important to remember retirement isn’t a ‘one size fits all’ situation.
When you want to retire and how you plan to live during retirement could be markedly different from the benchmark so be sure to think holistically about what you want from a retirement lifestyle too.
Measuring that against what your pension pot looks like might mean you have to compromise on a few things or make a conscious effort to boost your investing habits now.
As we have seen, your 40s and 50s are likely to contain a lot of life events which will constantly challenge your perceptions of what is achievable or even desirable in terms of retirement lifestyles.
But we should take into account that, by and large, by the time retirement comes we’re likely to have fewer grand savings goals than during our earlier working lives.
One of the most common targets prospective retirees still have is paying off the mortgage. A lot of people use their 25% tax-free cash from their pension upon retirement to help make that final payment.
With housing payments, often the biggest single expense, out of the way, this tends to mean we only need around half to two thirds of our final salary to achieve a similar standard of living as pre-retirement.
Again, this general guide can be a big help in putting you on the right track but you need to factor in your personal circumstances too if it’s to be as relevant as possible.
Your pension pot at 40
A common guiding principle is to have twice the value of your current salary in your pension pot by the age of 40. Often that chimes with the goal of having seven to ten times your salary put away by the point of retirement at 68 (the age at which the state pension will likely kick in for most people).
Broad estimates from the ONS show the average life expectancy for a 40 year old male is 85, for a 40 year old woman that rises to 87. Both have a fair chance of reaching 90 and beyond, meaning those retirement savings will have to last for at least around 20 years if you are to feel comfortable that you won’t run out of money. 
Your pension pot in your 50s
If we follow the same guidance, that pension pot should be four times the value of your salary by the age of 50. It might sound like a huge leap from a decade earlier but remember, further to your contributions and tax relief over the period, you’ll hopefully also have investment growth, that glorious compounding effect and workplace contributions too.
But, given that the youngest age at which you’ll be able to access your pension will be 57 from 6 April 2028 (up from 55 currently), you might also want to really concentrate on those contributions in your 50s. The reason pension saving in your 50s can take on a different hue is that it’s the first decade you can think about putting money to work as you enter the period and take it out towards the end.
If you do want to retire at 57, racking up those investment returns and tax relief becomes more important than ever.
You might also be more willing to have the likes of a Christmas bonus go straight into your pension as it can attract tax relief, won’t be taxed immediately and can be accessed relatively soon after.
Understand how much pension you have already
Realistically, the pounds and pence figure on your pension account isn’t much use on its own. Factoring in life events and what you actually want from a retirement adds colour to the picture and will help you decide whether that figure is high, low or just right.
If you have vast dreams of constant luxury, it might be the case that either the amount in your account needs to grow, or it might be you need to compromise on a few things instead.
It’s useful to keep track of how your headline figure changes so you can start to see how you might need to adjust your expectations, your asset mix or your risk tolerance.
Saving vs investing
When you’re putting money away there’s always a risk/reward balance you need to make sure matches your comfort levels. Often that becomes a decision to save or invest.
Cash has the advantage of relative safety, meaning you can be pretty sure how much is going to be in that savings account from day to day.
But for that security you sacrifice the opportunity to grow those savings above the rate you’re being offered by a bank or building society.
That might suit you, as investing does carry more risk in pursuit of higher reward, or it might be that you are willing to put up with that risk in order to give your money the chance to go further.
Where that balance matters as you approach retirement is dependent on the route you want to take as you start to use those pension savings.
The traditional route was to plan to buy an annuity or gradually tail off into bonds to protect your gains the closer you got to retirement.
That’s becoming less and less attractive for retirees who still need a bit of investment growth to make their money last longer.
That can mean keeping risk on the table by investing in equities, including dividend-paying shares, and staying invested throughout retirement rather than chopping off that growth as you cut the cake at your leaving party and hand in your key card.
What if I haven’t started saving for retirement yet?
Starting your pension in your 40s
If you’re in your 40s and reading this nervously, you do still have time! But the reality is you have less of that most valuable of commodities than those kicking off their careers in their 20s and 30s.
There are going to have to be compromises if you want to rack up a decent pension pot - either in your final expectations or what you’ll realistically have to contribute from now until then.
Those figures will depend entirely on what we’ve talked about so far - your personal view of what you want to achieve and what you can realistically put aside to let grow. It may also be that you need to push retirement a bit further out than first planned or adopt a higher risk profile with your investments to aim for higher returns.
Of course, this carries the risk that your investments or asset mix doesn’t perform as you’d like. Try not to get sucked into taking enormous risk through fear of un underfunded pension pot. Be conscious that a situation like this might mean considering a greater weighting to equities, but keep it within your comfort limits.
Retirement planning tips in your 40s
Something that is becoming increasingly popular among people with an eye on retirement is the idea of slowing down in work, not stopping altogether.
