5 money mistakes people make in their 50s

For many people, their 50s are a turning point. The financial constraints of the early years of a career or raising a young family have lifted and focus begins to shift - to retirement and life after work.

That’s not to say this age is without its own challenges. Boomerang children and ageing parents can put additional strains on family finances, while redundancy, divorce, or ill-health — all sadly more common in this decade — can seriously derail financial plans, at a time when it becomes harder to get back on track.

Even without these upheavals there’s a reason why the government is encouraging people to take a midlife MOT in their 50s. By reviewing finances, alongside career and health prospects, you can identify potential issues to ensure you’re in good shape for the years ahead.

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Many common money mistakes made at this age relate to a failure to take stock of their current situation, put right previous problems, and start planning for the future.

Below are five financial traps — with suggestions on how to avoid them. The good news is that in your 50s you’ve still got plenty of time left to enjoy life and sort out niggling money issues.

Failing to maximise savings while you’re still earning

Many people reach their peak earnings during their 50s. At the same time, heavy demands on their income can start to decline — be it childcare costs or the end of mortgage repayments. The 50s, for many, feels like the decade when finances start to get on an even keel.

For those in this position, it makes sense to maximise savings during this period. Pensions are a good place to start. Employers are required to contribute to these, and many offer ‘matching’ schemes, where their contribution will increase if employees also pay more.

If this is available, make the most of these additional payments; you wouldn’t turn down a pay rise, so why miss out on contributions that can help boost your pension pot?

If you are self-employed, or this 'matching' option isn’t available, it can still be beneficial to maximise pension payments, through a workplace pension or SIPP, as contributions benefit from tax relief. For those that want to seriously build up their pension fund, salary sacrifice schemes can be a tax-efficient way to put more money into their pension.

Alternatively, you might also want to look at other savings options. Making the most of your tax-free ISA allowance should be your first port of call. People can save up to £20,000 a year into ISAs, which includes both cash and stocks and shares ISA options. Although there is no tax relief on contributions, money can be taken out tax-free at a later stage.

Being too cautious with your investments

Many 50-year-olds will be invested in older-style pension or investment plans that automatically start de-risking a decade out from retirement. These ‘lifestyling’ plans were often set up at a time when most people bought an annuity at the age of 65, so are designed to avoid a sudden drop in value prior to this, due to stock market fluctuations.

But times have changed. Most people now keep pension funds invested beyond retirement. In your 50s you are potentially looking at a further 20-year investment horizon, so may be less concerned about shorter-term market volatility. Playing it safe and shifting assets into cash, gilts or bonds is likely to restrict future growth potential, meaning the value of your investments may not keep pace with inflation. With this in mind, it is important to review pensions and investment to ensure the investment strategy remains appropriate and suits your risk tolerance.

This also applies to those cashing in part or all of their pensions, but opting to keep these funds in a savings account over the longer term. If inflation stays at a modest 2% — well below levels seen in recent years — in 10 years’ time a £20,000 pot will have the same buying power as £16,407 today. (This does not take any interest paid into account).

At 4% inflation, the same pot will effectively be worth just £13,511 in a decade.¹ There’s a reason inflation has been called a ‘slow motion bank robbery’. No one wants to take crazy risks with their money, but playing it too safe can also damage your longer-term financial prospects.

Unlocking pensions before you retire

Many people are delighted to find that they get the keys to unlock their pension funds, midway through their 50s, thanks to George Osborne’s 'pension freedom' reforms. From the age of 55, people can access their pension funds and spend the money as they wish (although it’s worth noting this increases to 57 from 2028).

For most, pensions will be their largest single asset, after their home, so it can be tempting to spend some of these savings, perhaps to pay for holidays or home improvements, or to pay off credit cards or other debts. Many 50-somethings have certainly been dipping into these funds — in the 10 years since these 'freedoms' were introduced, £72.2bn has been withdrawn from pensions via these 'flexible' payments.²

But there are several reasons why you should think twice before spending even a small part of your pension savings in your 50s. The first is that this will obviously deplete future retirement funds. This may not be a problem if you have a generously funded pension that is on track to provide a comfortable standard of living in retirement — but the vast majority of people are not in that position. In fact, the reverse is true — most people need to be saving more into pensions at this age, not spending the savings they have.

Accessing your pension funds can also restrict how much you can save in future. Most people can save up to £60,000 a year into a pension³ (if earnings allow) with contributions over this subject to tax. But once you start taking money from a pension, you are subject to a reduced limit of just £10,000 a year —technically known as the Money Purchase Annual Allowance, or MPAA. This might reduce your ability to replace the money you’ve taken out and could restrict your ability to save in future. In some cases, it may mean you cannot take advantage of future employer contributions. This MPAA isn’t triggered though if you only take your tax-free cash.

Finally, there will be some cases where people need to access these funds. If this is the case, make sure you do this tax-efficiently. You can withdraw 25% of a pension fund tax-free, but contributions over this are taxed at your marginal rate. Significant withdrawals can push people into higher tax bands. Withdrawing smaller amounts over a number of years may be more tax-efficient. Those potentially affected by this should seek financial advice.

Not knowing when you’ll retire — or what you’ll receive

Retirement might be a decade or more away, but now is the time to start putting together a plan for how and when you might be able to afford to stop work. The old adage of failing to plan is planning to fail certainly applies here, and inaction could mean you end up working for far longer or retiring on less than you’d like.

One key thing to know is when you’ll get your State Pension. Spoiler alert — it might be later than you think. The State Pension age will start increasing from 66 to 67 between 2026 and 2028, and there are proposals to raise this again to 68 at a future date — although an exact timetable has yet to be set out.⁴ A State Pension forecast (available on gov.uk) will show when you’ll get this benefit, and what it’s currently forecast to pay. If you have been out of the workforce for a number of years, it’s possible to top up National Insurance contributions to boost your State Pension entitlement.

Alongside this, it’s worth reviewing other pension savings. This might involve some detective work, tracking down older workplace or private pension plans to get a clearer idea of how much you’ve saved, what these pots are now worth, and what they might pay once you retire. If this is less than what you’d ideally need, then you have time to address the issue: save more, adapt your investment strategy, consolidate poorly performing plans or into a SIPP, or even plan to work longer to bridge a potential shortfall.

Not prioritising your own financial needs

Those in their 50s are often referred to as the sandwich generation, caught between the financial demands of younger and older relatives. Many will still have dependent children living at home, including those who have ‘boomeranged’ back from higher education. And during this decade, many may find their parents start to need more support. This can take a toll on people’s finances, with the Bank of Mum and Dad being called on to help fund housing deposits or subsidise living costs. At the same time many fifty-somethings, particularly women, opt for part-time or less stressful work roles to be able to provide support and help for ageing parents. This can impact their own earnings and savings potential. However, try to ensure that the help you provide isn’t at the expense of your own financial security — this is unlikely to benefit family members in the long run. Resolving these issues is never easy but try to have frank discussions with family that address financial issues across the different generations.

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Source:

¹ Inflation calculator, Wesleyan.co.co.uk, September 2024
² IFA Magazine, 14 March 2024
³ Money Helper, September 2024
⁴ Gov.uk, September 2024

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in an ISA or SIPP and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a SIPP will not normally be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.