Help! In my forties and still no pension

If you're a late starter you aren't doomed to a retirement in poverty as long as you start to turn things around today.

If you haven’t yet started a pension, you can overt a potential financial crisis in the future by taking some decisive action today. There's still time to build up a decent retirement fund even if you’re already in your forties and you don’t have a single bean in your pension pot,

Follow these steps to find out how...

Are things really as bad as they seem?

Although you might not be saving into a pension now, do you have any old pension schemes which you no longer contribute to? If you’ve been working for twenty years or more the chances are you may have a couple of old schemes that are left forgotten.

Have a good trawl through all your paperwork and see if you can find any literature relating to these old plans. Once you’ve done that, contact each of the relevant pension companies and ask for the following information:

• A current valuation of the scheme
• A summary of all the contributions made into the scheme
• Details of exactly where your money is invested
• A projection of future benefits based on the value of the plan

Once you’ve gathered these details you should be able to get a picture of how well these neglected schemes have been performing.

By now you should have a more accurate idea of your total pension savings. If you really have lost track of things but you have an inkling there’s an old plan out there somewhere, you can help recover lost schemes using the Pension Tracing Service.

Switch to improve performance

You shouldn’t be too surprised to find these old schemes haven’t done too well. This is what happens to pensions when they’re left completely unattended. But you can give them a new lease of life by switching them into a better performing fund.

It may be a good idea to seek professional help from an independent financial adviser, particularly if you’re a pension novice. They will help you decide what action to take at this stage. It’s absolutely vital that you check you won’t be giving up any valuable benefits or triggering heavy exit penalties by switching.

Older style schemes often have much higher charging structures than modern pensions, so you should be able to reduce the costs at the same time too. Take a look Why you should transfer your pension to find out more.

Start saving hard today

Most importantly of all, make saving for your retirement a priority by opening a pension today, and start squirreling away as much as you can afford. If you’re 40 now, you could feasibly work for another 30 years which is plenty of time to plan for the financial side of retirement.

State pension age is due to increase to 66 soon and will rise again in the years to come, while the default retirement age will be phased out. This means, it's inevitable many of you will be working significantly later in life than people who are retiring now. Working longer may not sound much fun, but it will at least give you more time to get your retirement planning act together.

But how much should you save? As a general rule of thumb you should try to put away half your age as a percentage of your salary. So, if you’re 44 now that means your pension contributions should be around 22%.

Applying this uplift each year will help to protect the value of your pension contributions from the effects of inflation. But you should also bear in mind that you have some catching up to do, so if you can afford to save more, go for it.

Don’t forget all your pension contributions qualify for 20% tax relief. This means you’ll only need to pay £80 out of your own pocket, for £100 to be paid into your pension. Higher rate taxpayers will enjoy a further 20% tax relief which can be claimed through their annual tax return.

Tax relief is a way of getting back the tax you have already had deducted from your income. And it will provide an instant boost to the pension contributions you make.

Better still, if you have spare cash sitting about in ordinary savings accounts, you can put it to better use by moving it into your pension. You can invest a decent chunk and still get the tax break as long as you earn enough to cover the contribution.

So let’s say you have £1,000 in an instant access savings account, and you’re a basic rate taxpayer. If you pop that into your pension, it will step up to £1,250 once 20% tax relief has been added. Just make sure you leave enough cash in savings to cover emergencies and other essential expenditure.

Is a pension right way to go?

I know a lot of people hate pensions and don’t trust pension companies to manage money correctly. It isn’t absolutely necessary to use a pension to save for retirement. If you prefer, you can use a different tax-efficient investment such as an ISA. Alternatively, you could think about using your property to fund your retirement, but this is not without risk as we explain in The danger of using property as a pension.

ISAs enjoy roughly the same tax breaks as pensions and can be just as effective as a way to save for the future. But you won’t enjoy the same tax relief on your ISA contributions.

Instead when you draw money out of your ISA later in life it will be completely tax-free, unlike pension income which is taxed under normal income tax rates. But the taxation of ISAs and pensions comes to pretty much the same thing even though it is applied in a completely different way.

Compare ISAs at lovemoney.com

More: The terrible news for your pension | How to fall in love with your pension again