The impact of the ‘singles tax’ on retirement planning

• Single workers need to save £290 each month from age 22 to achieve a moderate retirement (needing a pension pot of £330,000 according to the latest PLSA Retirement Living Standards) 
• In theory, to achieve the same standard of living in retirement, a single person would have to start saving 16 years earlier than someone in a couple 
• A member of a couple can potentially achieve a moderate retirement income by saving £290 from age 38, achieving a pension pot worth £165,000 by retirement (all figures are adjusted to today’s money) 

New interactive investor calculations based on the latest PLSA Retirement Living Standards reveal a stark contrast in the fortunes of single people and couples when it comes to retirement saving.

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

Camilla Esmund, senior manager, interactive investor, says: “It’s no secret that being single can be more expensive, and building wealth as a single person can feel like an uphill struggle because your everyday costs tend to be higher. From splitting bills, to holidays, to sharing pizzas, life can be cheaper when you're part of a couple. 

“These figures are illustrative, but our number crunching shows just how important it is for single people to build that long-term financial resilience. But despite needing to save more, single people often have lower disposal income due to additional costs – it’s a really tricky balancing act.

“And the difference doesn’t stop at retirement. If you want to achieve a moderate living standard, the PLSA has worked out that it costs £165,000 more to retire as a single person than as part of a couple – which is a daunting figure.”

Monthly pension contributions needed to reach a moderate retirement income

Despite needing to save more, single people often have lower disposal income due to additional costs – below are examples of some of the extra costs incurred by single people in just one year.

Bridging the gap and building individual financial resilience 

Esmund adds: “Although it’s possible to bridge the gap by starting early and by investing more, that’s going to be a tough ask for most single people. They are already facing steep living costs, so affording to put aside more money for investing won’t be possible for everyone.

“The good news, however – is that even small, but regular, contributions can make a huge impact over time, thanks to the magic of compounding. The key, though, is to start as early as you can. If you’re currently single, this could be a good time to try to prioritise your individual financial well-being.

“In theory, to achieve the same standard of living in retirement, a single person would have to start saving 16 years earlier than someone in a couple - assuming the same level of monthly savings, adjusted for inflation. A 22-year-old single person could achieve a moderate retirement by saving £290 into their pension each month until they hit the state pension age of 68.

“By contrast, someone in a couple could achieve a moderate retirement if they start saving £290 from age 38 - 16 years later. A single person who begins saving into a pension at age 38 would need to save £585 each month to achieve a moderate retirement (all amounts are in today’s money).

“It’s impossible to predict the future, and many people end up single in retirement due to divorce or bereavement. In fact, more women are living in poverty in retirement, partly because they live for longer on average, often outliving their partner or spouse. Also, older women also face poverty in retirement as they are more likely to live on their own, and this makes it harder for their money to stretch. This all goes back to the importance of building long-term financial resilience – because life can throw us all sorts of challenges.

“Retired couples, however, benefit from two state pensions, as well as two private pension pots, so can achieve a moderate retirement income with a much lower level of retirement saving. They need a private pension pot of £165,000 to achieve a joint after-tax income of £43,900. Whereas a single household needs a pension pot of £330,000 to achieve an after-tax income of £31,700.”

Quick tips to feel more in control of your pension savings and help build financial resilience

• The state pension
  • A great step on greater pension control and clarity is to get a state pension forecast. If there are any gaps in your national insurance (NI) record – you need 35 qualifying years to receive the full amount – the sooner you can plug them, the better
  • While the state pension can provide a valuable source of income in later life, it alone is unlikely to be enough to achieve a comfortable lifestyle. The key is to think about how you would like to spend your time in old age and work out how much you’ll need every year to live the life you want. The earlier you can think about this, the better
• Maximise your workplace pension if you can
  • Employers must pay at least 3% of ‘qualifying earnings’ into your pension, provided you pay 5%. And some workplaces offer pay in more, though you might have to increase what you contribute to receive it. As this is essentially free money, it can be savvy move, and means your employer is doing more of the heavy lifting

• Take control of your personal savings
  • If you are able to do so, consider topping up your savings, which you can do by putting more each month into your workplace scheme or setting up a separate personal pension
  • If you’ve maxed out your workplace benefits, or are self-employed, a great way to put yourself in the driver’s seat is to open a Self-Invested Personal Pension (SIPP). It gives you choice and flexibility, but you must be happy to make your own investment decisions
• Consolidation 
  • Finally, a task that can put you further down the track without any extra funding is to round-up any lost or misplaced pensions. This can make things easier to manage and reduce your fees (this can have a big impact on your retirement pot) – just make sure you don’t lose any valuable guarantees in the process.

Note on calculations:

• All amounts are stated in today's money.
• Inflation means that £330,000 (the current amount needed for a moderate retirement) will be £820,000 by the time someone aged 22 reaches the state pension age of 68. They would need to start with initial contributions of £290 to get there
• The calculations assume their contributions would rise by 2% each year in line with inflation. This means a 22-year old contributing £290 a month would pay £400 by age 38

If that 22-year-old waited 16 years to start their pension, until 38 years old, they would need to pay £800 per month to reach £820,000 by retirement (this is £585 in today's money based on inflation of 2%).