More pensioners are renting in retirement – what can be done?

Scott Gallacher, chartered financial planner and director at Rowley Turton, says advisers must highlight the importance of home ownership to their clients after worrying research from the Pensions Policy Institute predicts the proportion of households that will own their home in retirement could fall from 78 per cent to 63 per cent by 2041.

The research, which is based on the continuation of the current home ownership trends among today’s 45 to 64-year-olds, calculates that the proportion of retired households living in the private rental sector could increase from 6 per cent to 17 per cent during the same period.

The PPI has labelled changing home ownership patterns as a fault line opening beneath the pensions system that could risk retirement adequacy for more than 1mn pensioner households by the early 2040s.

Renter woes

Gallacher says this changing landscape is problematic because it means pensioners will need to plan now to ensure they have enough money for ongoing rental costs in retirement, which will inevitably increase over time.

He says: “Homeowners can realistically expect to have repaid their mortgage by retirement. Consequently, they look forward to a retirement free from the burden of mortgage payments. This contrasts starkly with renters facing a much bleaker retirement. 

"Not only do they contend with ongoing rental costs in retirement, but these costs are also expected to escalate over time.

“Under similar circumstances, renters would necessitate a significantly higher pension fund or income to attain a comparable retirement lifestyle enjoyed by homeowners.

"This underscores the financial challenges that renters face in achieving a retirement free from the burden of housing-related expenses, emphasising the critical role of comprehensive financial planning in navigating the evolving retirement landscape.”

The prospect of renting through retirement is not discussed enough and people don’t factor it into their retirement savings plans.Helen Morrissey, Hargreaves Lansdown

He adds that renting in retirement also limits a pensioner’s access to benefits such as equity release and notes that IFAs must highlight the importance of home ownership to prevent people from struggling in retirement.

He says: “Despite the recent uptick in interest rates, owning a home in retirement often outweighs relying on a larger pension.

“Inflation-linked annuities struggle to match rental yields, necessitating a pension pot larger than the house value to cover rent. Moreover, the flexibility that comes with home ownership, such as equity release or downsizing, provides options not available to renters relying on an inflation-linked annuity.

“While affluent homeowners, the core of most advisers’ clients may not be immediately impacted, advisers in general should actively promote home ownership to reduce future retirement income needs.

"Assisting individuals in getting on the housing ladder becomes crucial, possibly even more so than traditional pension planning for many younger individuals. This strategic approach can have a significant positive impact on future retirement financial security."

Realities of retirement renting need more discussion

His concerns are echoed by Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, who says it is important that UK workers get to grips with the changing landscape of home ownership because many retirement projection tools are based on someone having paid off their mortgage by the time they retire. 

She says: “The prospect of renting through retirement is not discussed enough and people don’t factor it into their retirement savings plans.

"The Pensions and Lifetime Savings Association’s retirement income targets give an idea for how much people need in retirement to live a certain lifestyle, but they also note that they are based on someone having paid off their mortgage by the time they retire.

"If we factor rent into the equation then people will need thousands of pounds more each year and so will need to save significantly more into their pensions as a result. With home ownership decreasing it is a difficult reality that more people will need to get to grips with.”

The findings by the PPI were published last month in its report "Renting in Retirement – The Fault Line Below the UK Pension System", which was released in association with Aviva.

The PPI warned that few renters will have enough savings to cover both the cost of living and cost of renting in later life and estimates that 400,000 households could become dependent on income-related pensioner benefits. 

The report marks the first time that the PPI UK pensions framework has been used to model the impact of a ‘what if’ scenario on future retirement outcomes and explored the risks that falling home ownership, rising private renting and shrinking social housing sector could pose to the retirement outcomes of those nearing pensionable age.

Anna Brain, research associate at the PPI, says it is time for the industry to update its outdated view that most people will own their homes once they retire. 

She adds: “The research reveals a series of increasingly outdated assumptions around how future pensioners work, live and save for retirement is putting strain on the overall UK retirement income model and on the very fabric of the UK pension system.

"The expectation that people will reach retirement with high rates of home ownership, supported by an adequate supply of social housing, is one of them.”  

Despite the recent uptick in interest rates, owning a home in retirement often outweighs relying on a larger pension.Scott Gallacher, Rowley Turton

IFA Haresh Raghwani agrees that advisers should not assume their clients will own their home when they reach state retirement age because affordability means people still have a mortgage when they are 75-years-old. 

The director of Craufurd Hale Wealth Management adds: “I have seen a lot of individuals in recent years who have mortgages to age 70 or 75, mainly because of affordability.

"The general view is that most individuals will have paid off their mortgages by state pension age or earlier. I have seen individuals borrowing more money and to make it work they extend the term.

"I have met with clients who have mortgages and are retired, they have an income need and therefore want to look at alternative strategies such as equity release to free up their income. 

“We shouldn’t expect when giving advice that individuals will have paid off their mortgage. A key part of providing advice and planning is that we should be discussing everything in detail when meeting with clients.  

“It simply comes down to holistic planning and asking questions to the individual. The adviser community generally is focused on assets under management and when sitting down with a young couple or a middle-aged couple, these types of questions need to be asked. Cash flow modelling should be done.”

Raghwani adds it is that IFAs discuss affordability when planning for retirement so that their clients were not shocked by the reality of later life.

Clients need to understand that state benefits will not cover this type of shortfall. Education is really key.Haresh Raghwani, Craufurd Hale Wealth Management

He says: “This is why planning is so important, to discuss issues such as affordability when retiring, plans for the future are discussed so the client doesn’t get a shock. Most individuals do not appreciate their income levels will fall when they retire. 

“Challenges are trying to help clients understand today, if they will not be in a position to buy their own home, then they need to make provisions now by saving and investing funds into Isas or pensions, to ensure they have the income to cover rent costs in the future.

"Clients need to understand that state benefits will not cover this type of shortfall. Education is really key.”

Potential pitfalls

However, more people renting in retirement should not automatically be viewed as negative. 

Interestingly, Kusal Ariyawansa, chartered wealth manager at Appleton Gerrard Private Wealth Management, says owning a home might not make financial sense for some. 

He says: “The very British tradition of wanting to own your own home might not make financial sense after all. Historically, price rises and low interest rates made home-buying a must, yet the landscape has changed. We're unlikely to see property growth like in the 1970s to 1990s.

"Higher interest rates, transaction costs and other expenses mean the actual growth might be less than what you get through buying shares in companies. In Switzerland and Germany more than half the population rent and there is no shame because it makes financial sense.

"I say so because if you look at the interest paid over a 25-year term and the final value of your home, there needs to have been a significant uplift for it to make a return better than global equities. 

“Renting removes the hassle of big decisions around build and essential contents, allowing you to focus on getting your furniture to make it your home. For this strategy to be effective throughout your life, the additional savings need to be invested. If this is done tax efficiently you can minimise your inheritance tax liability as well.”

He adds that IFAs should support their clients in adapting to the changing landscape by helping them decide whether it makes sense to rent or buy.

“Advisers can help clients decide whether it makes sense to rent or buy. In the case of the former they must help clients devise a cohesive long-term strategy that ensures they enjoy a comfortable retirement, just as they would had they owned their own home.” 

Aamina Zafar is a freelance journalist