Cost of renting will wipe out auto-enrolment savings for future retirees, research warns

The consultancy has found that people who rent in retirement will need to have paid the full minimum 8% automatic enrolment pension contribution from the age of 22 simply to cover their housing costs in later life.

In its latest paper, Tapping the Potential of Property and Pensions, the firm’s modelling suggests that if renting retirees see their entire minimum automatic enrolment pension consumed by housing costs, it would leave their workplace pension providing little or no support for day-to-day retirement spending, with the state pension expected to cover all other living expenses.

“Workplace pensions were designed to provide additional income to live in retirement. They were never intended to fund rental costs alone.”

Calum Cooper, Hymans Robertson

Calum Cooper, partner and head of pensions policy innovation at Hymans Robertson, said the findings highlighted the fragility of the pensions and property systems.

“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,” he said. “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.”

Hymans Robertson said the findings highlighted the need for closer links between pensions and property, proposing innovative approaches that could help people get onto the housing ladder while continuing to save adequately for retirement.

According to the consultancy, introducing such solutions could significantly improve retirement outcomes, with its modelling indicating they could increase retirement income by as much as 100%. It called on the Pensions Commission, government, the wider financial services sector and the pensions industry to consider bold reforms that integrate housing and retirement policy.

Industry grows concerned over renting in retirement

The calls echo a similar message from the Association of Member Nominated Trustees issued just days after the Pensions Commission was relaunched last year.

Maggie Rodger, co-chair of the association, said at the time: “As ‘generation rent’ begins to reach retirement age in the next 30 years, even two-thirds [of salary as a retirement income] may not be sufficient to keep that generation’s elderly out of a diminished retirement.”

The warning comes amid growing concern over the rise in renting among older people. Citing figures from the Pensions Management Institute, Hymans Robertson noted that the number of pensioners renting privately was expected to triple over the next two decades as home ownership declines and the population ages.

The Pensions Commission’s interim report identified a lack of home ownership as a major obstacle to achieving an adequate retirement. While increasing the supply of affordable housing remained essential, Hymans Robertson argued that pensions policy and product innovation also had an important role to play in helping future retirees avoid rental poverty.

Cooper added: “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… 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 peoples’ lives.”