Retirement can be costly, and this can be compounded for individuals who are renting, without owning their own home.
New analysis by pension consultants LCP has unveiled the extent of the financial burden for those who are renting in later life.
It found those who have to fund rent out of their retirement income will need a pension pot of over £500,000 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 has worked from the Retirement Living Standards benchmarks, laid out by the Pensions and Lifetime Savings Association (PLSA).
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If housing costs are ignored, the PLSA states someone with a pre-tax income of around £26,000 a year could achieve a “moderate” standard of living in retirement.
Those who want a guaranteed index-linked income of that amount using their state pension and private pension would need a pot of £348,000 at retirement.
However, these figures assume a person is a homeowner by the time they reach retirement, which is increasingly not the case as Britons take longer to get on the property ladder, or are unable to do so at all.
Once rent is factored into the equation, the target pension pot soars.
Research from LCP suggests the median rental cost for a two bedroom property is approximately £9,500 per year.
In order to generate this amount after tax, a person would need a pre-tax income of around £11,900 – with the pot size needed to secure this as an additional £269,000.
When taken together, these estimates suggest that someone who needed to fund an average rent on a two-bedroom property in addition to a “moderate” standard of living would need a pot of £617,000.
Sir Steve Webb, former pensions minister and 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.”
LCP also cited research from the DWP which was published earlier this year.
The consultancy states the data shows those who are expected to be renters in retirement are at “much higher risk” of under-saving compared with those set to own their home outright.
For example, using the same ‘moderate’ benchmark, the Department estimates that whereas 45 percent of owner-occupiers are not saving enough to hit this target, around 71 percent of renters are likely to fall short.
This research does not take into account the potential growth in the number of renters in retirement in future.
Consequently, this issue could be experienced by many more people in the years to come.
