No savings at 40? No need to panic

Forty is a milestone age, and reaching it is an individual experience. Some embrace it with open arms, while others run and hide. For many, it’s the perfect point to reflect on the successes achieved to date, while setting more goals for the years to come.

For others, it’s a time to panic over the realisation that you’re not as financially stable as you thought you’d be at this point in your life.

Getting on the property ladder is harder than ever for first-time buyers, and a lifetime of renting can drain your income and leave little left for saving. For those who do make it onto the property ladder, all the trappings that go along with homeownership, such as repairs and maintenance can just as easily eat away at any spare cash for saving.

The old saying “you spend what you earn” is never truer, and that’s why I think committing to investing a small amount each month is the best way to get started in saving for your future. If it’s a solid commitment, you’re much more likely to find a way to meet it.

Invest in a SIPP

A SIPP is a self-invested personal pension. It may sound complicated, but once you’re in control of it, it’s really no more difficult than monitoring your online bank account. A great benefit to running a SIPP is that the government will top up your contributions with pension relief deposits.

Fellow Fool Rupert Hargreaves recently explained how he’d double his State Pension using this method.

SIPP advantages and disadvantages

A SIPP offers you flexibility both with how much you contribute and what you invest in. You’re free to invest in equities, funds, or trusts that meet your preferences for risk and sustainability. The pension relief that your SIPP contributions attract is based on your marginal rate of tax, which starts at 20%. 

The biggest disadvantage of a SIPP could actually be deemed a benefit. You cannot withdraw any funds before the age of 55, and after 2028, this age will be raised to 57. This makes it a much simpler way to save because you can’t be tempted to withdraw anything prior to this age.

Once you do start to withdraw, you can extract the first 25% of the pot tax-free, but the rest is taxable. The tax relief applied to the contributions is limited. It is currently set at £40,000 per year, with a total lifetime limit of £1,055,000 for 2019–20.

Open an ISA

If the responsibility of running your own SIPP fills you with dread, then an ISA may be a suitable alternative, particularly if you are a complete beginner to saving and investing.

The main attraction of an ISA is that it’s a tax-free way to save – you don’t pay income tax on anything you add to your ISA up to a maximum of £20,000 per year for 2019–20. Once you’ve opened your ISA  you can buy shares, funds, or trusts and reinvest dividends if applicable. 

Although 40 may be deemed a milestone age, it’s not too late to start saving for your future. Investing is a great way to compound your cash and increase your savings for a more comfortable retirement. The more you can contribute each month, the better your future prospects will be.