Financial planning guide for your 40s: Pensions, debt management and estate planning

Our forties can be an age where we are old enough to know we should do something smarter with our money, but not yet old enough to know precisely what! Some of us will be at the peak of our earning power and realise that it’s time to swing into gear when it comes to our long-term finances or risk an impoverished retirement... On the other hand, between supporting parents and possibly kids, the mortgage and the dream extension, many of us have less disposable income and more responsibilities than at any other point in life.

This means many forty-somethings are caught in an uncomfortable middle ground, knowing they need to do something, but not necessarily having the means to do it. The overriding message is not to succumb to paralysis by analysis. You still have a decent chunk of time before retirement so compound interest can work its magic. A little bit of forward-planning at this stage can make a real difference to your long-term wealth.

1. Get your head around the financial bits of retirement

Take stock of your pension pots

By now, you might have accumulated pensions from various jobs. It’s time to dig out the paperwork and figure out where you stand. Check how much you’ve saved, where it’s invested, and whether you’re on track to meet your retirement goals. Many people in their 40s realise they’ve lost track of old pensions from previous employers – don’t let those funds sit forgotten. Use tools like the government’s Pension Tracing Service to locate them and bring everything into view.

Once you’ve gathered the details, compare your current pension savings to how much you’ll realistically need for retirement. This can be daunting, but it’s helpful to gauge where you are. You can also log on to hmrc.gov.uk to get a State Pension forecast to add to the mix.

If you’re behind, consider increasing your contributions now. Even small increases can make a big difference with years ofcompounding growth ahead. You may also want to consolidate your pensions into one pot to reduce fees and make management easier. Seek advice before taking action to ensure it’s the right move for you – generally speaking, any ‘defined benefit’ or ‘final salary’ pensions have nice guarantees which can make moving a bad idea. You can always phone your provider and ask if there are any penalties or lost guarantees if you move.

Maximise your workplace pension contributions

If you’re employed, one of the most effective ways to boost your retirement savings is by taking full advantage of your workplace pension. Many employers offer to match your pension contributions up to a certain percentage. If you’re not contributing enough to get the maximum match, you’re essentially leaving free money on the table. Review your pension scheme and increase your contributions to maximise this benefit – it’s one of the simplest ways to grow your savings without bearing the full cost yourself.

Additionally, consider increasing your contributions beyond the matched amount if you can afford it. Contributions to a workplace pension are typically made before tax, meaning you’ll benefit from tax relief, making it a cost-effective way to save.

It’s also worth checking your pension’s investment options to ensure your money is working as hard as possible. Though your 30s are now in the rear-view mirror, you still have time to ride out market fluctuations, so investing in growth-focused funds with exposure to the stock market may be a good option. Reviewing and maximising your workplace pension contributions now can make a substantial difference to the value of your retirement pot further down the line.

Don’t ignore retirement if you’re self-employed

If you’re self-employed, it’s easy to push retirement savings down the priority list while you focus on running your business. But unlike employees, you don’t have an employer contributing to a pension on your behalf. That means it’s entirely up to you to make saving a priority. The good news is that self-employed people have access to Self-Invested Personal Pensions (SIPPs), which offer flexibility and tax advantages. Regularly contributing to one of these can set you up for a more secure future.

Start by calculating how much you can afford to put aside each month. It might feel challenging to prioritise retirement savings when income fluctuates, but building a habit of contributing even a modest amount can help. Consider automating your contributions to make saving easier and less likely to be overlooked. If your business performs well, you might also explore how to invest surplus profits in a tax-efficient way. Taking control of your retirement savings in your 40s ensures that your hard work today translates into financial freedom later.

2. Prep for the rainy days

Build an emergency fund

While these are usually your high-earning years, they can also be financially precarious. You may be reliant on a single salary while also needing to manage childcare responsibilities. The ‘job for life’ now seems like a historic oddity, with many people finding they are either permanently temporary or temporarily permanent. That means high-earning jobs can evaporate pretty quickly, quite aside from other disasters such as ill-health or emergency house repairs.

