Housing Benefit rules can leave older renters retaining just 35p of every additional £1 of private pension income, weakening the incentive to save as renting in retirement becomes more common, according to the Pensions Policy Institute (PPI).

The PPI’s report, Do Pension Savings Pay? Assessing the Interaction Between Housing Benefit and Private Pension Savings for Older Renters, found that private pension income currently reduces or removes Housing Benefit entitlement for around 330,000 otherwise eligible pensioner households.

Of these, around 230,000 have their entitlement reduced, while approximately 100,000 lose eligibility altogether once private pension income is taken into account.

The average reduction among affected households is £53.80 a week, rising to £57.43 for private renters and standing at £52.65 for social renters.

Under the current means test, income above the Housing Benefit personal allowance reduces entitlement by 65p for every additional £1.

For a single person reaching retirement under the new state pension system, the full weekly state pension of £241.30 is already slightly above the £238 Housing Benefit personal allowance.

As a result, even modest private pension income can immediately reduce Housing Benefit, leaving an older renter with only 35p of each additional £1 in disposable income, while entitlement continues to be tapered.

The report, sponsored by Independent Age, stressed that this interaction could discourage pension saving among people who expected to rent in retirement.

It also found that the treatment of pension wealth depended on how it was held.

Regular private pension income is included in the income assessment, while an unused pension pot can be treated as producing notional income even where the individual draws little or nothing from it.

By contrast, pension money already withdrawn and held as ordinary savings is ignored below the £10,000 lower capital threshold.

Savings above that level attract assumed tariff income, while Housing Benefit is generally withdrawn once capital reaches £16,000 unless the claimant receives Pension Credit Guarantee Credit.

The PPI estimated that Housing Benefit currently supports around 1.1 million pensioner households, including 900,000 social renters and 200,000 private renters, at an annual cost of approximately £6.3bn.

It warned that lower home ownership among younger generations could increase future demand for housing support in retirement.

Notably, current pensioners have a home ownership rate of around 78 per cent, compared with approximately 64 per cent among the generation approaching retirement.

Private renters could face an additional challenge because Housing Benefit is calculated using the Local Housing Allowance (LHA), which may be below the rent actually charged.

Meanwhile, the report explored whether disregarding part of a person’s private pension income when calculating Housing Benefit could improve saving incentives and retirement incomes.

The PPI found that a £25 weekly disregard could bring around 20,000 additional pensioner households into Housing Benefit eligibility and increase annual expenditure by approximately £100m.

A £50 disregard could increase eligibility by 40,000 households and cost around £190m, while a £75 disregard could bring 60,000 additional households into eligibility and increase spending by approximately £270m.

PPI senior policy analyst and report lead author, John Adams, argued that the current interaction between pension income and Housing Benefit worked against eligible retirees.

“With housing costs in retirement set to look markedly different to the last generation, policymakers will need to consider how they reach the right balance to ensure Housing Benefit support works as intended," he said.

Independent Age chief executive, Joanna Elson, added that the Housing Benefit system was failing older renters with small pension pots.

“Reducing the already inadequate rental support they receive is a disproportionate response to the tiny amounts of income the pensions provide," she said.

Elson urged the Pensions Commission to recommend changing the eligibility criteria so that small amounts of private pension income were disregarded.

She also called on the government to unfreeze LHA rates and ensure they kept pace with increasing rental costs.

“The growing number of older private renters, one-third of whom are in poverty after housing costs, really do need these changes,” she concluded.

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