A new report from pension consultant Hymans Robertson suggests individuals should be permitted to allocate up to half of their pension savings or borrow against their pension funds to purchase a home. This approach, the report argues, would help individuals avoid a "retirement rent trap" where rental costs in later life could consume their entire private pension, leaving them reliant solely on the state pension.
The study highlights that the number of renters in retirement is projected to triple over the next two decades as homeownership rates decline and the population ages. According to industry benchmarks, a single person requires an annual income of £32,700 and a couple £45,400 for a "moderate" retirement lifestyle, which includes essentials, some discretionary spending, and travel. However, these figures do not account for mortgage or rental payments, income tax, or potential future care costs.
Calculations by Hymans Robertson indicate that individuals adhering to minimum auto-enrolment pension contributions could see their entire private pension depleted by housing costs if they rent in retirement. Auto-enrolment requires employers to contribute a minimum of 3% of earnings (between £6,240 and £50,270) with an additional 1% from government tax relief. Employees must contribute at least 4%, with higher contributions recommended by experts for a comfortable retirement.
The report models the scenario of a 22-year-old earning the minimum wage (£26,437 annually). If this individual contributes 4% to their pension and does not prioritize buying a home, their total wealth at state pension age could be approximately £229,934. This would generate an annual private pension income of £10,452, but with an estimated annual rent of £10,246, their total retirement income, including the state pension, would be around £12,753.
In contrast, if the same individual reduced day-to-day spending to save for both a pension and a home deposit, Hymans estimates it would take 13 years to save for a deposit. Their total wealth at state pension age would be an estimated £490,075, with no rent payments. The annual private pension would be £11,414, leading to a total income, including the state pension, of £23,962.
An alternative scenario where the individual opts out of pension contributions early to focus solely on a home deposit could result in homeownership within seven years. At state pension age, their total wealth in pension and home equity would be approximately £459,223. With no rent to pay, their annual private pension would be £10,012, and their total income, including the state pension, would be £22,559.
The report proposes innovative uses of pensions for homeownership, such as allowing savers access to 50% of their pension savings for a deposit or offering a loan against pension value. Once a mortgage is repaid, these housing cost savings could be redirected into pension contributions. Under such a model, the 22-year-old could potentially save a deposit in seven years, with total wealth reaching an estimated £478,528 at state pension age, leading to no rent, an annual private pension of £10,889, and a total retirement income of £23,437.
Another proposed option is a pension deposit loan, where a set proportion of the pension pot's value is available as a loan. Repayments would be deducted from income above a certain threshold, or from the pension pot at retirement. If the loan remains unpaid at retirement, it could be settled from the tax-free cash portion of the pension pot or paid in installments from retirement income. The report suggests that if a loan from the government is not repaid, it could effectively replace housing benefit expenditure for pensioners. In this scenario, total wealth could reach £510,807 at state pension age, with an annual private pension of £12,356 and a total income of £24,904.
Hymans Robertson emphasizes that linking pension savings as a condition for a home loan could encourage greater engagement with pensions. However, the firm acknowledges that these proposals do not address the broader challenge of affordable housing supply, which must be managed sustainably alongside these financial reforms. The report urges the Pensions Commission, industry leaders, the financial sector, and the government to explore bold and innovative strategies for retirement adequacy, stressing that pensions and housing should not be considered in isolation.