Against that backdrop, it’s worth ensuring that you have something to fall back on. Financial advisers usually recommend at least three months’ worth of basic expenses in an easy access cash account, but six is even better. This should give you the breathing space to keep essential bills covered while you find another job or retrain, without needing to sell the house/dog/children!

Consider life insurance

Your 40s often come with increased responsibilities – whether it’s a mortgage, raising children, or supporting ageing parents. Life insurance provides crucial financial protection, ensuring your loved ones wouldn’t be left struggling to cover essential expenses like living costs, outstanding debts, or education fees in the event of your death. Getting a policy now can provide peace of mind that your family’s future is secure.

Many people put off taking out life insurance until later in life, thinking it’s an unnecessary expense in the meantime, but securing a policy in your 40s can be more affordable than for older individuals. Premiums tend to increase with age, so acting now could save you money in the long-run. If you already have a policy, it’s worth reviewing your coverage to ensure it reflects your current circumstances, such as buying a home or having children. You may need to adjust your policy to meet these new financial demands.

Depending on your circumstances, it could also be worth considering critical illness or income protection insurance.

Write your will

Oh, isn’t this jolly! Nonetheless, it’s important to make a will and ensure the ‘expression of wishes’ forms (for your pension and life insurance) are up to date. Without a will, your assets may not be distributed as you’d like, and it can create unnecessary stress for your family during an already difficult time. A will allows you to decide who inherits your property, savings, and possessions, as well as appoint guardians for your children if needed. Consider seeking advice from a solicitor or using a will-writing service to ensure your wishes are legally binding and accurately reflect your intentions.

3. Take care of your debts

Avoid getting into more debt

Your 40s can be a financially demanding decade, with mortgages, children’s education, and other responsibilities competing for your income. While borrowing might seem like a quick solution to cover costs, taking on more debt at this stage can make it harder to achieve your long-term financial goals, such as saving for retirement. High interest debt, like credit cards or personal loans, can quickly spiral, leaving you paying more in interest than on the balance itself.

If you’re carrying expensive debt, focus on paying off high interest debts first, then work your way down the list. If you’re finding it difficult to manage, consider speaking with a financial adviser or a debt charity for guidance. Avoid using credit to fund non-essential purchases and look into using a balance-transfer credit card to shift debt to less costly accounts.

Pay off your ‘bad’ debts

Now, you could argue that there’s no such thing as ‘good’ debt, but not all debts are equal.

A mortgage is a ‘good’ debt because, eventually, you purchase a home which becomes a powerful financial asset for you and your family. A student loan is also a ‘good debt’ because you start repaying it only when you meet the repayment threshold. You’ll often pay ‘good’ debts back over a very long time period (typically decades!), so they don't feel as expensive. And since your student loan is taken from your salary automatically, you don't really miss what you don't have.

With bad debt, however, you're trapped with much higher interest rates, which can quickly overwhelm you if you're not careful. According to the Financial Conduct Authority (FCA), the average annual percentage rate (APR) for payday loans can be as high as 1,500%!

So, the rule of thumb is to pay off any high interest credit card debt or other high interest loans first. Once you clear these debts, you should be in a better position to build some short-term savings. Then you can start thinking about putting more money away into long-term investments.

Finally, be careful about relying on overdrafts

Overdrafts can be a helpful safety net for short-term cash flow issues, but relying on them regularly can lead to financial strain. Overdrafts often come with high interest rates or fees, making them an expensive way to borrow. If you frequently dip into your overdraft, it may be a sign that your spending needs adjusting or that you need a better budget in place.

To break the cycle, start by reviewing your income and expenses to identify where you can cut back. Aim to clear your overdraft as soon as possible and consider setting up a small savings buffer to avoid falling back into it. If you’re struggling to manage, speak to your bank – they may offer alternative options or agree to reduce your fees. Overdrafts should be a temporary tool, not a long-term solution, so it’s vital to take steps now to regain control and improve the overall health of your finances.