This might naturally be a good fit for those starting to save later in life, as a regular income can become a supplement to a smaller eventual pension pot.
Money aside though, many people are choosing to reduce their hours or simply take on the projects they want in work because they are still healthy and active. Bluntly, a cliff edge like retirement can leave many people wondering what to do with themselves.
Once you factor in that you’ll probably have a wealth of knowledge in your chosen field by then, it might be the case that you still have something to offer and can do it on your terms.
Whether you fit that mould or you simply can’t afford to retire, think about what a semi-retirement might look like for you. Could you consult on a part-time basis or even turn a hobby into a profession once you pack in the day job?
Is it worth starting a pension in your 50s?
As we’ve said, pension saving in your 50s takes on a slightly different meaning. It’s no longer something you put money into with no real view of the end result. It’s also the first time your shorter-term investments can benefit from the addition of tax relief and workplace contributions.
It’s for that reason that pension investors in their 50s often ramp up the contributions. The clear thinking here is that it’s not very long until they’ll be able to access those investments, and the additional benefits can be hard to resist.
Starting a pension in your 50s will obviously not benefit from the value time can add to your investments (if you’re planning to start drawing money relatively soon after) but it might be attractive for the case above specifically.
Best ways to save for retirement in your 50s
Making the most of those pension benefits like tax relief can make sense the closer you come to actually using them. That will be helpful for a lot of pension savers in their 50s.
But remember, there is still an inherent inflexibility to pension investments. Make sure you have money you can access while you are putting money into your retirement savings. The last thing you want is for the car to break down and have no quick-access money to fix it.
And that goes for shorter-term goals too. If you have something coming up like a child’s wedding and you want to be able to invest tax-efficiently while maintaining pre-retirement access to your money, an ISA might be able to help. Investing for at least five years is a good idea but your 50s can involve multiple goals with different needs in terms of account flexibility so don’t get too focused on one and forget about the others.
How much should I contribute to my pension?
There are all sorts of figures out there that do nothing but provoke a raised eyebrow and ultimately scare people off saving and investing. As I hope we’ve made clear, there is nothing more important than factoring in your personal retirement needs, wants and ability to put money to work to get there.
In this sense, ‘How much?’ should really give way to ‘How?’
Here are five things to consider doing to make investing for your retirement more straightforward.
- Maximise your employer contributions. If you put a bit more in would they match it?
- Set up a regular savings plan. Be disciplined about investing regularly and robotically.
- Make a one-off payment. Got a bonus? Why not put part of it into your pension?
- Keep pace with your salary increases. If you get a raise, make sure your pension savings do too.
- Consider bringing your pensions together. Having a bunch of pensions from different jobs all over the place can mean they’re hard to keep track of. Moving them all into one self-invested personal pension (SIPP) might make sense.
One of the big attraction to invest for retirement through a pension is the tax relief your savings attract in the account.
If you’re in the basic-rate tax band and pay 20% tax on your earnings, you’ll receive 20% tax relief. That means a pension contribution of £100 from your salary into your retirement savings only costs you £80, with the government adding the remaining £20.
If you pay tax at a rate higher than the basic rate of 20% you can get even more tax relief on your contribution paid directly to you via your tax return.
For higher-rate taxpayers paying income tax at 40%, this £80 contribution is boosted to £100 by basic rate tax relief being added to your pension. You can claim a further £20 back via your tax return. Therefore the £100 going into your pension will end up only costing you £60.
And along similar lines, additional-rate taxpayers only have to contribute £55 to end up with a £100 contribution, as they can claim 45% pension tax relief, in line with their tax band.
Remember, the tax relief you are eligible for is judged by the highest level of income tax you pay.
You can find more on these figures as well as the details here.
Saving for retirement: ISA
An ISA isn’t the first account you might think of when it comes to saving for retirement but it can play a part, especially if you’re planning on retiring early. Taking income from an ISA can help bridge the gap between an early retirement date and eventually tapping into that pension when the time comes.
If that sounds a bit unfeasible, taking ISA income to supplement your earnings might allow you to reduce your hours until you can finally stop work altogether.
In this sense, it’s maybe more SIPP and ISA, not SIPP vs ISA.
Saving for retirement: SIPP
A self-invested personal pension or ‘SIPP’, is a type of investment account available to people in the UK designed to help you save for retirement.
Rather than passing the job onto the company behind your workplace pension scheme, a SIPP lets you decide what to invest in.
SIPPs can be particularly useful if you have a few pensions from previous employers knocking around.
Consolidate your pension in one pot
According to the Association of British Insurers around £19.4bn is currently sitting in lost or unclaimed pensions in the UK.
Don’t become part of this statistic.
The ease of keeping all your pensions in one place might be a reason to consider a SIPP transfer.
Other reasons might be that your current provider(s) have pension fees, limited investment options or poor visibility of what you’re actually invested in.
But don’t rush into it.
