Retiring on your own costs more – here's how to fund it

When you are on your own, most things in life come with a higher price tag. Holiday for two: cheaper than solo travel. Council tax if you live by yourself: there’s a 25 per cent discount but that's it. Taxes: higher. And on it goes, to the point that the media routinely refer to this phenomenon as the ‘single tax’, or the ‘single penalty’.

A ‘single retirement tax’ also exists: you need a lot more to retire on your own than to retire as a couple. With defined-benefit pensions becoming increasingly rare in the private sector, single people in defined contribution plans must either contribute more to their pots, invest more aggressively or keep working for longer to afford the same standard of living in retirement that someone in a couple might be able to achieve. 

A costly endeavour

“Retiring as a single person can be much harder than it is for a couple, mainly because you only have one income coming in to fund your retirement,” says Lucie Spencer, director in financial planning at Evelyn Partners. “Just because only one person is retiring, it does not mean that living costs automatically halve. Instead, a single person must shoulder all the household bills on their own.”

The question of ‘how much money you need for retirement’ boils down to how much you expect to spend, and how big your pension pot needs to be as a result. The chart below compares the expenditure and income needs of a single person with those required by someone in a couple. The figures are based on the Pensions and Lifetime Savings Association (PLSA)’s latest retirement living standards, which every year estimate the cost of living in retirement according to three different grades. 

The gap, as the chart shows, becomes more pronounced as your standard of living improves. If you have more money, you tend to do more things that are proportionally more expensive for single people, such as travelling or owning a car. For example, the PLSA comfortable living standard includes a fortnight holiday in the Mediterranean in a four-star hotel: this is costed at £2,744 per person for a couple, but at £3,225 for a single person.

The gap between singles and couples also grows if you look at how much gross income you need to afford the same level of expenditure, or to have the same net income. This is because couples enjoy a better tax treatment: they have two sets of tax-free personal allowances worth £12,570 each, and start paying the 40 per cent rate on a much higher level of income.

Single people need to accumulate a much chunkier pension pot as a result. Just how chunky depends on a range of factors, including your investment and retirement strategy, and it’s always better to build a personalised plan. But the chart below gives you an idea of just how much more single people might need to save. While a couple might be able to live on just two state pensions, a single pensioner will need extra savings even to achieve a very basic standard of living.

Keep in mind that these retirement standards don’t account for everything. It is assumed that by the time you hit retirement age, you will own your home mortgage-free. If you live alone and have to add mortgage repayments or rent to the equation, things become proportionally even costlier.

James Corcoran, chartered financial planner at Lumin Wealth, adds that not having a partner by your side as you age can be tough and result in additional expenses. “Everything falls on the single retiree – from household chores to decision-making. This can increase costs, as they might need to pay for services that a partner might otherwise provide, such as home maintenance or care in later life,” he says.

Care can be especially costly, especially if you don’t have a wider family or support network that can pick up some of the slack. Corcoran suggests looking at insurance options, such as long-term care insurance or critical illness cover, to mitigate this risk. 

David Goodfellow, head of wealth planning at Canaccord Genuity Wealth Management, notes that care costs can also be higher for a single person. Of course, not many couples will choose to move to a care home at the same time – but for those that do and share a room, this can cost less per person compared with a private room for a single person. 

Funding options

Goodfellow argues that, in terms of the process itself, there is no difference in planning for retirement for a single person or for a couple. You still need to look at what you have, how much you need, how much investment risk you are comfortable with, and build a plan (a cash flow planning tool can help with this). The amount of money needed is the main difference.

But Corcoran says that single people might also face a higher longevity risk (the risk of outliving your money), especially if they live longer than expected. Couples can plan together and pool resources to mitigate this risk, for example by making sure that each partner is the beneficiary of the other’s assets if they pass away.

Married couples and civil partners also have a lot more tax-efficiency strategies at their disposal, including transferring assets between them to make the most of two sets of tax-free wrappers and allowances. Single people cannot do that, so they should focus on using the allowances that they do have.

But regardless of your marital status, all the usual tips about preparing for retirement apply. Making a plan early on to acquaint yourself with the magnitude of the challenge might motivate you to save more, or equally reassure you that you are on track. Time is very much your friend when it comes to growing your pension – the longer your time horizon, the more scope you have to set an aggressive investment strategy and let compound interest do the heavy lifting.

Make the most of your pension contributions while you are still working. Between tax relief, and potentially matching contributions from your employer, as well as salary sacrifice, you can get a lot of bang for your buck, particularly if you are a higher or additional-rate taxpayer.

Spencer also suggests using ‘carry forward’ to maximise your pension contributions. In any tax year, you can still benefit from any unused annual allowance from the previous three. “A large bonus, for example, can be put to work in a pension,” Spencer says.

Corcoran stresses the importance of diversification. “Single retirees should consider diverse income streams such as annuities, investments and savings accounts,” he says. “While couples might rely on multiple pensions or incomes, a single person needs a well-diversified plan to spread risk and ensure a steady income in retirement.”

For example, using part of your pension savings to buy an annuity increases the portion of guaranteed income you receive in retirement and could be a good safety net. One of the downsides of annuities is that if you die prematurely, your beneficiaries typically get nothing. But if you don’t have a partner or children, this may be less of a concern. 

Make sure your investments are adequately diversified, too. Again, this applies to any portfolio, but if you rely on a single pot of money, it must be well run. Once you start drawing income from the pot, you will need a sufficient cash buffer to ensure you can access money without selling investments during downturns, in order to mitigate sequencing risk. This is the risk that being forced to crystallise losses at the wrong time could hamper the longevity of your pot.

If you are close to retirement and realise your pensions are not enough to fund the lifestyle you would like, you could also consider freeing up wealth from your home.

Downsizing can be especially suitable if you have not always lived on your own. If you have children who are now living elsewhere, or if you are divorced or widowed, a smaller place might now suit you more than it once did. 

“If someone is widowed, selling the family home can often be top of the priority list,” says Spencer. “Either to release equity to help fund the surviving partner’s retirement, or to have a smaller more manageable abode to run without the memories associated with the former marital home.” If you do downsize, make sure to invest the sum obtained appropriately, so it can support you in the years to come. 

If you don’t want to move out, you could also consider equity release. But this option is only suitable for the later years of retirement, and even then, it can be quite expensive and inflexible. Goodfellow says that when presented with both options, his clients, once they look at all the details, typically end up opting to downsize instead.

Finally, Corcoran warns that single people need to be more proactive about inheritance tax (IHT) planning. When someone who is married or in a civil partnership dies, the assets automatically pass to their spouse tax-free, and typically IHT is only a concern when the second person dies. If you are on your own and want to reduce IHT on your estate, you should plan ahead and consider gifting, trusts and other IHT planning strategies.