New research shows ‘renters in retirement’ need ‘over half million pound pension pot’ – Steve Webb, LCP

New analysis to be launched shortly by pension consultants LCP has found that those who will have to fund a rent out of their retirement income will need a pension pot of over half a million pounds to fund even a ‘moderate’ retirement. This is a quarter of a million pounds more than the target for someone who will be an owner-occupier when they retire.

The analysis looks at the amount of income needed by someone targeting a ‘moderate’ retirement based on the Retirement Living Standards benchmarks published by the Pensions and Lifetime Saving Association (PLSA).

According to the PLSA, if housing costs are ignored, someone with a pre-tax income of around £26,000 per year will be able to afford a moderate standard of living. To generate a guaranteed index-linked income of that amount throughout retirement (from a combination of state pension and private pension) would need a pension pot at retirement of around £348,000.

However, this assumes that there are no housing costs to be met. Once rent is factored in, the target pension pot soars.

LCP research suggests that the median rental cost for a two bedroom property is around £9,500 per year. To generate this amount after tax would need a pre-tax income of around £11,900. And the pot size needed to secure this would be an *additional* £269,000.

Taken together, these estimates suggest that someone who needed to fund an average rent on a two-bed property plus a ‘moderate’ standard of living, would need a total pension pot of well over half a million pounds (£617,000).

DWP research published earlier this year confirms that those who are expected to be renters in retirement are at much higher risk of under-saving compared with those who will own their own home outright. Using the same ‘moderate’ benchmark, DWP estimate that whereas 45% of owner-occupiers are not saving enough to hit this target, around 71% of renters are likely to fall short. And this research takes no account of the potential growth in the number of renters in retirement in future.

Commenting, Steve Webb, partner at LCP, said:

“For a long time, the pensions world has assumed that most people in retirement will have paid off their mortgage and can therefore manage on much less than when they were in work. But with younger generations finding it harder to get on the housing ladder, this could all change. Our research suggests that the pension pot needed by someone who has to pay a regular rent out of their retirement savings will require a pension pot well beyond the reach of most ordinary people. It is vital that when we talk to people about their financial futures, we look at their whole situation, including any housing costs in retirement, so that they can make realistic plans for the future.”