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Avoid a mid-life financial crisis

Wikipedia defines middle age as being “the period of life beyond young adulthood but before the onset of old age. Various attempts have been made to define this age, which is around the third quarter of the average life span of human beings. According to the Collins Dictionary, this is “usually considered to occur approximately between the ages of 40 and 60” while the US Census lists middle age as including both the age categories 35 to 44 and 45 to 54.”

What a choice! But whichever it is, the chances are you’ve been working for quite a few years now and you’re finally feeling a little more stable and secure. By now you may well have reached your earnings peak but retirement is still a fair way off, so this is the ideal time to make sure your money is working for you.

Of course, you may technically be in your mid-life years age-wise, but not stage-wise. It is not uncommon for many people to be starting families when they’re over 40 or at the opposite end of the spectrum, trying to retire when they’re 50. Based on where you are in middle years, you’ll need to tailor your investments to fit your needs and hopefully this is where we can help.

A good thing to do at this stage is to conduct a head-to-toe money checkup that covers everything from investing to insurance and protection to pensions. For instance, once you know what you already have put aside for retirement, you can decide whether that will be enough for your life choices at that time while there is still time to save more if needs be.

Review your life goals

Of course, it will be easier to do this if you know what you want. You might, for example, want to move to a smaller house or acquire a second home. You could be considering early retirement, a career change or starting your own business. You may even want to buy a Harley or relive your lost opportunity of becoming a guitar hero. Whichever combination of these you desire, all of the options require a strong, realistic financial plan to secure a satisfactory outcome.

Are you saving enough for retirement?

When you’re just starting to save and invest, this question is hard to answer with any precision. Who knows how much money you’ll need in retirement when those days are eons away? Now that you’re in your 40s or 50s, it’s easier to make an educated guess, and the first place to start is to look at what you already have.

While we live in a country with a sound welfare system, the basic State Pension is just that - basic. At the moment it’s £95.25 per week (2009/10) which is less than a quarter of average earnings. Depending on your National Insurance contributions, you should check whether you may also be entitled to the State Second Pension (S2P) or as it was formerly known, the State Earnings Related Pension (SERPS). Both S2P and SERPS entitlements will be small, so even if you do qualify they won’t bring you much extra income.

You should also note that there are going to be some major changes to the ages when you can claim the State Pension. The State Pension age is currently 65 for men and 60 for women born on or before 5 April 1950. This will increase for both men and women from age 65 to 68 between 2024 and 2046. This will affect everyone born after 5 April 1959.

The State Pension age for women is going to rise to 65 between 2010 and 2020. If you are a woman born between 6 April 1950 and 5 April 1955, the age when you reach State Pension age will depend on your date of birth.

Find forgotten funds

How many times have you changed employers in your working life? If you started a new pension each time, then by the time you retire you’ll have a whole cluster of pension plans, some of which you may even have completely forgotten you ever had. As they build up, it can become harder to keep tabs on just what kind of pension pot you’re going to be able to retire with. We can help you to get forecasts on these so you can have a better idea of what they will provide for your retirement. If you think you may have an old pension but are not sure of the details, the Pension Tracing Service at www.direct.gov.uk/en/Pensionsandretirementplanning/index.htm may be able to help.

Is it really worth my while to save anymore?

For the vast majority of people the answer is a very definite ‘yes’. For most people, every pound you pay into your pension is topped up with extra money from the Government, through tax relief. And if you are in a workplace pension your employer will typically pay about double the amount that you pay in.

So if you are not saving it is almost definitely worth starting now, because you will get extra money on top of what you save. How much should you invest in a pension is a tricky question and the answer takes in a number of factors.

A pension may need to last you for 20 years of retirement, and how much you should invest will depend on the lifestyle you wish to have in those 20 years. A rough guide to amounts is this: if you want to receive approximately two thirds of your final working salary as your monthly pension then you will need to invest around 10% of your monthly salary when you are in your 20s. By the time you reach 45 this percentage will have jumped to 20% and by 50 years old this will be around 25%.

Filling in the gaps

want to consider starting a personal pension now, as well as looking into any options for saving for a pension through your work. We can advise you on the different ways of ensuring you are making the most of the time you have left to save in this way.

In the meantime, we have already seen how small the State Pension is, but now is the time to check the amount that you actually qualify for. To qualify for the basic State Pension you need to build up enough ‘qualifying years’ before you reach State Pension age. A qualifying year is a tax year in which you have sufficient earnings upon which you have paid, are treated as having paid or have been credited with, National Insurance contributions (NICs). In 2009- 2010 you need to have £4,940 or more of such earnings as an employee, or £5,075 or more if you are self-employed.

