The growing number of retirement renters is the biggest threat to retirement adequacy in the UK, with millions of tenants having no chance of saving enough to pay their landlord out of pension saving.
That is the sobering picture painted by Anna Brain, research associate at the Pensions Policy Institute (PPI), in a new report: Renting in Retirement – The Fault Line Below the UK Pension System.
The report describes a fault line opening beneath the UK pension system that could jeopardise retirement adequacy for over a million pensioner households by the early 2040s and lead many to dependency on pensioner benefits through later life.
Key to this impending crisis is the falling levels of homeownership amongst retired households.
The PPI’s research shows the proportion of households who own their own home in retirement could fall from 78 per cent to 63 per cent, while the proportion living in the private rental sector could rise from 6 per cent to 17 per cent, with the proportion in social housing remaining unchanged.
This could lead to 1.2 million more households in the private rented sector, meaning many more people in DC schemes needing to save for rent in retirement as well as living costs, compounding an already mountain-sized savings challenge.
The PLSA’s retirement living standards do not factor in rent – they make an assumption that individuals will not have housing costs in retirement.
But for a growing proportion of the population reaching retirement, a life on means-tested housing benefit beckons, creating significant questions over whether pension saving has actually been worthwhile for these individuals.
“The first thing that strikes me from this report is the magnitude and the scale of the upcoming challenge. The size of the population affected is huge – over one million households, and this trajectory is not going to change. We know this because by the time people get to age 45 their housing tenure is broadly fixed. This could change in the future – but would need structural changes for that to happen, across two areas – wealth and the housing market,” says Brain.
Framework formula
So how did this emerging threat come to the attention of the PPI? A long-term project it has set up with Aviva to create a multi-year analysis tool to monitor the ongoing effectiveness of the UK pensions system.
“Three years ago we set up the ambitious UK pensions framework, a multi-year strategic project that aims to see how the system is working at any point in time. Our focus is on adequacy. sustainability and fairness. In 2022 we put all the data in and we identified falling home ownership – specifically 45 to 64-year-olds are at the most immediate risk. And we created a ‘what if’ scenario based on if they reach retirement without any meaningful change in housing tenure, what happens. This helps understand how housing sits into the overall retirement provision picture,” she says.
Bleak picture
The PPI’s report makes for grim reading for those not owning their own home when they retire. It predicts that a couple aged 45-64 today on median income may need to double their total assets or more if they are to privately rent even a one-bedroom flat outside London through later life.
It estimates an extra 400,000 households could become dependent upon income-related pensioner benefits, at a time when renewed concerns over the sustainability of the benefit system, including the freezing of the Local Housing Allowance, are prompting uncertainty over the extent to which the state might intervene to support people with living costs through later life.
It predicts that rates of relative and absolute poverty among pensioners could rise by 2 per cent, and an additional 170,000 households outside London could be precluded from meeting minimum living standard targets in retirement, of whom more than two thirds live on their own.
Ethnic minority groups are much more at risk, and the phenomenon impacts areas outside of London and the SE just as much as in the capital, where house prices are so much higher. Northern Ireland is an exception, with high levels of home ownership.
Unforeseen consequences
Brain points out that part of the reason for the current cohort of non-home-owning pre-retirees is the regulatory response to the global financial crisis of 2008.
“It is worthwhile reflecting why so many more people are renting. Many of the 45 to 64 age group households currently renting privately have never been able to get onto housing ladder because of stricter lending criteria after the financial crisis and rising house prices fuelled by low interest rates. With an average of 10 years left for this group there are not many opportunities to get onto housing ladder. Renters have lower levels of saving and pension compared to those with mortgages, and that tells us these assets aren’t going to be a solution,” she says.
“So we need to look at the housing market. Last time home ownership was low among this age group there was more social housing. One reason is right-to-buy – but that supply of social housing has never been replaced. We have an increasing supply of private housing, but it is out of reach for many. Increased social housing in the numbers required is extremely unlikely to happen. So we need to look for other solutions – it may be reforms to rent, that could be part of the solution, or reforms to means-tested benefits. If we do nothing, public spending will be required, either in increased social housing – or means-tested benefits,” she says.
