From a financial planning perspective, there’s nothing fundamentally wrong with renting your home in retirement – assuming you can afford it.
The traditional path in life is to buy a home, with a mortgage, during our 20s or 30s.
We repay that mortgage during our working lives, leaving us debt-free as we enter retirement and with a roof over our heads in later life.
New figures suggest that one in eight retirees, more than one million people, will be living in rental accommodation in 15 years.
This is around three times the current number.
The research comes from Scottish Widows and was carried out by Development Economics.
Along with the big expected increase in people renting in retirement comes a potential shortfall of £43 billion in savings to cover rental costs.
According to the study, 42% of the average retirement income will be spent on rent in 15 years’ time.
Scottish Widows calculated that the average renter planning to retire in 15 years’ time needs to save an additional £525 every month into their pension – £6,300 a year – on top of current pension contributions.
Alternatively, they could work for an extra 5.1 years to cover growing rental costs in retirement.
Despite the looming crisis, more than two thirds (67%) of 50-64year olds planning to rent in retirement have no plans to increase their pension contributions to cover this shortfall.
68% of those who would consider upping their contribution say they cannot afford to do so without a pay rise or significant compromise elsewhere.
The situation looks set to worsen in the future, as more people struggle to step onto the property ladder.
More than a quarter of renters under the age of 45 don’t think they will ever be in a position to buy a property.
Even among those who hope to buy a house one day, 15% anticipate they will still be paying off their mortgage well into retirement, rising to 26% of 25-34 year olds.
Robert Cochran, Retirement Expert at Scottish Widows, said:
Generation Rent is a term often applied to younger generations, but our research shows that the problem extends right to the other end of the generational scale.
The number of people renting in retirement is set to treble over the next fifteen years, but alarmingly few people are thinking about how they would cover the growing cost of a property lease when they stop working.
Whilst some people may choose to rent later in life, we also need to ensure it’s a more sustainable, secure option for an ageing population – many of whom will have no choice.
We’re therefore urging the government to consider ways to refine the housing market to better suit older renters – through options such as open ended tenancy, with predictable rents and protection.
Douglas Cochrane, Head of Housing Development, Lloyds Banking Group, said:
As this report recognises, renting in retirement can be a conscious choice and when making such a choice it is important that all financial implications for paying rent into retirement are fully understood.
The importance of saving through pensions or other investments to offset later in life rental costs cannot be underestimated.
The white paper ‘Fixing Our Broken Housing Market’ published in February 2017 refers to meeting the needs of an ageing population through appropriate housing provision. This report recognises not only the financial need, but importantly the need to build the right type of property suitable for later in life living.
When it comes to renting in retirement, financial planing to ensure the initial and likely future costs of renting a property remain affordable is vitally important.
Putting in place sufficient financial resources to keep up with the cost of living in later life is a process that needs to start early.