Depending on how many qualifying years you have you’ll get a basic State Pension between the weekly minimum and maximum. For the 2009-2010 tax year these are £23.81 and £95.25. If you don’t have enough qualifying years, you’ll receive a smaller basic State Pension, or you may not receive any at all. You may want to consider filling in any gaps in your National Insurance contributions (NICs) record by paying voluntary NICs. Whether it will make sense for you to do so will depend on a number of factors, including the amount you’ve contributed already and when you reach State Pension age.

A State Pension forecast gives you an estimate of how much you can expect to receive at State Pension age based on the current information held about you. The Pensions & Retirement section at www. direct.gov.uk tells you the various ways of obtaining one.

Review your investments

started other long-term savings plans over the years. If you haven’t, then you should really consider putting some money into Individual Savings Accounts (ISAs). ISAs provide tax free interest and capital gains. There is no minimum ‘lock in’ period and you may cash in your ISA at any time. An ISA may include any combination of cash, stocks and shares, unit trusts, life assurance and National Savings.

At the moment you may only invest up to £7,200 per year out of which up to £3,600 may be in the form of cash deposits (i.e. in a bank or building society). However from October 2009 the limit was raised for savers over 50, who will be allowed to save £10,200 a year in an ISA, of which £5,100 can be saved in cash. From April 2010 this limit will be extended to all savers, whatever their age.

If you’re investing strictly for retirement or for your heirs, you’re still at the point where you can take some risks to get a higher return on an investment. However, since you no longer have the luxury of youth on your side, the time lost means you must challenge your saving mindset, tempering some of your risk to make up for the loss of both the compounded interest and the time needed to ride the ups and downs inherent in any investment. Tax concessions are not guaranteed and may change in the future.

Spread your risk

risk as it may be that now you are thinking about stability, you want to ensure that your investments have a lower exposure to risk than your previous preferences. Or it may even be that you feel you have been too cautious in the past and can afford to take a little more risk with your funds.

It is also important to remember that risk and reward generally go hand in hand. The more risk you are prepared to take, the higher the potential reward. If you are not prepared to lose any of your money under any circumstances then you have to accept a lower level of return. But remember - if you see an investment promising an unfeasibly high return at little or no risk, be very wary.

The old saying “if it looks too good to be true, it probably is” almost always applies to investments. Balancing the combination of risk, return and cost needs careful management, and two suggestions you may want to consider are Omnis Investments, and the PruFund Investment Plan.

Omnis Investments is a joint venture between Openwork Limited and Octopus Investments Ltd, one of the UK’s fastest growing alternative investment specialists. They currently have eight clearly defined investment portfolio funds that have been designed specifically for investors in three specific risk categories: Cautious, Balanced and Advanced.

The PruFund Investment Plan is a lump sum investment plan that can be used if you want your money to have growth potential or if you are looking for an income. The funds are low to medium risk and designed to be held over the medium to long term for a minimum of 5 years. It includes a small element of life assurance and offers tax benefits to those taking an income.

The minimum investment is £5,000. Risk can never be eliminated but it’s possible to manage it by diversification - spreading your risk. Different investments behave in different ways and are subject to different risks, and putting your money in a range of different investments can help reduce the loss should one or more of them fall.

A balancing act

while planning for those in retirement is a delicate challenge. Ironically, your midlife years are the ones where your financial responsibilities are most likely to be at their highest level leaving you with little to spare for investment purposes, yet are also the most critical years for making the investments that will shape both your and your family’s lives in the future. None of us knows what the future holds, either in terms of our own personal circumstances or changes in financial markets and pension rules.

But if you’re investing as much as you can afford, you know that you’ve given yourself an excellent chance of having the comfortable retirement you dream of. Why not ask us for a review so you can see whether your current financial arrangements match your needs?

We are here to help you make a balanced & informed decision, and can provide all the figures for you to decide on the right course of action.

This article was taken from Seneca Reid's Spring 2010 newsletter.

Seneca Reid is a trade name of Andrew Charles Reid Smith who is an appointed representative of Openwork Limited which is authorised and regulated by the Financial Services Authority.

The information on this website is for the use of residents of the United Kingdom only. No representations are made as to whether the information is applicable or available in any other country which may have access to it.

Openwork Limited offers insurance and investment advice on products from a limited number of product providers and advice on mortgages representative of the whole market.