Retirees will have to have paid the full 8% of earnings via Automatic Enrolment contributions into a pension every year from the age of 22 just to cover the cost of renting in retirement, according to new analysis from Hymans Robertson. In its new paper Tapping the potential of property and pensions, they explore the impact of falling home ownership on retirement income. The firm’s modelling shows that those who rent in retirement could use up the full minimum auto-enrolment contribution simply to pay for housing.
This means their workplace pension won’t help to fund any of their lifestyle in later life and they’ll only have the state pension to pay for all other outgoings. The paper sets out a number of innovative approaches linking pensions with property that could help people purchase a property and still save for retirement. The firm claims introducing these types of innovations could increase pensions engagement with its modelling showing that it could boost retirement income by 100%. It calls for the pensions commission, industry, financial sector and government to be bold and innovative and look at these types of approaches to tackle this key barrier to retirement adequacy.
The paper includes evidence of a growing risk of rental-based poverty in retirement. According to the PMI, the number of renters in retirement is set to increase threefold over the next 20 years as home ownership falls and the population ages, with an estimated cost to the Treasury of £15.4 bn. Lack of home ownership was also cited as a key barrier to an adequate retirement by the Pensions Commission’s interim report. Hymans Robertson argues that while it’s vital that the supply of affordable housing increases, given the lead time for change and the current pensions reform window of opportunity, pensions policy and product innovation also have a role to help people buy a home without undermining retirement income.
Commenting, Calum Cooper, Partner and Head of Pensions Policy Innovation at Hymans Robertson, said: “Renters retiring will need the full 8% minimum pension contribution savings to provide an income just to cover the cost of rent. 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.
“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.
“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. Targeted flexibility will be key. So, as outlined in our paper, whether this is done through looking at using pensions savings as a deposit, addressing scheme design, increasing employer contributions or using pensions 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 peoples’ lives. 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.”
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