Before you make any changes to your current pension plans, you need to make sure transferring would be right for you. If you need to, get help from a financial adviser.
Here are some things to think over:
- Is your current provider going to charge you any exit-fees?
- Will any market value adjustment (MVA) apply on transfer from your existing provider?
- Will you lose any valuable benefits or guarantees?
- Consider how long the transfer might take and what impact this might have on your existing portfolio.
Early retirement planning - retire in your 50s
For most people, the thought of early retirement doesn’t mean downing tools in your 30s, it’s more likely to be about stepping away from work or reducing hours in your late 40s or early 50s.
There’s a different angle here though. Rather than just reel off the usual ‘save more to retire earlier’ message, a practical solution might be to start drawing income from your ISA before the age of 55 (rising to 57) when you can access your pension savings.
There’s a trade off here because your ISA investments won’t attract tax relief or employer contributions but they are easy to access before retirement. And as investment ISAs are tax-efficient, like pensions, you’ll keep all the gains your investments make inside them and won’t pay tax when it comes to withdrawing your cash.
This will take planning, as the questions of ‘how to become an ISA millionaire?’ will probably have to give way to your ISA adopting a supporting role rather than centre stage.
Risk when investing after your 40s
There are a few ways to look at risk here. From a pure investment risk point of view, you just need to make sure your assets match your intentions. If you are planning on selling your investments soon and buying an annuity (more on these below) then it might be taking risk off the table is a sensible option. It would be distressing to stay open to the possibility of wild fluctuations in the value of your money just as you come to take it out.
On the other hand, if you plan to stay invested and possibly start to draw an income from your holdings through your retirement you might have to accept a higher of level of risk.
Normally the theory is that a steadily higher allocation to bonds is helpful as you move towards retirement. But in an era of record low interest rates many investors have climbed the risk scale into dividend-paying shares instead.
If you choose to hold these instead, remember that they naturally carry a higher level of risk than bonds because there is also the possibility of capital growth alongside dividend payments. And, as last year demonstrated, bear in mind that those dividends aren’t set in stone.
The other perspective on risk here is the possibility that you won’t hit your pension pot target.
What to invest in
You can invest for your retirement through a wide range of assets like UK and US shares, ETFs, bonds and investment trusts. The assets in Freetrade’s universe cover every sector you can think of, including green energy, consumer products, technology, pharmaceuticals and whatever else makes the world go round.
Learn more on how to start your investment journey with our 'How to buy shares for beginners' guide.
Annuities vs drawdown
In the old days, it was pretty much obligatory to use your pension savings to buy an annuity when you collected your gold watch and said goodbye to the office.
Annuities allow you to exchange your eventual pension pot for a guaranteed regular income stream.
The introduction of the government’s pension freedoms in 2015 changed all of that.
No longer did you have to swap your savings for an annuity. Instead, you were free to take control of your own money and decide how best to manage it throughout your retirement.
That’s where we are today.
And after initial fears that we’d all go out and fritter away that cash without the guiding hand of an annuity provider, it seems as if the nation is getting on fine.
You can still opt to buy an annuity with all, or part, of your retirement savings but there is another alternative that we’ve alluded to. Drawdown is the practice of keeping your money invested in the stock market and drawing down cash over time from those investments.
It provides less security than a traditional annuity but it offers more opportunity for growth.
Those regular annuity payments can also have the inflation spectre hanging over them, as they’ll often stay the same even if inflation rises.
And if you’re planning on leaving some money to your loved ones from your savings, think carefully about which way to handle your retirement pot. Often, annuities won’t offer the ability to leave any money to family.
There are a lot of things to consider in this regard. If you need a bit more help to understand your options you can visit the government’s Pension Wise service online at www.pensionwise.gov.uk or over the phone on 0800 138 3944.
If you fancy putting your money to work in a pension, the Freetrade SIPP might be able to help. It lets you take control of those tax-efficient pension savings for a flat fee of £9.99 per month, or £7 per month if you are a Freetrade Plus member.
What people invest in, in their SIPP
As of May 2021, these are the most popular assets held within the Freetrade SIPP.
- Argo Blockchain
- iShares Global Clean Energy UCITS ETF (Dist.)
- Scottish Mortgage Investment Trust
- iShares Core FTSE 100 UCITS ETF (Dist.)
Important information on SIPPs
SIPPs are a pension product designed for people who want to make their own investment decisions. You can normally only access the money from age 55 (set to rise to 57 from 6 April 2028).
This article is based on current rules, which can change, and tax relief depends on your personal circumstances.
When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest.
Before transferring a pension you should ensure you will not lose valuable guarantees or incur excessive transfer penalties. Pensions are usually transferred as cash so you will be out of the market for a period.
Freetrade does not currently offer drawdown products for our SIPP.
The fees described in this article do not include any fees which may be charged by product manufacturers (e.g. ETF management fees).