Housing benefit challenge
One particular challenge for the pensions industry is the extent to which pension saving may not have proved to be as effective for this growing cohort of retirement renters as it is for everyone else. Corporate Adviser has received communications from advisers reporting big offsets, in some cases as much as 100 per cent, in cash-flow modelling tools, when private pension is factored in, suggesting a significant disincentive to save for many. Housing benefit calculation regulations are extremely complex and pinning down the exact level of disincentive renting pension savers may experience is difficult. But it is clear that they are a long way from receiving a pound for every pound saved. This effect is reminiscent of the concerns over means-tested pension credit that existed when Lord Turner conducted his pension commission reports, ultimately resulting in the single-tier pension.
So how should the industry respond to this growing threat to pension value for some retirees?
Policy options
Brain says: “We don’t make policy recommendations – our role is to present the evidence and highlight the implications. But it is true that the extent to which people have private pension savings will impact their eligibility for means-tested benefits such as housing benefit. This opens a conversation on what auto-enrolment means for low earners.”
So is there a 100 per cent offset and if so, what should we do about it? “There is an argument to say that we need to revisit the means tested benefits system – auto-enrolment has been a huge success in terms of coverage. But we know there are groups for whom it isn’t working perfectly – so we need to look at how we deal with that,” she says.
And are there groups who would have been better off not saving? “There will always be people who look back and think a different course would have been better – but it is very difficult to identify who they are going to, and it is not certain they will be on the same journey throughout their life. Income can go up or down. We need to look at the broader savings journey and other factors such as owning one’s own home or affordable housing,” she says.
“One of the challenges around tackling this is there is no consensus target on how many people should own a home in retirement. Without that consensus it is hard to design any policies to tackle the problem this cohort faces,” she says.
Pension dipping?
Is one solution to give access to pension for first property purchase – to enable those with insufficient sums to save for a deposit the ability to move from being renters to homeowners, thereby potentially giving them greater financial resilience in retirement, and making their pension saving more meaningful? One solution that has been floated is the idea of the pension pot buying in partnership with the individual. For example, the pension buys a 10 per cent stake in a home with funds from the pot, providing the deposit, with the individual arranging a mortgage for the other 90 per cent. The individual then pays a 10 per cent rent into the pension. At a later date the individual may remortgage to raise funds to buy out their pension, with the payment going into the pot. Brain is not convinced for today’s pre-retirees.
“For this age group it isn’t the solution – the renters we are concerned about do not have sufficient savings to even start to get on the ladder.
“A couple aged 45-64 on median income will have £60,000 in pension savings and £30,000 in other assets. Although these numbers are sizeable, because they have short time left to retirement there won’t be enough time to pay off the mortgage. There’s an increasing number of calls on pensions – long term care funding being another.
“The other complication is that where there are fiscal incentives to increase home ownership, those with the highest income typically do best,” she says.
“But when it comes to younger age groups, there is a conversation to be had, although we would also have to consider the demand that would place on the housing market.”
Joined-up thinking
Her own journey into pension policy is born of a focus on later life issues following a long period of caring for her parents, which highlighted the immense challenges individuals and families can face when navigating extremely complex and stressful personal circumstances. This spurred her on to a master’s in public policy and ageing, and a desire to move into shaping the way government and other stakeholders shape the world.
For Brain, the report’s findings are a classic example of the need for greater co-ordination across government. “We’d like to see greater collaboration between policy areas. The reason this issue has occurred is because of the fracture of the relationship between housing and retirement. Policy sectors would benefit from working closer together. When it comes to policy, retirement is multi-dimensional.”
BOX: All About Anna Brain
Brain has worked with the PPI since 2019, and has undertaken analysis on a range of topics, intergenerational trends in long-term saving; pension systems and their sustainability; structural and social determinants of health, wealth and digital inequalities; interactions between pensions, health and social care policy; and evolving transitions in later life. She says she aims to contribute to independent and evidence-based research which can make a difference in peoples’ lives.
Prior to joining the PPI, she worked closely with asset, investment and pension fund managers for nearly ten years at EY and Bloomberg before pursuing her passion for policy research and thought leadership. She has a Master’s degree in Public Policy and Ageing with distinction from King’s College London, which focused on economic, health, social and policy concerns in the management of population ageing, demographic change
and the Covid-19 pandemic.