By Dale Critchley, Workplace Policy Manager, Aviva
The report is an early warning of a potential challenge to adequacy created by a reduction in home ownership, and an increase in the number of pensioners who could be living in more costly privately rented accommodation.
The report makes a compelling case to re-examine the traditional model of retirement. A model which is predominantly based on defined benefit pensions - making up around two thirds of income - combined with the state pension, to provide almost one hundred per cent of retirement income without the major financial burden of housing costs.
The PPI report reveals just how far we could move away from that model if current rates of home ownership and private renting persist into retirement. Over two-thirds (37%) of retirees could be renting in retirement by 2041, with 17% of those pensioners paying private sector rent.
The PPI’s model shows a negative impact on non-pension wealth – with housing a major component of wealth in the UK - along with increased retirement living costs. It also shows a negative impact on sustainability, triggered by a potential for higher rents to be paid by means tested benefits, in the absence of lower cost housing or additional pension income.
The increased cost of retirement for those who are renting is laid out in the report and has also been highlighted by the Resolution Foundation when establishing the case for a Living Pension . It is single retirees who are especially vulnerable. The Living Pension contribution rate might be sufficient to provide a minimum income standard for couples living in social renting accommodation, but the 12% contribution does not bridge the gap for single pensioners, those living in higher cost accommodation, and those who have not been able to save until later in their life. This includes those people in their 40’s who are currently renting and with little prospect of buying a home before they hit their 60’s.
Inheritance could play a role in bridging the gap, but it is far from a guaranteed panacea.
The report makes the point that housing and pension policy needs to be aligned, but there are pension interventions that can improve adequacy. The abolition of the auto enrolment lower earnings threshold will provide the greatest uplift to pension savings for those on lower levels of income, and who are more likely to be renters. Auto enrolment from age 18 will provide an additional 4 years of saving. Adoption of the Living Pension by employers could see a 50% uplift in private pension income.
Pension freedoms provides savers with opportunities to take a flexible approach to retirement, allowing a phased transition from full-time work into a life in retirement.
Advice and guidance have a key role to play in helping people set retirement goals, and make better decisions, based on their personal circumstances. Improvements in investment returns could mean what is paid-in produces a bigger pot. While more efficient conversion of pension wealth into a retirement income can mean pension savers have more to spend once they have given up work.
The evolving mix of housing tenure is a significant consideration for pension policy makers. As pension professionals, our role is to create opportunities for all savers to accumulate their best possible pension income.
|
