Finance at 40

How to Secure your Financial Future

Moira O'Neill

• Publisher: A&C Black Business Information and Development
• Year: 2009
• Print ISBN: 9781408101117
• eBook ISBN: 9781408105672
• Edition: 1
• Topic: Personal Development
• Subtopic: Personal Finance

By the age of 40 most people haven't yet given a thought to retirement planning: they've been too busy paying off debts and mortgages, and supporting a growing family. But with 25 years still to go until state pension age, 40 is a good age to start planning for those golden years.

Finance at 40 is aimed at anyone who wants to lay some secure foundations for the future but doesn't know where to start. This book will help readers work out the value of retirement plans they may already have in place, and will then guide them through the basics of investments, pension plans, and managing savings.

The Financial Intelligence series offers down-to-earth, practical guides to personal finance, aimed at anyone who wants to increase their financial IQ. These guides will help readers to feel confident about making the right decisions when it comes to spending, saving and investing their money.

1

Introduction

You’re 40. You haven’t yet given a thought to planning for your retirement. That’s perfectly understandable, as your finances until now have probably concentrated on paying off debts, building a deposit to get on the property ladder, paying off your mortgage and perhaps supporting a growing family. But now that you’re about halfway through life, it’s time to bite the bullet and start planning for the future.

You may have seen your parents reach retirement. If they’re part of the ‘Baby Boomer’ generation – the first tranche of which was born between 1946 and 1954 – they’re probably sitting on decent pensions and valuable properties to tide them through their golden years. However, your experience is likely to be different.

Bad luck: things are much more difficult for your generation. State pensions are diminishing and private pensions are no longer gold-plated. So you’ll have to take on much more personal responsibility for your retirement plans. NOW is the time to start planning for your golden years, if you want them to be golden and not miserable. Forty isn’t too late – in fact, it’s a very good age to start planning as you still have many years until state pension age, which will have risen to 66 by the time you retire.

Twenty-six years is plenty of time to stash away a decent amount. But if you delay, you may find that it’s difficult to catch up. It’s not going to be good enough to save money into your bank account. You’re going to have to put it into the stock market – and this means you’ll need to choose some stock market investments for your money.

You know nothing about investing? Most of your contemporaries know very little – although many are reluctant to admit this. But it will pay to learn the basics, and it’s not as daunting as it may at first seem.

In the chapters that follow, I’ll explain how to build up a portfolio of investments that you can rely on in future if you need an income or a lump sum.

How to read this book

My advice is don’t try to read it in one go. Finance and investing are complicated and they could bring on a panic attack and leave you with palpitations! Digest slowly, taking one step at a time.

What this book won’t do

Debt is obviously something that you need to deal with before you can start investing for a secure future. I’m not going to spend time addressing debt problems – that could be a whole book in itself – but you’ll find useful contacts at the back of this book to help you overcome debt issues.

Am I alone?

‘Everyone else seems to know so much about finances. And they’re confident that they’ll have enough to live on in retirement. I’m afraid to talk to my friends about my worries.’

The likelihood is you’re not talking to your friends or family about your finances at all, as money has usurped politics as the greatest taboo conversation topic. Two-thirds of Brits feel money is a personal subject that should be kept private, according to research by personal finance website Fool.co.uk. The study highlights how reluctant most of us are to chat about our cash, and reveals that politics, religious beliefs, career concerns and even relationship problems are more favoured than money as topics of conversation these days.

The vast majority of people fail to save sufficiently for retirement, and many fail to save at all. Other things, such as paying off the mortgage, bringing up kids etc., simply take priority. If you begin to save now, you’ll have a head start on most of your contemporaries. Most people regret not having done more to save in the past, but it’s not worth beating yourself up. Remember splashing out on special treats such as meals out and holidays with fondness!

What happens if you don’t save for retirement?

Could you survive on £124.05 a week, the minimum income that the government currently guarantees in retirement? Wouldn’t this be a struggle? You’d be able to buy enough to eat, certainly, but this is hardly an income that will let you enjoy a lifestyle including holidays, the occasional meal out, running a decent car and so on. Not having to deal with this prospect is just one very good reason to put money aside for retirement by saving in the private sector.

Nonetheless, state retirement benefits are a good basis for retirement planning and need to be factored into your plan. The trouble with relying on them, however, is that they’re likely to be worth a lot less when you reach retirement than they are today. The question is, are you prepared to gamble on whether you’ll be receiving a decent state pension in 20 or 30 years’ time?

Unfortunately, many experts predict a steady erosion of state pensions as UK demographics change. This is because the number of older people will increase relative to the number of young people. The Government Actuary’s Department (GAD) expects the average age of the population to rise from 38.8 in 2000 to 42.6 in 2025.

The current state pension

The state pension is paid to pensioners out of National Insurance (NI) funds paid by people currently working, so as the proportion of workers decreases, it will be more difficult for the government to find the funds to pay the state pension at current levels. This means we could eventually see a substantial cut in benefits. Following recommendations by experts and lobby groups, the government has already agreed that the most sensible solution is to raise the state retirement age.

