I meet people every week who know they need sort out their pension and retirement stuff… but have been putting it off.
And I get it!
Life does have a habit of getting in the way.
In your 20s, it’s just not a priority. Old age feels a million miles away, while you’re trying to figure out your career and get on the property ladder. In your 30s, family often takes over, raising the kids and paying the mortgage every month, while still trying to grow your business and get more money coming in.
But when you get into your 40s – especially your mid-forties – there’s this period of realisation that actually, retirement isn’t that far away. Maybe it hits you suddenly or maybe it slowly creeps in, that nagging feeling in the pit of your stomach that you really DO need to get things sorted out.
Most of us have got friends in and around our age group, maybe 10-15 years either side, which means that when you hit 45, some of your friends will be talking about early retirement.
Especially your friends in employed roles – talking about their company pension schemes, whether they might finish work early and all the exciting things they’re thinking they might do. And this may well lead to you sitting there quietly thinking oh my goodness, I really need to be doing this.
But then there is that sneaking suspicion that you think you’ve left it too late.
Is it even worth setting up a pension when you’re 45? Well… yes. Today I want to share 3 reasons why setting up a pension in your 40s is still a good idea, even if you’re starting from zero!
Reason #1: If you don’t, you’ll be skint when you retire!
Sorry to be blunt, but there you go.
If you’ve made enough National Insurance contributions, then yes, you’ll receive a full state pension.
(If you’re not sure, you can check your National Insurance record here on HMRC’s website).
But the state pension is NOT designed for you to live a comfortable lifestyle on. It’s a survival income – and that in itself is debatable.
Right now in 2024, the full state pension is £11,502.40 a year. I mean, how far does that actually go?!
Just for comparison, the National Minimum Wage for someone over 21 in a full-time permanent role working a 40-hour week is a gross annual salary of £23,795.20.
The state pension is less than half of this. It does go up each year with inflation (and obviously we’re going into paying the relevant tax here) but ultimately, that’s not a lot of money to live on. Even if by that point you have paid off your mortgage and downsized into somewhere much smaller, to free up some cash.
But there is so, so much more to retirement than simply surviving and getting by.
You’ve worked so hard to build your business. You have a nice lifestyle and to be fair, you’ve got used to some creature comforts. You don’t want to be going without them, but also you don’t want to have all this free time on your hands in retirement and not be able to go and do anything because you can’t afford it.
Of course it’s true that money doesn’t buy happiness but ultimately, most things do cost something. Even if your favourite thing is to quietly walk along deserted beaches, you’re going to need a decent pair of trainers and a warm coat and money to get there or live by the sea.
None of us wants to feel left out, when your friends are doing the things that they want in retirement and you’re sitting there wondering whether or not you can afford to go. A bit like flashbacks of being a skint student again or when you were young and baby stuff was really expensive. And really, who wants that for their later life?!
Reason #2: You’ll save loads of tax!
I know tax isn’t the most exciting of things to talk about – but bear with me here.
Pensions are designed to be used with your pre-tax earnings which means that if you pay into your pension personally, you get tax relief.
In effect, you get free money added to the pot if you are a Limited Company business owner.
Paying into a pension is a way of extracting profits from your business in a really tax efficient way. Even if you didn’t need the money for retirement, it can be a really good way to pay less tax now.
But why would you want to do that if actually, you’re not bothered about how much money you’ve got in retirement?
Well, that leads us to my final point:
Reason #3: You’ll leave a tax efficient legacy for your family
I think this reason is one that’s really overlooked. When you’ve worked hard to build your business for years, you naturally want to leave as much as you can for your kids or family or whoever your chosen beneficiaries are.
Pensions are great for inheritance tax planning because effectively, the money you’ve saved is in a trust, and the protective trust wrapper helps to keep it safe from the tax man.
This means that when you pass away, the money in your pension does not count as your estate for inheritance tax purposes.
You can pass the money on to whoever you like – your children, a charity or anyone else – without them having to pay a whole load of inheritance tax on it.
It’s an important thing to realise because inheritance tax is one of those things that is catching more and more people out. House prices have gone up; savings and investments go up, and yet the threshold where inheritance tax kicks in hasn’t changed.
There has been talk about what will change in the budget and whether inheritance tax thresholds will change – the same as whether pension treatments will be changed – but ultimately none of us has a crystal ball, and there is no way of knowing.
What we need to do is deal with things as we see them now, as we sit here today.
If you’re a single person without children, you can pass £325,000 worth of your estate onto whoever you like and pay no inheritance tax.
But let’s face it, if you own property, your estate is likely to be worth more than that. Especially if you live in one of the many parts of the UK, where a typical family home will set you back more than this (let alone if you live in or near London!).
If your estate is worth more than £325,000, your beneficiaries will pay 40% tax on the bit that is over that limit. There is an additional limit if you’re leaving a property to your own children or grandchildren – but on the whole, having money into a pension wrapper is a great way to pass money down the generations without a massive tax bill.
So there you go!
Three very good reasons why if you haven’t started a pension in your 40s, now is a great idea.
If you want to know more about what to do and how it all works, then check out Pathway here – my 1:1 / group hybrid experience SPECIFICALLY for 40-something business owners, with little or no pension.
It’ll show you how to create a decent amount of retirement savings from the money you’re already making, to give you proper security for the future while living a fun and amazing lifestyle now.
Here’s the link again with all the details!
Until next time,
Claire