In the first of a three-part series looking at finances across the midlife decades, Danni Hewson from investment platform AJ Bell explores some of the topics and issues you might be thinking about in your 50s.
Words: Danni Hewson. Images: Shutterstock
It’s the decade when many of us start really thinking about retirement, and I have developed a probably unhealthy habit of checking up on my pension pots on a sometimes weekly basis. I say unhealthy, because it means I am hyper aware of the fluctuations in my investments, but at least I know exactly how much I have in my pots. As is common with lots of people in their 50s, I still have multiple pension pots. For some, this will be because they’ve moved jobs a lot and haven’t combined their pensions. For me, it’s because I’m lucky that several of my pensions have some valuable guarantees attached, so switching them to a different provider isn’t an option (even if consolidating would make it easier to keep track of where I’m at).
For many people, combining pension pots is the answer, especially if you have more than a couple of pensions to keep track of. If you’ve not got your ducks in a row before your 50s, there are a couple of really good reasons why now is definitely the time to make the effort.
First, we know that there is a gender pensions gap, and chances are you don’t have as much in your retirement fund as you’d like. Only a quarter of women we spoke to when we launched our campaign thought their pension was on track to deliver what they will need in retirement. The cost-of-living crisis has forced many of us to make tough choices, but if you are still working, make sure you are still paying into a pension, because too many women aren’t saving at all.
If you can, it’s worth upping your contributions, especially if your employer will match that increase. Our research found that half of women have never paid more than the minimum requirement into their pension and that’s unlikely to give you the kind of retirement you’re hoping to have. Even a few extra pounds a month can make a huge difference over potentially 10 or 15 years, especially once the magic of compounding is added to the mix.
To cash in or not?
Second, this is the decade when you can choose whether or not to start accessing your defined contribution pots, either by taking a tax-free lump sum or a regular income. The option is open to you from the age of 55 (57 from 2028), but that decision is always a complicated one and often more so for women who tend to live longer than men.
The earlier you dip into your pot, the more likely you are to run out of money and end up relying solely on the state pension for the last years of your retirement. If you are tapping into your tax-free cash, make sure you are doing it for a reason. Some women find they need to turn to their pension early because they need to quit work or reduce their hours, thanks to caring responsibilities or the effects of the menopause. Just remember, as well as impacting how long your pot might last, there will be tax implications to consider as well.
And if you are taking a taxable income from your defined contribution pension, you need to be aware of something called the “money purchase annual allowance”. Even taking one pound of taxable income flexibly from your pension will reduce the amount you can pay into your pension every year from £60,000 to just £10,000.
The way we think about midlife has changed considerably over the past decade, and while we know a huge number of women are economically inactive in their 50s, many others are choosing to change careers or rejoin the workforce. This mid-point often brings change and it’s important not to consider those changes in isolation.
On the plus side, if you suddenly find you’ve got a bit of extra money because you’ve paid off your mortgage or your children have flown the nest, don’t just allow lifestyle creep to gobble it up. Think carefully and proactively about what might come next.
Financial Life checklist for your 50s
- Carry out a midlife financial MOT. Make sure you know what investments you have and how they are performing.
- Boost your pension. If you can afford to increase contributions, your 50s is a great time to do so.
- Consider whether to take a tax-free lump sum. Just because you can doesn’t mean you have to.
- Think about your housing costs. Can you pay off your mortgage or downsize if your family situation has changed?
- Watch out for lifestyle creep. And pay off any unsecured debt.
Danni Hewson is head of financial analysis at AJ Bell. To read more articles and listen to their fortnightly podcast, visit ajbellmoneymatters.co.uk.
