Future retirees who continue renting throughout later life could need their entire workplace pension contributions simply to cover housing costs, according to new research that explores the relationship between pensions, home ownership and property investment.
In its latest paper, Tapping the potential of property and pensions, pensions and financial services consultancy Hymans Robertson argues that declining home ownership is creating growing financial pressure for future retirees.
Its modelling suggests that someone who rents in retirement may need the full 8% minimum automatic enrolment pension contribution, paid from the age of 22 throughout their working life, just to meet rental costs.
The report warns that this would leave workplace pensions contributing little or nothing towards other living expenses in retirement, with retirees relying largely on the state pension to fund day-to-day spending.
Alongside its analysis, the paper proposes a range of approaches designed to better connect pensions with home ownership. These include using pension savings towards a housing deposit, changes to pension scheme design, higher employer pension contributions and allowing pension savings to support mortgage lending conditions.
According to Hymans Robertson, these changes could encourage greater engagement with pensions while improving retirement outcomes. Its modelling indicates that the right reforms could increase retirement income by 100%.
The consultancy is calling on the Pensions Commission, government, the pensions industry and the wider financial sector to consider new ways of combining pensions policy with housing policy to address long-term retirement challenges.
Property investment and retirement security
The report also highlights what it describes as a growing risk of rental-based poverty among older people.
Drawing on figures from the PMI, it says the number of renters in retirement is expected to triple over the next two decades as home ownership continues to decline and the population ages. The associated cost to the Treasury is estimated at £15.4bn. The report also notes that the Pensions Commission's interim report identified a lack of home ownership as a significant barrier to achieving an adequate retirement income.
Hymans Robertson argues that increasing the supply of affordable housing remains important. However, it believes pensions reform and property investment through home ownership should also form part of the solution while wider housing measures take effect.
“Renters retiring will need the full 8% minimum pension contribution savings to provide an income just to cover the cost of rent," explained Calum Cooper, partner and head of pensions policy innovation at Hymans Robertson.
"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.
"This will be bad for the pensions brand. 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 continued: “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.”
Cooper believes the pensions industry and government should work together to develop more flexible solutions that support access to home ownership without weakening long-term retirement savings.
“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," he said.
"Targeted flexibility will be key. So, as outlined in our paper, whether this is done through looking at using pension savings as a deposit, addressing scheme design, increasing employer contributions or using pension 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 people’s lives.
Cooper concluded, "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.”
