If your freelance career is earning you enough to cover the bills and even allow the odd treat, you could be forgiven for thinking that’s fine; what more could you ask for?
But my fifth and final thing I’m advising you to save for is equally, if not more important. You should be saving for retirement.
News Flash: The State Pension isn’t Enough to Live On
It’s not enough for most people now, and chances are, it will fail to be so even more in the future (or cease to exist entirely).
Think about the costs you have now. Go and check what they are. And now consider, honestly, how many of those costs would disappear or be less if you retired. If you have a mortgage that’s due to be paid up by the time you retire, fine; you can eliminate that cost from your calculations. But if you’re renting and expect still to be doing so when you retire, that cost needs to stay in.
I’m now going to tell you, in case you don’t know, what the State Pension currently pays someone whose National Insurance is fully paid up. You might want to sit down.
For the current tax year (2017/2018), the new State Pension is £159.55 per week. That’s around £685 a month. I’m guessing your costs, including all bills, groceries, household essential and clothes come to more than that, without thinking about the expense of birthdays, Christmas, leisure and holidays.
Saving for Your Retirement
Even if retirement is decades and decades away for you, if you haven’t started saving for retirement, do so now. The latter years of your life, when you’ve dedicated decades to working and you’re likely to be less fit and well than you once where, are not the years to be living on the breadline, scared to turn your heating or worried about how you’ll afford care if you need it.
Yet a study from the Pensions and Lifetime Savings Association suggests that about 53% of the workforce are at risk of an inadequate income in old age.
The money you save in a pension when you’re younger gives you a far greater return than money you invest in in the decade or two before retirement, because it’s earning tax relief from the moment it’s deposited and has so many more years to earn interest.
Basic-rate taxpayers get 20% pension tax relief, higher-rate taxpayers can claim 40% pension tax relief and additional-rate taxpayers can claim 45% pension tax relief. For basic rate payers, this means that if you pay £40 into a pension, the Government will top it up to £50.
If you’re a non-taxpayer, you’re still eligible for tax relief of 20%; however, the maximum you can contribute is £3,600 or your total income, whichever is lower. This includes the government top-up, so your personal contribution can be no higher than £2,880.
Prudential have a handy tax relief calculator, although it’s not applicable for people born before 6 April 1948, or those earning more than £100,000 (£50,000 if receiving Child Tax Credit).
How Much is Enough?
Look this up on the internet and you’ll get some scary (but not necessarily incorrect) answers that suggest even in your 20s, you should be saving £200+ a month to live comfortably in retirement.
According to research by Scottish Widows, a 30-year-old earning the UK average salary of £27,271 a year, contributing the current minimum of 1% to their workplace pension which is matched by their employer, would achieve an annual income of just £9,734 at retirement and £14,047 once the combined minimum contributions from employees and employers rises to 8% in 2019.
Someone who has left pension saving to their 50s would need to put away £1,445 a month to achieve a £23,000 annual income at retirement. Ouch.
But if freelancing is your only means of income and you don’t have an existing workplace pension, start planning. Which? estimates that retired couples need £26,750 a year at present to live comfortably, and that if you and your partner are in your 40s, you’ll need to start saving around £169 a month each to bridge the gap between the state pension and that figure.
It’s never too late to start saving for your retirement, so don’t put your head in the sand if you haven’t started – get good pension advice and remember that anything you save is better than nothing. However, on the flip side, don’t delay just because retirement seems a long way away – start saving now to make the most of your contribution opportunities and investment.