September 24, 2023

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Retirement and wealth shock: If you are a renter, you will need a large retirement basket for a “moderately” comfortable lifestyle.

A new study has found that people who end up renting in retirement will have to save staggering sums to pay for modest housing and living expenses.

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It would only take a pension basket of £269,000 to earn around £9,500 a year, which is the average or ‘average’ rent for a two bedroom property in the UK.

This is in excess of the £348,000 plus the full government pension required to achieve a “moderate” income of £23,300 a year after tax to live on in old age.

An estimate of how much retirement rent will go out of your pension fund was made after official data showed nearly five million adults still live with their parents and may never be able to afford to buy a property and pay off a mortgage.

Census data shows that the total jumped 15 percent to 4.9 million from 2011 to 2021, and that more than half of 20-24 year olds live in a family home.

Soaring home prices, financial pressures and nursing responsibilities keep families under one roof for long periods of time.

Some adults currently living with their parents will never gain access to the housing ladder, and if they do, many are likely to be saddled with mortgage payments instead of rent in retirement rather than mortgage-free as previous generations.

“Whether you rent or buy, there is a real risk that at least part of your pension will end up in housing costs, as well as daily living expenses,” says former Pensions Minister Steve Webb, now LCP partner. who crunched the numbers on paying rent at retirement.

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Webb says his firm separately calculated potential rental costs during retirement because it was vital to consider people’s situation as a whole, including any housing costs, to help them make realistic plans for the future.

Rent or mortgage payments, social security costs and income tax are not included in the standard industry measure of what people need for a minimum, moderate or comfortable retirement.

It states that an individual income of £12,800, £23,300 and £37,300 per annum is needed for a basic and a decent and comfortable retirement lifestyle respectively. For the couple, the numbers are £19,900, £34,000 and £54,000.

This is based on various baskets of goods and services, such as food and drink, transportation, recreation, clothing, and social events, collected in the Pensions and Lifetime Savings Association’s annual Retiree Living Standards Report.

The full government pension for people retiring from 2016 is currently £10,600 per annum.

Retirement income requirements for single people (PLSA source)

Retirement income requirements for single people (PLSA source)

Retirement income requirement for couples (PLSA source)

Retirement income requirement for couples (PLSA source)

Webb, retirees columnist for This is Money, says: “For a long time, the retirement world assumed that most people in retirement would pay off their mortgage and therefore be able to live on a much smaller amount than when they were at work.

“But with the younger generation finding it increasingly difficult to climb the corporate ladder, things could change.

“Our research shows that the retirement basket needed by someone who must regularly pay rent from their retirement savings will require a retirement basket that is far beyond the reach of most ordinary people.

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“It’s not just renters who may need to finance housing costs after retirement. More than half of all new first-time homebuyer mortgages are over 30 years old, and with young people taking longer to climb the corporate ladder, these mortgages could easily take them past retirement age.”

Webb cites a government study published earlier this year that shows that people who are most likely to rent a home in retirement are at a much higher risk of undersaving compared to those who own a home outright.

When the annual Living Standards Survey was recently released, Quilter’s head of pension policy, John Greer, noted: “All PLSA data assumes retirees live in their homes without rent or mortgages.

“So while these numbers make sense now, for future generations, these numbers will need to rise significantly.

“This is due to skyrocketing home prices, which means many are struggling to find the money to buy a house, or are forced to take out mortgages for up to 70 years to achieve lower monthly mortgage payments.

“Similarly, the PLSA figures also do not take into account the potential costs of receiving social assistance. According to the ONS, healthy life expectancy for men is about 62.8 years, and for women – 63.6 years.

“Meanwhile, life expectancy was 79.0 years for men and 82.9 years for women, meaning that many people will spend a significant portion of their retirement in poor health, potentially needing access to costly care.”

The Institute for Financial Research recently released the following chart which shows that less than 5% of people born in the 1930s and 1940s were private renters and 6% of people born in the 1950s were renters by the mid 60s. x years.

“For those born in the 1960s, the share of private renters has been stuck at 10 percent for about three decades, and now in their 50s there are no clear signs of a drop.” said IFS report “Problems in the UK pension system”.

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“The potential for higher private rents among those approaching retirement age is even greater for younger generations, although there is significantly more uncertainty about how these models will evolve for them.”

But the IFS warned that recent trends suggest that a growing portion of the population will have to save money for retirement, including monthly rent payments, expenses that are likely to be partially covered by housing allowances.

It says that inheritance can counteract or…