Renting in retirement: The relationship between pensions and housing

We are hearing more and more about the detrimental impact of renting in retirement on people’s pension outcomes.

Having to pay rent, or even a mortgage, in retirement means that people’s retirement savings need to go further. How can we think more holistically and join up the challenge of home ownership saving for retirement?

A fracture between our pensions and housing systems

Research published last year by the independent Pensions Policy Institute (PPI) shone a light on the financial impact on people if they rent in retirement, opening a “fault line” under the retirement security of more than a million pensioner households.

Recent research by Standard Life also suggests that those who rent in retirement could need almost £400,000 more in savings than those with no housing costs.

What’s more, this is a problem that is only going to get worse.

According to the PPI, the proportion of households who own their own home in retirement could fall from 78% to 63% by the early 2040s, while the proportion living in the private rental sector could rise from 6% to 17%. This could lead to 1.2m more households in the private rented sector.

There are two answers to this conundrum that aren’t mutually exclusive.

The pensions system needs to recognise that people need to fund renting in retirement, with more money going into pensions to build up adequate savings.

Alternatively – or perhaps additionally – we need to address the acute affordability issues when it comes to helping generation rent get on the housing ladder.

Getting on the ladder

Our analysis shows that millions of people can comfortably afford to rent the house that they want but are unable to get the mortgage to buy a similar home.

This often means uncomfortable compromises, for example on size, suitability, or location of dwelling. Often, these are not feasible – so people end up staying in rented accommodation.

Getting on the housing ladder is a struggle for many. First-time buyers, on average, can get a mortgage of at most three-and-a-half times their income. But the average home in England is nine times average income.

People need a substantial deposit to secure a mortgage, but it can take 19 years to save the deposit for a home that people can comfortably afford to rent, and that is without thinking about the fact that people need to save more for their retirement.

The problem is stark: saving for a mortgage deposit while renting, and trying to save for a pension, is out of reach for many.

Joining up pensions and housing

At Wayhome, our approach allows regular families to buy a regular family home, helping people meet their aspirations and get on the first rung of the homeownership ladder without making difficult compromises.

‘Gradual homeownership’ allows people to buy a share of their home, with the rest being owned by pension schemes through an investment fund. Residents then pay rent on the share they don’t own. People are encouraged to own a greater proportion of their home over time through ‘staircasing’. Given there is no debt in the model, it is a fully Sharia-compliant way of owning a home.

This helps people get on the housing ladder, but importantly the aim is to create a virtuous circle through creating investable opportunities for schemes that deliver strong inflation-linked returns, the ability to rapidly deploy funds, and diversification.

It is also an investment with impact, as it is helping to address a significant societal issue and allows for local impact through place-based investing.

In a nutshell, the approach is to use pension fund investments to help people on the housing ladder leading to better retirement outcomes for people.

This is one idea to help with the impending fracture between pensions and housing – but it is only one idea. We also need to build more affordable houses, and we need to give people the opportunity to own their own home.

Joined-up thinking, looking across pensions and housing, could deliver a better pensions and housing system, helping to solve two of society’s biggest problems. What’s more, it will also make people better off in retirement.

Nigel Purves is CEO and co-founder of Wayhome.