The state pension age is set by law and for those retiring in 2008 is 60 for a woman and 65 for a man. You can’t get your state pension before state pension age, even if you retire from your employment before then. For women born on or after 6 April (the start of the tax year) 1950, state pension age will begin to increase from April 2010, so that by 2020 both men and women will have the same state pension age of 65.

However, the state pension age for both men and women is to increase from 65 to 68 between 2024 and 2046, with each change phased in over two consecutive years in each decade. The first increase, from 65 to 66, will be phased in between April 2024 and April 2026; the second, from 66 to 67, will be phased in between April 2034 and April 2036; and the third, from 67 to 68, between April 2044 and April 2046.

So if you’re 40 in 2008, you’ll get your state pension when you’re 66.

There is a state pension age calculator at www.thepensionservice.gov.uk/resourcecentre/statepensioncalc.asp

Basic state benefits

In the tax year 2008/09, the full basic state pension is £90.70 a week for a single person and £145.05 for a couple, where one partner has no entitlement of their own.

Qualification for the basic state pension depends on your National Insurance contribution (NIC) record. To qualify for the full basic state pension you currently need to accumulate 44 years of NIC credits between the ages of 16 and 65. However, the government is reducing the number of qualifying years needed for a full basic state pension to 30 for people who reach state pension age on or after 6 April 2010.

There could be gaps in your NIC record if you have been:

unemployed and not claiming benefit

living abroad

self-employed and exempt from paying Class 2 contributions

If you don’t have the required NIC credits, you’ll receive a smaller basic state pension based on the number of qualifying years you do have. From 2010, people who have fewer than 30 qualifying years will get 1/30 of full basic State Pension for each qualifying year they have. It is possible to make voluntary payments to make up a shortfall in NICs but you usually have to make up the shortfall within six years. For further information, contact the National Insurance Helpline for Individuals on 0845 302 1479 or write to National Insurance Contributions Office, Benton Park View, Newcastle upon Tyne, NE98 1ZZ.

Second state pension

There is a second state pension related to earnings, which can boost your retirement income by a small amount. The government has announced that between 2012 and 2015 the link with earnings will start to disappear, and the state second pension will start building up as a flat rate for each qualifying year. By 2030, it will become a fixed-rate pension regardless of earnings. Many people in occupational pension schemes (that is, pension schemes offered by their employer) contract out (opt out) of the second state pension and therefore pay reduced NICs as a result. However, from 2012 at the earliest, contracting out into certain types of private pension scheme will no longer be allowed.

Minimum income guarantee

If you’ve made no private pension provision, or have a gap in your NIC record, then you’ll be struggling to make ends meet on what basic state pension you receive. However, the government has a safety net for poorer pensioners. It’s called ‘pension credit’ and anyone with a NI number can apply for it.

Pension credit tops up retirement income to £124.05 a week for a single person and to £189.35 for a married couple (in tax year 2008/09). The amount you get is means-tested, so it will depend on your circumstances and any savings you already have. If you have more than £12,000 savings, you won’t qualify. Also, the government looks at your other sources of retirement income, including any priv...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Table of Contents
• About the author
• Disclaimer
• 1 Introduction
• How to read this book
• What happens if you don’t save for retirement?
• Basic state benefits
• How much will you need to save?
• Where do you start?
• Your financial goals in order of priority
• Where to find the money to invest
• 2 Financial advice
• How can a financial adviser help?
• Choosing an independent financial adviser
• Before your first meeting
• 3 My property is my pension
• Rent a room for extra cash
• Equity release
• Your mortgage
• 4 Things to put in place before saving for retirement
• Establishing an emergency cash fund
• Get the right financial protection
• The importance of making a will
• 5 Introduction to investing
• The difference between saving and investing
• The power of compounding
• Lump sum or regular savings
• The two enemies of investors: inflation and tax
• Your tax return
• 6 Your retirement toolkit
• Pensions
• Individual Savings Accounts (ISAs)
• Investment funds and trusts
• National Savings and Investments
• Friendly society tax-free savings
• Investment bonds
• Offshore bonds
• Venture capital trusts (VCTs)
• 7 ISAs in depth
• ISA basics
• How to use ISAs in your financial plans
• How to buy an ISA
• 8 Pensions in depth
• How much should you save?
• Choosing your pension
• Personal pensions
• Personal accounts
• At retirement: annuities v. other options
• 9 Building an investment portfolio
• The basic ingredients of an investment portfolio
• Asset allocation for your portfolio
• 10 Choosing investment funds
• Open-ended funds
• Closed-ended funds
• Active management v. tracker funds
• Exchange traded funds
• How to research active funds
• Do it yourself
• Funds for all seasons
• Structured products
• 11 Profits with principles
• Ethical investing
• Social and environmental issues to consider
• Ethical banking
• Ethical mortgages
• 12 Retiring abroad
• Pensions
• Healthcare issues
• Banking issues
• Tax
• 13 Children
• Investing for children
• Reasons to save and invest for your kids
• Where to start?
• Investments designed to help you save for a child
• Bank of Mum and Dad: lending money to your adult children
• 14 Inheritance tax planning
• Inheritance tax basics
• Reducing your IHT bill
• 15 Useful Contacts