Renters will run out of cash 12 years before homeowners

Longevity, house prices and savings clash in perfect financial storm for tomorrow’s elderly

Calculator with wooden house and coins stack and pen on wood table. (Getty/iStock)

Future generations’ hopes for a moderate retirement will be scuppered because they couldn’t afford to buy a home, according to economic forecasts that spell trouble for the UK’s youngest adults.

Assessing the impact of lifelong rental costs on savings, the Investing and Saving Alliance (Tisa) has calculated the average UK household still renting in retirement is likely to have exhausted typical workplace pension savings twelve years sooner than homeowners in otherwise similar financial circumstances.

In fact, by the time they become elderly renters, UK savers entering the workplace in the mid 2020s will probably run out of savings nine years before they reach the average life expectancy age of 90.

The study comes as the Office for National Statistics revealed this week that these circumstances are already on the cards for many working adults.

Almost three-quarters of people aged 65 years and over in England own their home outright, but those now in their mid-thirties to mid-forties are three times more likely to be renting than 20 years ago.

A third of this age group were renting from a private landlord in 2017, the most up to date figures released, compared with fewer than one in 10 in 1997.

If this trend persists as they age, older people will be more likely to be living in the private rental sector than today.

Assuming they pay the minimum 8 per cent currently saved into the automatic enrolment workplace pension scheme, of which 5 per cent comes from their qualifying gross salary, today’s teenager is likely to run out of savings by the age of 81 if they remain a lifetime renter.

Homeowners, assuming their mortgage was paid off at around 64, but with otherwise similar financial circumstances, would probably make it to the age of 93 thanks to their minimal housing costs.

Increasing their contributions to 10 per cent for their working life, a renter would make it to 84 and a homeowner around 99 years if they spent the £29,000 a year in retirement the Pensions and Lifetime Savings Association (PLSA) calculates a couple would need for a “moderate” lifestyle, including the state pension.

But even if the contribution increased to 12 per cent, a renter still wouldn’t make it to their full expected lifetime. Their savings would only last to aged 87, compared with a homeowner’s funds which probably wouldn’t run out until the age of 105.

“Current levels of contribution at 8 per cent clearly won’t cut it for those households that don’t own their home,” says Renny Biggins, retirement policy manager at Tisa.

“Based on our research, increased contributions of even 12 per cent 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.

“The perennial political debate around the best way to fix the housing crisis is unlikely to be resolved any time soon. But what this report drives home is the critical need for consumers to be armed with more information and better choices that reflect the new reality of retirement.”

Steven Cameron, pensions director at Aegon, adds: “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 per cent is simply not going to be enough for most people to live the lives they want in retirement.

“For many, 12 per cent throughout their working lives is a more realistic benchmark of what they, along with their employer, may need to contribute.”

In practice, how much you should be saving as a proportion of your earnings depends on your earnings and your retirement aspirations. For low earners, the state pension will replace a higher proportion of working age income, so the 8 per cent contribution may be enough. But average and higher earners will need to save more.

“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,” adds Cameron.

“This further strengthens the need to help individuals understand how much they personally should be saving to be able to afford the retirement they aspire to.”

The data suggests an increase in the total auto enrolment pension contribution to 12 per cent will allow the majority of UK households – including households in which one or more family members spends a period of time off work, or face long-term care costs – to achieve a moderate level of retirement up to age 90 and beyond.

Biggins adds: “Auto enrolment alone will not solve the savings crisis facing the UK. According to the FCA, only 8 per cent of the population receive financial advice. This means around 47 million people fall into the guidance gap, where firms are limited in the help they can offer based on current regulation.

“This is creating significant consumer detriment. The majority of people don’t know how to properly manage and evaluate their savings – particularly when sudden life events throw things off course.

“For auto enrolment to be the success we want, there needs to be far more education and guidance support wrapped around the defined contributions schemes that underpin it. We are calling for an urgent review of the financial guidance rules.”