The rise in pensioners renting during retirement means many could face a bleak future in old age if they do not plan appropriately, an IFA has warned.
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.”
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."
