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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.

Don’t panic! Anyone in their 40s and 50s still has time to build up a pension

Life often gets in the way of our best laid plans. Saving for a first home, raising kids and sky-high tuition fees often mean people don’t think seriously about retirement until their 40s or 50s.

If this sounds like you, don’t panic! Everyone’s pension journey is different and, with a bit of planning, you can still build a nest egg that will last throughout your retirement.

Automatic enrolment reforms mean that, from 2019, all UK employers will have to offer a workplace pension and match at least your first 3% of contributions. That’s free money from both your employer and the Government.

You will also be entitled to some state pension, provided you have at least 10 years of qualifying National Insurance contributions. The Government has a handy tool you can use to check your state pension entitlement. Click here.

Increases in life expectancy mean the age at which you receive your state pension is likely to rise in the future.

So what can you do to make sure your own contributions go further?

Top up your existing contributions

A handy rule of thumb suggests that you can halve the age at which you start making contributions in order to work out what you need to pay in each year for a decent retirement.

So if you start at age 40, you’re looking at total contributions of around 20%. Clearly this is just a guide, but it gives you an idea of how much extra you might need to save.

There are a range of different vehicles available for retirement saving. For many, a self-invested personal pension (SIPP) provides the right mix of flexibility, investment choice and low charges.

Like other types of pension, SIPPs are extremely tax efficient. Tax relief is paid at your marginal rate, so if you are a 40% taxpayer you get 40% tax relief.

For example, if you make an £800 contribution into your SIPP, you automatically get £200 in tax relief from the Government.

You can also claim a further £200 through your self-assessment tax return. That means a £600 contribution is converted into £1,000 in your SIPP through tax relief.

Furthermore, any investment growth is tax-free, while withdrawals will be taxed in the same way as income.

Make the most of your tax allowances

Government rules allow you to save up to £40,000 a year in total in a SIPP, inclusive of tax relief and dependent on earnings.

That means even if you start saving later in your life, you can still utilise free money from the Government to boost the value of your pension pot.

Furthermore, ‘carry forward’ rules mean that, if you haven’t used your pension allowances in the previous three tax years, you can use them in the current tax year – meaning you could utilise a bumper allowance of £160,000.

Tom Selby, senior analyst, AJ Bell

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