Future generations’ hopes for enjoying a comfortable retirement could be scuppered by failing to get on the housing ladder.
The Investing and Saving Alliance (TISA) is calling for automatic enrolment contributions to increase to 12% to be sufficient to ensure a comfortable retirement.
Currently the minimum contribution under auto-enrolment is 8%, but TISA says this will not generate a sufficient pension pot for those still renting in retirement.
TISA’s report Getting Retirement Right: Plan, Prepare, Enjoy, has modelled different scenarios for UK savers entering the workplace in the mid-2020s. The aim is to understand the levels of saving needed to meet moderate living standards in retirement.
For each scenario, TISA indicated the age at which private pension funds would run out based on contribution levels of 8%, 10%, and 12%.
Renters will run out of retirement cash
It found that the average UK household still renting in retirement is likely to exhaust the family’s pension provision 12 years sooner than homeowners on current levels of auto-enrolment contributions.
The modelling also suggests renters could exhaust their pension pot nine years before they reach the average life expectancy age of 90. With home ownership rates on the decline, the research illustrates the scale of the challenge facing future generations.
Renny Biggins, retirement policy manager at TISA, says: “We know from trends surrounding home ownership among younger people that renting could become much more common in retirement. Indeed, recent statistics have suggested that up to a third of millennials will be lifetime renters, if things continue as they are.
“Current levels of contribution at 8% clearly won’t cut it for those households that don’t own their home. Based on our research, increased contributions of even 12% would be insufficient in isolation for families unable to get on the housing ladder. Should renters also have to face care costs, they could quickly find themselves in pension poverty, without any housing wealth to fall back on.”
Steven Cameron, pensions director at Aegon, says the report is further confirmation that for most people the 8% minimum contribution under auto-enrolment is not enough.
He says: “This thorough analysis from TISA adds further weight to the evidence that while auto enrolment has been successful in getting millions more saving for retirement, the current minimum contribution of 8% is simply not going to be enough for most people to live the lives they want in retirement.
“But until now, little attention has been given to the impact of home ownership on income needs in retirement, and therefore on what proportion of earnings people should be saving. Homeowners who have paid off their mortgage are in a better position that those who anticipate renting in retirement, as ongoing rent will be a significant addition to their retirement expenditure.”
Of course a pensioner will probably have many more options regarding where they live than someone tied to a job in a particular location. It would be interesting to know where the heavily advertised half buy half rent retirement properties fit into this. The best of both worlds or the worst ?