The increase in private renting poses a threat to the future of the UK’s pensions system and savers’ retirement outcomes, a new report from the Pensions Policy Institute (PPI) has warned.

It described changing home ownership patterns as a ‘fault line’ opening beneath the pensions system that could jeopardise retirement adequacy for more than a million pensioner households by the early 2040s.

Using its UK Pensions Framework, in association with Aviva, to conduct a policy simulation for the first time, the PPI 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.

According to the modelling, if the current home ownership trends among today’s 45-64 year olds continue through to retirement and other factors remain the same, the proportion of households that own their home in retirement could fall from 78 per cent to 63 per cent by 2041.

Furthermore, 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 noted that very few renters would have adequate savings to cover both the cost of living and cost of renting in later life, estimating that as many as 400,000 households could become dependent on income-related pensioner benefits.

Its modelling highlighted a growing fracture in the relationship between pensions and housing that was putting strain on the overall UK retirement income model, and warned that unless policymakers adjust their expectations around housing affordability and ownership in later life, dependency on public spending among pensioners could increase.

Furthermore, the institute raised concerns that the assumptions, levers and metrics in UK pensions policy do not adequately reflect the changing characteristics and circumstances of future pensioners, the holistic nature of retirement, or threats to adequacy from outside the UK pensions system.

The PPI stated that its simulation demonstrated the need for a renewed focus on the holistic and individual nature of retirement, and for saving for retirement.

Commenting on the report, PPI research associate, Anna Brain, said: “The research uncovers two critical implications.

"First, its findings quantify the concerning scale of the risks that the rise in private renting could pose to future pensioners, many of which have not featured widely in recent policy debate. By 2041, over one million more pensioner households could face a fall in disposable income or living standards because they had not planned to rent through retirement.

“Most of these people look unlikely to accumulate the level of savings they need to cover both future rent and living expenses, and the scenario suggests that up to 400,000 more households could become dependent upon Housing Benefit to afford the cost of their home.

“Second, results reveal that 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. Behind this pressure, the experiences that people have of preparing for and living through later life are becoming more individualised.

“At the same time however, the range of threats to financial security that originate outside the pension system is growing. Many of these threats, including the housing scenario, cannot be mitigated by pensions alone.

"Instead, finding an effective way to tackle them will depend on promoting awareness of how wide-ranging risks might evolve from working into later life, collaboration across policy sectors, and most importantly, a holistic view of retirement.”

Aviva managing director for wealth and advice, Michele Golunska, added: “The findings from this report serve as an important reminder to the pensions industry that to ensure savers have the comfortable retirements they are working towards, we must consider their overall financial circumstances – which, of course, includes housing.

“We continue to find that pension savers feel they lack sufficient knowledge and the tools required to navigate their options in the run-up to and transition into retirement.

"This makes it more important than ever that they are empowered to make informed decisions about how to maximise later life income. Improving our understanding of differences in financial circumstances will help the pensions industry develop better solutions for savers.”

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