By Tom Murray, Head of Product Strategy, Exaxe.
The industry has a tendency to pass over those living in rented accommodation. The presumption has always been that renters are all saving in order to get a deposit for a house. Given the difficulty in getting onto the housing ladder in the UK, this is a huge task.
Therefore, it is assumed that renters are disinclined to slow down the process by putting money towards any other financial goal. It is when they finally get a home that financial advisers believe they will have the ability to lift their eyes towards other financial goals and start thinking about their broader financial position.
Times have changed, however, and home ownership is falling in the UK. From a high of 69% in 2001, it has now dropped to 64% and there is every sign that this trend will continue. More and more people are now facing a future of permanently renting. This new generation, labeled Generation Rent in the popular press, has lost hope of ever purchasing a home of their own. They are making their life plans based on the idea of permanently renting.
These renters are a group that tends to be ignored by the life and pensions industry. Adverts for income protection, for example, are endlessly pitched at young couples and families moving into new homes and are based on their need for protection to stay there.
However, if people are permanently renting, they are just as much in need of income protection to maintain a roof over their heads as those who have a mortgage. Perhaps even more so, as landlords are more likely to move quickly to the eviction stage in the event of payment arrears than a bank or building society would be to move to the expensive and legalistic option of repossession. After all, those who have invested in the buy-to-let market are often in need of the rent as part of their own retirement income. The same applies to critical illness and other protection products.
The other primary difference is, of course, the need to provide for an income post-retirement. Whilst that need applies to all individuals, most mortgages are designed so that they will be paid off at, or close to, retirement age. This gives the homeowner the security of knowing that, with a roof over their head, they will be able to live on the minimum of just a state pension. It might be a basic lifestyle but at least it is a solid base, below which they cannot fall. Their minimum income requirements drop heavily just at the moment that they stop earning.
This isn’t the case for Generation Rent. The need to pay rent will not change just because they have finished earning. Whilst the homeowners have the luxury of calculating a reduced income need in retirement, Generation Rent’s income requirements will actually stay the same or, indeed, increase. Therefore, a financial plan is needed earlier than ever to cover off how they will actually cover their housing needs in retirement. With sharp reductions in social housing, most Generation renters are stuck in the high-cost, high-turnover private rented sector.
As such, they are going to need a lot of support from the taxpayer or else the government will need to encourage a much higher level of pension saving.
Without doubt, Generation Rent is going to have a far more difficult time supporting itself when things go wrong. Its dependence on a high stream of current income and lack of the valuable asset that a house represents means that there is even more pressure on them to save from an early age. Government support for those in rented accommodation may not extend to keeping them in the exact place they were able to afford when working. Thus older renters face the prospect of having to move to cheaper accommodation, without any of the benefits that homeowners receive when downsizing, i.e. a large lump sum.
The L&P industry needs to wake up to the needs of Generation Rent. We have got to stop seeing this market as just a transient one and provide them with the financial products they need. It is vital that both the industry and the government seek to educate people so that they are planning from an early stage rather than just drifting towards their retirement without realizing how fundamentally different it is to rent in retirement rather than to actually own the house one is living in. Otherwise the amount of support required by this section of society will pose an almost impossible burden on the ever-shrinking workforce of the future.
|
