Do renters need to save more for retirement than homeowners?
As the disparity between house prices and wages continues to grow, home ownership is becoming an unattainable prospect for many people. This is having a knock-on impact on the provisions that people need when it comes to saving for their retirement, with 30% of people now expected to rent and face the ongoing cost of housing in old age.
The latest Scottish Widows Retirement Report shows that in some areas of the UK rents can be equal to – or in excess of – average pensioners expected retirement income. Rent is therefore likely to be a significant burden for many in retirement. But how can savers prepare for these costs, and what can the government and pensions industry do to best support them?
Who is most likely to be affected by rental costs in retirement?
The cost of renting varies dramatically depending on location. People renting in London will face rents that are 131% of the average expected retirement income. Staggeringly, this is three times the cost of rents in the North East. Renters living more widely in the South also face elevated costs compared to those in other regions too, with rents equalling 100% of the median expected retirement income in the area.
All this suggests that, for retired people renting in and around London and the South, housing benefit and other retirement benefits will play a vital role to ensure that they have even the most basic standard of living.
As well as the geographical disparity, the burden of renting is also more likely to fall on those with lower incomes in retirement, with people with the lowest projected retirement incomes being most likely to expect to rent (43%). This drops to around only 20% of those on higher projected retirement incomes.
However, even in the cheapest areas the cost of renting is still significant, with rents in the North East absorbing over half (59%) of retirees projected incomes. Halifax advises that, as a general rule of thumb, roughly 30% of an income is about the right benchmark to be paying on rent so that a person has enough left over to afford the rest of their monthly outgoings. With even the cheapest projected rent taking up nearly double that, it could make it especially difficult for retired renters to reach even a minimum standard of retirement.
How will renters cope in retirement?
To manage, many lower income renters are likely to hope to rely on housing benefit, or they may need to downsize to smaller and cheaper accommodation to help reduce rental costs.
With such a big portion of their income going on rent, retirees may also have to make compromises and cutbacks in other areas, such as food shopping and holidays. However, the research for the Scottish Widows Retirement Report has shown that 35% of savers aren’t on track for even a minimum lifestyle in retirement.
Given the vulnerability of these older renters, more also needs to be done to provide high-quality social housing to stop retirees facing homelessness. In 2018 (the latest figures available), there were 2,500 people aged over 60 who were officially homeless – double the number than in 2009. And in 2017 the Local Government Association warned that the issue was only going to become more prevalent, with the number of existing elderly homeless set to double by 2025.
Moreover, social housing that’s currently planned or in development needs to be built in a way that enables homes to be easily adapted as residents needs change, with research from the Centre for Aging Better finding that 80% of older people want to stay in their home as they age. This means housing that is accessible and that can be easily adapted as mobility needs change.
There’s a significant shortage of social housing in the UK, with a shortfall of around 100,000 new social homes every year and over a million people currently on the waiting list in England alone. Lloyds Banking Group is the biggest supporter of social housing in the UK. Since 2018, we’ve supported around £15 billion of funding to the sector, helping build over 35,000 homes. We’ve recently partnered with homeless charity Crisis, and together we’re calling for one million more homes for social rent across Britain by 2033.
"There are currently over a million people on the waiting list for social housing in England alone."
Will homeowners be better off in retirement?
Roughly two thirds of people expect to own their home in retirement. Provided that they are largely mortgage free by the time they retire, these people will not only save substantial amounts on rent, but they’ll also have the option to build up equity which they then can potentially access through equity release.
Typically a retired homeowner might access around a third of their equity, and the average value that is accessible will vary across the country, mirroring house prices. For most regions of the UK, typical equity release could provide an additional £60,000 to fund retirement. In the South East this doubles to over £120,000, and in London it’s over £170,000.
Access to housing is crucial in order to enhance retirement outcomes. Improving housing affordability is central to this, and means we need to ramp up house building. This would result in renting being more affordable, and fewer would need to rent in retirement if they could get on the housing ladder.
Retirement expectations vs reality – homeowners vs renters
Scottish Widows’ Retirement Report demonstrates more clearly than ever that while many are making good preparations for retirement, a substantial minority are being left behind. While addressing the high cost of living is rightly the government’s priority for the time being, as inflation goes down and conditions begin to stabilise, more needs to be done to address the long-term reforms and enhancements to automatic enrolment if savers are to enjoy a comfortable retirement income.
Automatic enrolment has undoubtedly been a game changer, with many savers in their 30s now likely to reach a comfortable retirement lifestyle, with auto enrolment playing no small part in establishing these strong saving behaviours.
The self-employed have also not benefited from automatic enrolment and as a result are much less likely to be saving into a pension. The forecast shows that while the self-employed do proportionately save more outside of a pension, this is not nearly enough to close the gap.
The report also shows the important role that a variety of assets have in retirement. Workplace Pensions and Personal Pensions are central, but so too is the state pension, wider savings that individuals accumulate or inherit and the equity that many build up in their homes. People need to be getting guidance, advice and support that brings all of these elements together to help them plan effectively for their retirement.
Our findings also highlight the disparities between those who are likely to rent in retirement and those who will own a home. Those on lower incomes are disincentivised from saving for retirement and are encouraged to rely on housing benefit, while those on middle incomes save too little to cover their rent and end up facing a much poorer retirement than they expect.
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