If you have reached 40 years of age with nothing put aside for retirement, there’s no need to panic. It is never too late to start saving for the future.
As long as you have a set saving and investment plan in place, it is relatively straightforward to build a sizeable nest egg from a standing start between the age of 40 and retirement. Here’s how.
A savings plan
Saving for the future is a daunting task for many. Moreover, sometimes life just gets in the way. Going without today while saving for retirement does not seem like a sensible trade-off.
As a result, millions of people struggle to save for retirement. Nevertheless, it has never been easier to build a substantial nest egg than it is today.
The first thing you should do if you are serious about saving for retirement is open a SIPP. These are one of the best tools available to pension savers at the moment.
Contributions to one of these tax-efficient savings wrappers will be entitled to tax relief at your marginal tax rate. That is 20% for basic rate taxpayers. You can contribute up to £40,000 a year.
Even if you are not earning, you can put away a maximum of £2,880 a year and still receive tax relief. The tax relief is added to your contributions. So, for someone contributing £2,880 a year and receiving tax relief of 20%, the taxman will add £720 a year to take the total up to £3,600 gross.
This can be a massive help if you are trying to build a substantial nest egg in a short period. In addition to these tax benefits, any income or capital gains earned on money saved inside a SIPP is tax-free.
However, you will have to pay tax when you withdraw the money. Still, you can build up your savings without having to worry about significant tax liabilities.
Making money in the market
Investing in the stock market through a SIPP is the best way to turbocharge the growth of your savings.
The FTSE 250 has produced an average annual return for investors of around 12% since its inception 30 years ago. At this rate of return, a saver putting away £240 a month or £3,600 a year after tax relief (£300 a month in total) would be able to accrue a pension pot worth £570,000 over the space of 25 years.
This will be enough to produce an income of roughly £22,800 a year in retirement.
Including the State Pension of £8,762 a year, this pot could yield a total pre-tax income of £31,567 a year.
Therefore, if you have hit 40 with no savings set aside for the future, this strategy of putting away a little bit every month, and investing in the FTSE 250 could help you build a sizeable financial nest egg in a relatively small amount of time.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.