AE contributions could be entirely absorbed by rental costs in later life, according to new research, which calls for new ways for pensions to help first-time buyers.
Hymans Robertson’s report, Tapping the potential of property and pensions, highlights the impact of falling home ownership on retirement income.
The firm’s modelling shows that those who rent in retirement could use up the full minimum auto-enrolment contribution simply to pay for housing, meaning their workplace pension won’t contribute to a better standard of living in retirement at all.
Other pension experts have also raised the issue that AE savings could mean retirees don’t qualify for state benefits, designed to cover rental costs.
Hymans Robertson calls for pensions to deliver “new pathways to property ownership” which it said could also boost engagement with workplace pensions.
This report sets out a number of innovative approaches to achieve this, enabling workers to purchase a property while still saving for retirement. Hymans Robertson claims its modelling shows this approach could boost retirement income by 100 per cent.
As a result it is calling for the Government, the Pensions Commission and wider financial services to be bold when it comes to tackling this key barrier to retirement adequacy.
The paper also includes evidence of the growing risk of rental-based poverty in retirement. According to the Pensions Management Institute, the number of renters in retirement is set to increase threefold over the next 20 years as home ownership falls and the population ages, with an estimated cost to the Treasury of £15.4bn.
Lack of home ownership was also cited as a key barrier to an adequate retirement by the Pensions Commission’s interim report. Hymans Robertson argues that while it’s vital that the supply of affordable housing increases, given the lead time for change and the current pensions reform window of opportunity, pensions policy and product innovation also have a role to help people buy a home without undermining retirement income.
Hymans Robertson partner and head of pensions policy innovation Calum Cooper says: “Renters retiring will need the full 8 per cent minimum pension contribution savings to provide an income just to cover the cost of rent.
“This shows how fragile the pensions and property systems have become. If we fail to do something during this period of pensions reform, then there’s a risk of a ‘lost generation’ of impoverished renters in retirement – and they will wonder why they saved into pensions rather than buying their own home.
“Workplace pensions were designed to provide additional income to live in retirement. They were never intended to fund rental costs alone. Our analysis raises serious questions about whether the current pensions system can deliver adequate outcomes for future retirees who, much evidence suggests, are increasingly likely to be renting.”
He adds: “We know that home ownership is one of the strongest foundations for financial security later in life. Without it, far more people are exposed to the risk of poverty, instability and difficult financial choices throughout retirement. This is why we need to think differently; pensions and housing cannot be treated in isolation.
“The industry, supported by government, should be bold and find ways for pensions to support access to home ownership without compromising their long-term purpose.
“Targeted flexibility will be key. So, as outlined in our paper, whether this is done through looking at using pensions savings as a deposit, addressing scheme design, increasing employer contributions or using pensions savings as a loan condition, innovation is needed.
“Ultimately, this is about making the system work harder for people. But it will also help society. With the right thinking and collaboration, we can help give individuals a more secure retirement income and massively increase engagement in pensions, as they become the keys to unlocking value earlier in peoples’ lives.
“This can come with the stability of owning a home, rather than forcing a trade-off with pensions. We need to be thinking ahead for the world as it will otherwise be in the 2030s and invest our time to make the change now. By putting mechanisms in place through the current parliamentary term, we have a chance to change the system in the 2030s and prevent a generation reaching this cliff edge of inadequacy before it is too late.”