How to save for your future - 40-56 year olds

It's never too early or too late to think about retirement. In the second of a three-part series Lauren Thompson looks at how 40 to 56 year olds can save for the future.

How do you picture your retirement - travelling the globe? Living by the seaside and enjoying the sun? Sadly, millions of people will find such a comfortable existence out of reach, unless they start saving more into their pension.

Four in 10 people are not saving enough for their retirement and two in 10 are not saving anything at all, according to research from AXA.

Andy Zanelli, head of retirement planning at AXA Wealth, says: "Rising longevity means retirement is likely to be longer than ever before. Planning ahead and taking control of your financial future as early as possible is vital." The good news is that it is never too late - or too early - to begin saving for the future. We explain how to get started whatever your age.

Age: 40 TO 56 This is the time to start taking a serious interest in your retirement savings and increase your monthly contributions if necessary. Hopefully you are now earning more than in your 20s and can afford to put a bit extra away.

Go online and use a pension planning calculator - such as the one at moneyadviceservice.org.uk - to see if you are saving enough. Read your annual statement, as you need to know the current value of your fund, how much you and your employer contribute every month and roughly how much income you would like in retirement.

Remember, if you don't have access to a workplace pension or you simply want more flexibility with your investments, you can open a personal pension instead of or as well as your workplace pension.

Self-invested personal pensions (SIPPs), where you pick and monitor the investments yourself, give savers an enormous range of investment options, but you have to be confident when it comes to managing your own funds. Leading low-cost SIPP providers include Alliance Trust, Hargreaves Lansdown and AJ Bell.

Khalaf says your choice of investments at this age will depend partly on what age you are planning to retire, and your appetite for risk. Someone in their early 40s may still have 20 years of work or more left, and so can afford to keep their money mainly invested in relatively risky assets such as equities, including some in emerging markets.

More cautious investors could consider a balanced managed fund, which aims for less volatility by investing in a broad range of securities. Khalaf recommends AXA Framlington Managed Balanced. It has grown by 11.5% in the past year and is invested in low-risk gilts (UK government bonds) as well as companies such as HSBC, Glaxosmithkline, Vodafone and BP. Its annual charge is 1.25%.

Khalaf also likes the Schroder Managed Balanced fund for those looking for a broad mix. It grew by 11.6% last year and is invested in a range of Schroder funds, including UK equity, corporate bond, Asian and global high yield. It has a lower charge at 0.8%.

How to draw your pension You've spent years saving into your pension. So how can you make sure you get the most out of it? There are two main options when it comes to turning your pension fund into an income for retirement. One is to buy an annuity, where usually the entire pot is handed over to an insurer in return for a set income for life.

Anyone buying an annuity should shop around for the best deal; don't just accept the offer from your pension provider. You may be able to get a much higher income elsewhere. When buying an annuity you should also declare any health or lifestyle issues such as smoking or high blood pressure. These could lead to a higher income, simply because you are not expected to live as long.

You also need to consider if you want an income that increases with inflation every year; and if you want your spouse to receive the pension after you die. Both these options will mean your starting income is smaller because the payments will have to increase later.

Buying an annuity is irreversible and can have a huge impact on the quality of your retirement. It is therefore worth getting expert advice.

Those with larger pension pots (around £150,000 or more, if you have no other sources of income) could consider income drawdown instead of an annuity. This involves taking a regular sum from your pension fund while keeping the rest of the money invested. You can still buy an annuity at a later date.

Auto-enrolment is here All workers aged 22 or over and earning more than £8,105 a year will soon (if not already) be automatically enrolled by their employer into a workplace pension. Even better, employers have to contribute. From 2018 your employer will have to pay in at least 3% of your earnings.

You can opt out if you want, but the government is hoping the new system will provide millions of people with a pension for the first time.

Very large companies started enrolling workers last month, with smaller companies following over a period of several years. Ask your employer for more details. For more information go to moneywise.co.uk/auto-enrolment.

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