Archived article: Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
It’s easy to move retirement planning and saving in pensions to the bottom of your to do list, before suddenly feeling you’ve missed the boat. But the good news is that there are plenty of things that savers in their 40s can do to build their retirement pot.
Getting started
Whether you are well into building your pension or just getting started, one of the easiest places to grow your savings is the workplace. And, chances are, your earnings are growing at their fastest rate since you started work, too.
If you are employed, your workplace will auto-enrol you in a pension as long as you meet the basic criteria. At a minimum, your personal auto-enrolment contribution will be 4% of your earnings between £6,240 and £50,270, with your employer matching up to 3% and a further 1% coming via pension tax relief. But some employers may offer more generous matching.
Bear in mind that if you opt out of your auto-enrolment scheme you’ll effectively be refusing free money, so make sure you stay in if you can afford to.
If you don’t have an employer, you can instead invest through a Self-invested personal pension (SIPP) or a Ready-made pension. While you won’t be getting the top-up from work in this scenario, you still can get the tax relief. It’s important to note that setting up a SIPP or Ready-made pension won’t be automatically done for you like it would be in a workplace. Instead, you will need to set one up yourself.
Choosing the right investment strategy
Getting the right investment strategy in place is a crucial part of retirement planning. This will be determined by several things, including your attitude to risk and how long you have until you plan to retire.
For those who began investing in their 20s, you might have built a significant pot by the time you’re in your 40s, and it may feel uncomfortable to take investment risk with this money. But in most cases, you won’t be planning to access your retirement pot for another 20 or even 30 years. This provides a long investment horizon that still allows some time to take risks. Once you get within 10 years of the age you plan to retire, then derisking might start to become a consideration.
If you have an auto-enrolment pension, your employer picks the investment for you. The ‘default’ investment fund, assuming you do nothing, has a cap on charges currently set at 0.75%, though many schemes will come in well below this fee cap. However, it’s worth checking out whether it’s the right fund for you, because it will usually try to appeal to a broad band of people, not your specific situation.
At 40, it’s also possible that you’ve had quite a few different roles. A helpful way to keep track of your pension pot, and make sure that all your money is invested effectively, is to combine your pots. This puts all your retirement savings in one place so they can be managed together.
How much should you be saving?
One very rough rule of thumb is to take the age at which you started saving into a pension and halve it. That should then be the percentage of your salary you contribute each year. For example, if you’re 40 and have just started saving for your pension, this would suggest a contribution equal to 20% of your salary.
These percentages would include any contributions from your employer and tax relief, but it still may be above what you’re capable of saving at the moment. Even if you aren’t able to follow this rule exactly, any contributions above the 8% auto enrolment can be a big help. Your employer may also match increases to your contributions, so there could be extra boosts for you.
If you don’t qualify for a matched employer contribution through auto-enrolment, pension tax relief still provides a strong incentive to make your own savings. This will automatically convert an £80 contribution into a £100 in a pension, while higher and additional-rate taxpayers can claim back extra tax relief from HMRC. Some workplace schemes – such as salary sacrifice pension arrangements and ‘net-pay’ schemes – will pay this extra tax relief automatically, provided your contribution comes from salary taxed at 20% or higher.
If HMRC must instead top up your pension after income tax (often called relief at source), it’s important to keep alert if you’re a higher-rate taxpayer. HMRC will automatically top up the 20% for basic income tax, but you will need to make a claim for any income tax you’ve paid on pension contributions above this amount. This extra money will be paid back to you; it isn’t automatically added to your pension.
Because of this generous tax treatment, you can usually only pay up to £60,000 into a pension each year, so long as you have earnings up to that amount.
What if you haven’t started?
If you are in your 40s and haven’t started saving for retirement yet, don’t panic – you are not alone. Lots of people at this stage of life will have spent most of their 20s and 30s saving for a house, building up their career, or raising young children.
On top of that, millions of people – including low earning employees and the self-employed – are not included in auto-enrolment. It means you might have missed out on contributing to a pension or have put it off until another day.
Let’s say you start contributing to your pension at age 40 on a £50,000 salary, that grows by 2% each year. If you can manage to contribute 15% of your salary, you could have a pension pot of over £453,000 by the time you were 65.*
Make a plan (if you haven’t already)
For most people in their 40s, there will be competing financial priorities. For example, many will have their sights set on paying off debts, saving for a first home or building a pot of money for their children’s further education. But if you can get a plan in place you’ll be able to work out how much you can afford to put into your pension.
Try and block out time to write down your outgoings and incomings, so you know what you can spare each month. If you haven’t already, it also makes sense to build up a decent-sized ‘rainy day’ fund in an easy access cash account in case of emergency. Aiming to have around three months’ fixed expenses in this emergency account is a good place to start, and make sure you shop around for the best interest rate you can find.
Once you’ve got that sorted, you can figure out how much you can afford to pay into your pension.
Investing with a personal pension
If you don’t have access to a workplace pension, you may be saving into a personal pension option like a Self-invested personal pension (SIPP). With a SIPP, you’re responsible for choosing your own investments. Some of the key steps you can take are establishing the level of risk you’re comfortable with and keeping investment costs low. Over times costs can really eat into the value of your pension, particularly when you are dealing with a time frame which runs into decades.
Those building their retirement fund through a SIPP can also opt for a Ready-made pension. Ready-made pensions are a low fee option that allows for a more hands-off approach than a traditional SIPP. It has set options for investing your pension, geared towards those who would prefer not to manage their investments personally.
It’s also important to ensure your investments are spread or ‘diversified’ around different sectors and countries so you don’t have all your eggs in one basket. If you aren’t confident in doing this yourself, you can invest in something like a multi asset fund where investment professionals make the decision for you.
Having reached the point where you are comfortable and satisfied with the risk profile and individual components of your investment portfolio, you can set a reminder to check in on your pension about once a year to make sure you’re on track for your investment goals. If you are, you should be able to sit tight until you are around five or 10 years from retirement. Most of the time the last thing you want to do is trade too often as this will layer on extra costs with no guaranteed benefit.
The tapered annual allowance
One of the benefits you may have for investing in later years is a larger salary to work with. However, it’s important to have a grasp on the rules around contributions.
While most people enjoy a £60,000 pension annual allowance, you may face a smaller limit if you exceed certain income levels. To have a diminishing pension allowance, you would have to have a threshold income above £200,000. To calculate your threshold income, you add all the income you earn (including investments) but deduct things like pension contributions. If you’re over the threshold income, you need to see if you exceed the adjusted income limit, which is £260,000. Adjusted income includes things like pension savings and any tax relief you get from HMRC.
Anyone who exceeds these limits will have their annual pension allowance reduced by £1 for every £2 of adjusted income earned above £260,000, to a minimum of £10,000 for those with an adjusted income of £360,000 or more. If you breach your allowance the taxman will come for any tax relief you have received over and above your annual allowance.
You can find out more information here to see if you breach the limits.
*Calculations by AJ Bell. This assumes a 5% investment growth after fees using a salary sacrifice scheme.
Hannah Williford: Content Writer
Hannah joined AJ Bell in 2025 as an investment writer. She was previously a journalist at Portfolio Adviser Magazine, reporting on multi-asset, fixed income and equity funds, as well as macroeconomic impacts and regulatory changes...
