The world is designed for couples – from booking a holiday to getting approved for a mortgage. And pensions are no exception.
The cost of a comfortable retirement has soared in recent years thanks to inflation. What’s more, poor investment returns in 2022 (a by-product of soaring interest rates) have pushed it even further out of reach for some savers.
The bad news for singletons is that they will need an additional £277.5k in their pension pot to secure a moderate standard of living in their golden years, according to research from Standard Life. This soars to an additional £397.5k if they want to enjoy a more comfortable lifestyle.
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With this in mind, it is important for savers to start thinking about their pension as early as possible – no matter what their relationship status. Single people will have to foot a bigger bill, but the sad truth is that not all relationships last.
We share all the details, before delving into some tips on how you can set yourself up for success.
How much does a comfortable retirement now cost?
The latest research from the Pension and Lifetime Savings Association (PLSA) shows that the cost of a comfortable retirement has increased by more than 8% since 2022/23 – and that’s if you are in a couple. For single pensioners, it has increased by almost 16%.
A single person will now need an annual retirement income of £43,100 to enjoy a comfortable standard of living. Meanwhile, a couple will need £59,000.
This factors in a weekly grocery bill of £130, as well as luxuries like beauty treatments, theatre trips, a subscription to a streaming service, and a two-week European holiday each year, as well as some UK minibreaks.
However, as the below table shows, even a basic retirement will now cost a single person £14,400 and a couple £22,400 – and this does not include a budget for running a car.
Meanwhile, the cost of a moderate retirement has increased at the fastest rate, suggesting those in the middle could face the biggest shock to their lifestyle.
| Standard of living | Cost | Increase versus 2022/23 |
|---|---|---|
| Basic retirement | Single person: £14,400; couple: £22,400 | Single person: 13%; couple: 18% |
| Moderate retirement | Single person: £31,300; couple: £43,100 | Single person: +34%; couple: +27% |
| Comfortable retirement | Single person: £43,100; couple: £59,000 | Single person: +16%; couple: +8% |
Source: PLSA Retirement Living Standards
How big a pension pot do you need?
Standard Life has conducted some further analysis to determine how big a pension pot you will need to achieve your desired standard of living. Its research looks at how much it would cost you to buy an annuity which would meet the above income requirements.
| Standard of living | Pot needed if single | Pot needed for a couple | Difference |
|---|---|---|---|
| Basic retirement | £75,000 | £0 (two state pensions will be enough) | £75,000 |
| Moderate retirement | £555,000 | £277,500 | £277,500 |
| Comfortable retirement | £890,000 | £492,500 | £397,500 |
Source: Standard Life
This analysis reveals the cost of being single is twofold – not only do you miss out on the economies of scale that couples enjoy, you also suffer as a result of not being able to combine your finances with someone else.
“Whether single by choice or by circumstance, single people must front a whole host of expenses on their own – from mortgage or rent payments, utility bills and council tax, to broadband, holidays and TV subscriptions”, says Dean Butler, managing director for Retail Direct at Standard Life.
“Unfortunately these aren’t automatically half the amount that couples pay”, he adds. “It’s similar when it comes to pension savings too. Couples can pool their finances for retirement, and as our analysis shows, single pensioners need to amass a significantly bigger pension pot to achieve the same standard of living as pensioner couples.”
Tips for maximising your pension
1. Never opt out of your workplace pension scheme
Under auto-enrolment rules, UK employers are legally obliged to provide an employee pension scheme and, as soon as you start working, you will be automatically enrolled (provided you are 22 or older, and earn at least £10,000).
Your employer is required to contribute a minimum of 3% and you will automatically start contributing 5%.
Do not opt out or reduce your 5% contribution. Doing so could mean that you lose your employer contribution too – which is essentially free money. On top of this, opting out will mean you lose out on valuable tax relief.
For example, if you are a basic-rate taxpayer and you put £80 into your pension, HMRC will gross it back up to £100 to refund you for the 20% tax you paid originally.
2. Start building your pension young
When it comes to investing and saving for retirement, time is your friend. The earlier you start building your pension, the more opportunity you have for it to grow, benefitting from compound returns.
3. Maximise your pension contributions
Each year, you can shield up to £60,000 from the taxman in your pension pot (including your own contributions, employer contributions, and any tax relief). This means that maximising your pension contributions is a good idea.
You can’t access your private pension until you are 55 (and this is increasing to 57 from 2028), so you might be reluctant to lock away money that you could otherwise spend today. However, over time, it should grow significantly thanks to investment growth – and any investment income or capital gains will be shielded from the taxman too.
While ISAs also allow you to shield your investments from income and capital gains tax, the tax reliefs offered by pensions are far more generous overall. That’s thanks to the tax relief HMRC gives you when you pay money in. You can also contribute up to £60,000 tax-free to your pension each year, while ISAs only allow you to contribute £20,000 per year.
4. Find out whether your employer will match your pension contributions
If you increase your pension contributions above the mandatory 5%, some employers will match this up to a certain amount. This is another great way to get free money.
5. Buy voluntary National Insurance credits
If you don’t qualify for a full state pension because you took some time out of work, you should consider buying voluntary National Insurance credits to top up the amount of state pension you are entitled to. You need thirty qualifying years of National Insurance contributions to qualify for the full state pension (£11,502.40 a year).
As we explored in a previous MoneyWeek article, anyone who draws a state pension for three years or more will usually benefit from paying voluntary National Insurance contributions.
6. Claim child benefit
Another reason some people miss out on valuable National Insurance contributions is because they take time out of work to look after children. However, if you claim child benefit, then HMRC knows that you are doing unpaid childcare work, which prevents your National Insurance record from having gaps in it.
Even if you aren’t entitled to receive any money through child benefit (the high income charge kicks in for households where one parent earns £60,000 or more), you should still complete the child benefit form to collect your valuable National Insurance credits.
You can tick a box on the form that says you want the National Insurance credit but not the money or, alternatively, you can claim the money and then pay it back through your self-assessment tax return.
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