The Labour Party’s Independent Review of Retirement Income (IRRI) has suggested that workers should be aiming to save 15% of their salary into the pension each month, according to a BBC report.
The other week, in an FT piece that went viral, Rebecca Taylor, director at the Chartered Institute for Securities and Investments, said that 25-year-olds should be aiming to pay an average of £800 a month into their pension for the next forty years. Now this is an average: less now can be balanced out by paying more later. But the message is clear: start now.
If you’re a renter looking at your budget you might feel a numb blankness at this point. How can you possible do something as extravagant as saving for a pension while rent is ever increasing? If you’ve thought about saving at all it’s probably been about saving for a deposit. Far from a lifestyle choice, many renters want to escape into home ownership. If nothing else, it’s cheaper – and that difference in costs could be being used to plan for the long term future.
But to move into ownership you need to save sufficient money for a deposit - this is a large amount of money and gets larger the longer you wait. If a renter is saving to buy, everything saved for a pension now delays the date at which that can happen. Renters who manage this will then have to pay more in a shorter period of time to save up what is currently regarded as a decent pension.
Renters who don’t will be paying for other people’s pensions all their lives – without the same means of building value up to extract wealth from the next generation.
The other side of this problem is that money paid in rent isn’t lost into the ether, it ends up in other people’s pockets. Buy-to-let landlords are themselves worried about the future and use rental properties as a way of filling up their own pension pots. The 2010 Private Landlords Survey found that over three quarters of dwellings owned by private individual landlords were considered to be investment or pension by their owners. 60% of landlords plan to live off their rental income in retirement. Pension reform means that this April over-55s will be able to cash out their entire pension and invest in buy-to-let properties. So that 60% may have company soon.
It’s not just landlords whose pensions can benefit from the current crisis – equity release schemes allow homeowners to pay for their retirements with the proceeds of scarcity. We have built a lot of ways that housing wealth can be used to pay for the future – and so created a large number of incentives to keep prices high. It’s also worth remembering at least some housing benefit ends up with landlords paying into their pensions – so the total amount of taxpayer’s money that ends up funding pensions is even larger than it seems.
It’s easy to conjure up an image of one generation of vampires living off the young (possibly literally), but of course it’s not that simple. Pensioners need money to live and many live in poverty. The average pensioner landlord isn’t cackling at taking money from babies, but looking at their bank balance and worrying about the cold in winter. Past failures to provide for the old mean that misery is being shared with the young – and damaging their chances of avoiding the same situation.
Pensions and home-ownership are ways of building up claims that we hope will be valuable in the future when we are no longer able to work. At least one of those will be far weaker in future. The current housing crisis will have a long afterlife.
Alex Parsons is a Generation Rent supporter. If you would like to blog for us, get in touch.