A “rapid collapse” in homeownership over the past 20 years could cause significant financial problems for future retirees, who may have inadequate pension savings to meet rising rental costs.
Speaking at Corporate Adviser’s summit in Windsor the Pensions Policy Institute’s research associate Anna Brain told delegates that while much of the focus of the housing crisis has been on the difficulties of those in the 20s and 30s getting onto the housing ladder, the decline in home ownership among the 45-64 age group — the so-called generation X — remained “one of the biggest risks to the pension system.”
This issue is exacerbated by the fact that this group will largely be reliant on DC rather than DB pension savings and have not benefited from AE contributions for their entire working lives. “There are already questions about declining pension adequacy for this group,” she said, “and this is before the issue of higher numbers paying rent in retirement is taken into account.”
She said there was a need for government and policymakers to take a more holistic look at both housing and pensions together to tackle this problem and to ensure people have adequate resources to maintain living standards in retirement.
Brain said: “There has been a fracture between pensions and housing, and the two systems are no longer aligned.”
She pointed out that this has been partly due to the fact that most recent generations to have retired have benefited from rising levels of home ownership. Currently home ownership among the over-65s is at its highest ever level — at about 80 per cent. But this look sets to decline in the years ahead, with homeownerships levels declining among younger generations.
Figures show that home ownership among the over 65s has risen, from 71 to 78 per cent over the past 20 years. But among the 45-64 age group this number fell, from 81 to 68 per cent, while home ownership levels have fallen from 64 to 48 per cent among the under 45s.
Brain said: “While the situation looks worse among the younger adults, many of those will subsequently move from rental accommodation to home ownership.”
She pointed out that a change of tenure becomes less likely once people are over 45, with those in this age group having a relatively short space of time before retirement to save for a deposit. Those buying at this age are likely to face significantly higher mortgage repayments (if the mortgage is to be repaid before retirement) or see mortgage payments stretch well into retirement. As a result there is expected to be higher number of those in rental accommodation moving into retirement in future.
Brain pointed out that this fact needs to be factored in to pension policymaking. “At the moment there are a number of embedded assumptions , with measures of pension adequacy for example often calculated after housing costs, which assumes homeownership or secure affordable tenure.”
Statistics published by the PPI show the financial difficulties future retirees could face if they are still paying rent. This problem Brain says has been made worse by the in decline in social housing — which tended to offer more affordable and secure long-term rental contracts — and the rapid rise in private rents over the past couple of years.
Brain says that for the South of England and Scotland the median rent was now 80 per cent of average pension income, while in London the median rent was 130 per cent of the average pension. For the rest of England, median rents were equivalent to around two-thirds of the average pension income.
The PPI calculated that rental costs for a one-bed flat outside of London total £9,000 a year. This equates to £190,000 over a retirement – assuming average longevity.
Brain pointed out that among the 45-64 age group those living alone, on lower incomes, or those living in the North East, North West, South West, Yorkshire and Humber and London were more likely to be living in rental accommodation, while there was also a higher number of men than women in this situation.
When it comes to addressing this complex issue Brain said that policymakers have to look at a number of housing and pension issues.
When it comes to pension policy there was considerable support among the delegates attending the debate for more flexible pension policy that would perhaps allow people to access pension funds earlier for a first house purchases – similar to a 401k in the US.
Brain said that while this is a pensions issue, pension policy alone cannot solve the issue, and it requires a joined up approach to housing, retirement savings and benefits to come up with a range of solutions. People need to have better information on how taking tax-free cash from pensions for example may impact their ability to claim housing allowance she said.
Any solution also needs to address housing policy. “It is not just a case of the failing to build enough houses, the problem is we have not been building the right sort of houses,” she said. “As well as looking at building affordable homes to buy we also need to ensure there is sufficient housing stock that is affordable to rent.”
Brain says this was a complex problem and it would not be solved simply by looking at how policy can reverse the decline in home ownership. She said it was more important to ensure people have a choice of tenure so can make the decision that is right for them and their individual circumstances, in order to ensure greater levels of adequacy and fairness when it comes to retirement savings.
