"To drop from an almost guaranteed (98%) chance to a 43% likelihood of achieving the Minimum standard is a huge drop that should not be understated"
- Hannah English - Hymans Robertson
Paying rent in retirement cuts the likelihood of achieving the UK’s Minimum Retirement Income standard in half, new modelling by pensions consultancy Hymans Robertson has found.
Using its Guided Outcomes (GO)™ tool, the firm assessed how likely different savers are to meet the Pensions and Lifetime Savings Association’s (PLSA) updated Retirement Living Standards (RLS). The analysis showed that housing costs are one of the most significant factors influencing income sufficiency in retirement.
The PLSA's recently revised RLS defines the Minimum standard of retirement income as £13,400 per year, while the Moderate and Comfortable benchmarks are set at £31,700 and £43,900 respectively. Though the Minimum level is intended to be achievable for most, particularly since the recent RLS update brought it closer to the level of the state pension, the ability to reach that target declines sharply when ongoing housing costs are factored in.
For example, someone earning £20,000 annually and contributing 8% to their pension – including employer contributions – has a 98% chance of reaching the Minimum income standard. However, when rent is deducted from their projected retirement income, their chances fall to just 43%.
“Our analysis spells out how big a difference paying for housing makes in dictating an individual’s quality of life in retirement,” said Hannah English, head of DC corporate consulting at Hymans Robertson. “To drop from an almost guaranteed (98%) chance to a 43% likelihood of achieving the Minimum standard is a huge drop that should not be understated.”
The research also underscored the limitations of the current minimum pension contribution levels under auto-enrolment. According to English, an 8% contribution rate is unlikely to deliver either the Moderate or Comfortable retirement income levels for average earners.
“We believe an increase of contribution level to 12% must be put in place if the chances of a better retirement are to be achieved,” she explained. “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.”
In addition to pension contribution reform, Hymans Robertson is advocating for a closer link between retirement planning and home ownership. English proposed that pension savings could be used as collateral for first-time buyer mortgages. This would allow savers to get on the housing ladder without needing a deposit, while still keeping their pension funds invested.
“One way to improve the adequacy of living standards in retirement, and also to 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,” said English. “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.”
She added that while such an approach could help reduce the cost burden in later life, it would not solve the lack of affordable housing. English pointed to the government's recent pledge of £39bn for social and affordable housing as a step in the right direction, provided it results in a meaningful increase in housing supply.
“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 said.
English concluded by stressing the need for further government action on retirement adequacy. “The government has a crucial role to play in making a desirable retirement achievable,” she noted. “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.”
Hymans Robertson's modelling took into account various individual factors such as salary, age, retirement age, and investment choice. The data was presented in a colour-coded matrix that visually illustrated how housing costs shift an individual's likelihood of reaching the Minimum income standard, with stark contrasts between those with and without rental expenses in later life.
