Paying rent in retirement halves the chances of people being able to afford even a minimum standard of living once they stop work, according to new research from Hymans Roberston.
Modelling done by the pension consultancy shows the impact home ownership, or lack of it, can have on retirement prospects. As a result it is calling for government to “think creatively” about how pensions could be used to help people get onto the property ladder, removing the need to pay rising rents in retirement.
Tthe Pensions and Lifetime Savings Association (PLSA) suggests that individuals need an income of £13,400 a year to afford just a ‘minimum’ standard of living in retirement, rising to £31,700 for a ‘moderate’ standard of living and £43,900 for ‘comfortable’ retirement.
The minimum standard of living in retirement has previously been considered highly achievable – and the PLSA’s recent update to these retirement living standard brought it within reach of many more retirees, as it estimates the minimum income needed is now only slightly higher than the state pension.
However these figures assume there are now housing costs to pay in retirement. Hymans Roberston’s figures show that this can make a “fundamental difference” to whether people will be able to reach this minimum living standards or not.
It calculates that if people were helped to purchase a property while saving for retirement, using pensions savings as collateral — then this could help reduce the rent burden in retirement.
An individual earning £20,000, with a joint employee plus employer pension contribution of 8 per cent has a 98 per chance of achieving the minimum standard in terms of their income. However, if the cost of housing, which at this age is likely to be rent, is taken out of this retirement income they only have a 43 per cent chance of reaching this minimum standard.
Hymans Robertson head of DC Hannah English says: “Our analysis spells out how big a difference paying for housing makes in dictating an individual’s quality of life in retirement.
“To drop from an almost guaranteed chance to a 43 per centlikelihood of achieving the minimum standard is a huge drop that should not be understated.
“The other major finding from our research is that the current 8 per centminimum under auto-enrolment (AE) is unlikely to provide average earners with either comfortable or moderate standards of living in retirement.”
Hymans Roberston has previously stated that it thinks a contribution level of 12 per cent should be put in place, to help boost retirement outcomes. English adds: “We also set out that AE should be extended to all workers, not just those earning over £10,000. Both of these changes will help workers achieve better standards of living in retirement and, in tandem, help to close the pensions gender gap, benefitting over one million female workers.”
When it comes to addressing this issues around housing English adds: “One way to improve the adequacy of living standards in retirement, and reduce the number of those renting in retirement, is to allow pension savings to be used as collateral for mortgages – for first-time buyers only.
“This arrangement would let people get on the housing ladder without a deposit, and benefit from lower interest rates as lenders take on less risk of negative equity.
“Crucially, the money in the pension would still be invested – just in property, rather than in bonds or equities. Alongside the investment, the likelihood of someone being ladened with paying rent throughout retirement is reduced as they could have paid off their mortgage by the time they reach retirement.”
She adds: “What our proposal does not fix is a lack of affordable housing. For our idea to work most effectively, there needs to be more social housing available for people to buy. It’s for this reason that we welcomed the government’s £39bn commitment to social and affordable housing over the next ten years in the recent Spending Review. We hope this will move the dial in fixing the supply-side problem of getting more people on the housing ladder, as it would significantly improve their chances of reaching the PLSA’s minimum standard of living in retirement.”
She adds: “The government has a crucial role to play in making a desirable retirement achievable. This government has engaged with the industry and hit the ground running with their focus on pensions, as seen in the recent Pension Schemes Bill and Pensions Investment Review. But as these numbers show, there are still near-endemic issues in the UK regarding people reaching a desirable standard of living, or even being able to afford to retire. Our proposals would help improve the standard of living for the UK workforce after they punch their timecard for the final time.”
The firm calculated future retirement incomes by considering member specific characteristics such as age, salary, assumed investment choice and retirement age.
