Do we need to consider the UK’s housing and pensions strategies together?
The pattern of home ownership appears to be changing in the UK, with a growing number of retired renters. But could this pattern be different, if early access to pension was allowed to help fund a home deposit?
Such a radical change in approach would require a rethink of many of the assumptions upon which the pension sector operates.
As well as focusing on the quantum of retirement savings and increasingly how to covert those savings into a sustainable income, there may be a need to look at spending.
Given that mortgage costs reduce and then cease at the end of the term, but rental costs could last for a lifetime and, of course, increase, it does beg the question could we use the pension system to help people buy property, at least to get on to the housing ladder and deal with one big area of spending. Certainly, the stakes seem to be increasingly high.
Age UK began a campaign last December seeking more protection for retired renters from eviction. It wants the repeal of Section 21 the Housing Act that allows no fault evictions.
The charity asserts that in England more than three quarters of a million people over 60 are “locked out from having security”, simply because they rent from a private landlord.
The Age UK analysis of the English Housing Survey 2017-18 suggests that around a third (33.6 per cent) of people aged 60 or over living in the private rented sector have a household income below 60 per cent of the median household income (after housing costs).
In contrast, the proportion of people aged 60 or over living in owner occupied homes with a household income below 60 per cent of the median household income (after housing costs) is estimated to be 7.3 per cent.
The Office for National Statistics looked at the issue most recently in 2020, though based on statistics from a few years before.
It corroborates many of Age UK’s concerns. The ONS found that “After paying housing costs, those renting (privately or socially) have lower incomes than homeowners. Households containing an older person in the social rented sector have low incomes on average, so despite having small properties (one bedroom on average) and low housing costs, income after paying rent is still low.
“Around a quarter of households containing an older person that rent privately or socially have £250 or less left each week after housing costs, compared with 16 per cent of those with a mortgage and 9 per cent of those who own outright.”
It also found issues with poorer housing quality and said renters have more health issues.
Pension fault lines
But if this is the problem now, it looks set to get worse. A report, published in November by the Pensions Policy Institute and sponsored by Aviva described renters in retirement as the fault line in the pension system.
The statistics and projections in the report are chastening. According to the analysis, if patterns of home ownership among today’s 45 to 64 year olds persist through to retirement, by 2041 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.
In total the PPI predicts the number of households renting in retirement could rise to 3.6 million, of whom 1.7 million would live in the private rented sector, around 1.2 million more than today.
This has significant implications for the benefits system. The PPI suggests that as many as 400,000 more households could become dependent upon income-related pensioner benefits.
The report discusses the siloed nature of pension policy in the UK and is critical of the current policy mix and industry assumptions.
The report adds that “assumptions underpinning key components of the UK pensions system may no longer adequately reflect the diversity in housing and other circumstances of future pensioners.”
It also notes that by its nature, the pension system, including pension freedoms, tends to help mortgage holders.
“Prospective homeowners cannot use their pension savings to fund a house purchase, but homeowners can use their tax-free lump sum to pay off or pay down outstanding mortgage debt,” it says.
It also notes that in the US, New Zealand, South Africa and Switzerland, pension assets can be used to purchase a home although the mechanisms vary.
It also gives a handy pros and cons list. Given tax relief, you can save for a deposit faster. Downsides include the fact it would still benefit the wealthy more.
Support for early access
Yet corporate advisers we spoke to generally favoured the change. Mark Pemberthy principal, benefits consulting leader at Aon would also incorporate a short-term savings strategy.
He says: “A joined up strategy on saving and wealth would be very welcome — not just including pension and housing but also including resilience, as low/non-existent levels of short-term savings also has a significant short and long term impact. Renting is one of the biggest variables so we do need to be more explicit about the impact of different household circumstances on retirement timing and lifestyle.”
Does the pension industry need to adjust its assumptions about retirement spending demands?
“This was a silent issue when most retirees had just DB pensions,” Pemberthly says, “as there was limited ability to flex retirement income. However as more people retire with just DC and non-pension saving it is more important that people are able to make informed decisions about retirement income and capital needs, not just in relation to housing but also in relation to how lifestyle might vary during retirement. It is difficult to navigate between not drawing enough income and drawing too much and we need to get better at being able to guide and support people on this journey.”
He adds: “We already have something which does this the Lisa (Lifetime Isa), but it is completely separate from mainstream DC pensions so there is no clear pathway for balancing liquid savings, house purchase and long-term savings. The inconsistent interaction with different savings products and benefits just makes a confusing situation even more confusing and really difficult to signpost good holistic saving habits.”
Learning from the US
CanScot Solutions principal Robert Reid believes the US 401k system can be adapted to the UK: “Say you have $50,000 and you want to borrow $25k to get on the housing ladder. You have to pay it back in. You are almost acting like you are a gilt, the fixed interest part of your pensions savings. You know you are going to get the principle back and the yield. Most would have an element of fixed interest. You are not really changing much in terms of asset allocation.”
However he warns that there needs to systems that can cope with these changes and payments, as it will fall to providers to facilitate this.
He says that as soon as you do this, you are getting very personalised and that it might not be easy to facilitate, particularly through newer pension developments like CDC. But generally, he has says he has always believed it is a good idea.
“I have promoted it in the past and been told to behave myself. I think it would work as a disciplined way of giving access. It would mean that people would contribute to their pension, instead of stupid things like Lisas. I couldn’t see why you might not give a bonus for paying back early. We have been lacking creativity to get people to save for a long time. We need to try and fit ourselves into the way people really think about life. It may mean people would be more likely to put more money into their pension.”
Cavendish Ware director, strategic partners Roy McLoughlin says that his firm works with lots of US-owned companies and employees, whose pensions can be used for deposits, as part of remortgaging and sometimes downsizing strategies. If it works in the US, he sees little reason why it would not do so in the UK he says.
However, he says it needs to be done with advice and certainly not as a do-it-yourself option. He says there needs to be a minimum saved, before it can be done, potentially a six figure sum.
He adds: “It can’t be good for society to have so many people renting in retirement.”