Will your Retirement Income Cover your Rent?

In the April edition of Construction Magazine, Susan O’Mara writes. In a 2017 article, I explored the issue of pension scheme members reaching retirement age and still renting in the private sector.

Since 2017, little has changed. Owning your own home remains difficult for young adults and pension savings are below what would be required to enjoy a comfortable retirement if you are not a homeowner. Indeed, I could have copied the 2017 article, updated the rental amounts, and mentioned that Mandatory pensions are starting in September 2025 (and not Q2 2018 as expected then!).

In April 2023, the Pensions Council published their observations arising from the “Future trends in housing tenure and the adequacy of retirement income,” an ESRI report that they funded. Broken down between different age brackets, their report provides stark statistics regarding the impending issues for the building and pensions sector.
Below are the results of the ESRI’s detailed analysis of projected future home ownership rates:

Source: pensions-council-observations-arising-from-the-esri-report.pdf

If you are 65 or older now, this is unlikely to be an issue for you. The ESRI estimates that 90% of those at or approaching retirement age, own their own home. Of those renting, most rent from a local authority or voluntary body so will have low stable housing costs.

Only 2% of people in the 65 plus age bracket are in the private rental market.
While the ESRI observed that there is significant uncertainty with the youngest age group (25-34), it did place a much stronger reliance on its results for the 35-44 age group. Based on 2022 mortgage rules, the ESRI predicted that the home ownership rate for the 35-44 age group will be 65% by the time they retire leaving approximately 35% renting.
For this reason, this is a pensions problem. Where a person has higher housing costs in retirement (such as rent) they need a higher income to maintain the same standard of living than a person who has a “paid for house”.

Among the solutions suggested by the ESRI are:
• improving incomes for older households (e.g., increasing the State Pension, introducing targeted supports, or directly intervening with a household supplement)
• supporting younger people to buy their own home now through equity supports
• and/or supporting people earlier during their employment to build up more retirement savings to meet the higher costs in retirement.

The first solution will result in large additional costs for a government which is already facing the significant and increasing State Pension burden. An increase in the number of older people eligible for HAP will add to the already difficult challenges associated with an increased reliance on the private rental sector. The recommendation for more supports now to help our young people achieve secure housing makes sense for the current economy and for long term security of tenure for our future pensioners. This will require an increase in supply of homes for first time buyers or through the cost rental scheme.

The final part of the solution is that more retirement income will be needed. Another significant challenge. Employees cannot do this alone and will need the support of employers and the Government through tax breaks. The Government appear to be finally starting to meet the pensions challenge. The expected start date for Auto-Enrolment (AE) pensions is 30th September 2025 and from this date, pension savings will be mandatory for all employees over age 23 earning more than €20,000 p.a. While it will take 10 years for the rates to increase from a low starting point of 3.5% to 14%, this will significantly impact workers in the ESRI study, particularly those in the 25-34 age bracket. The rates include contributions from employers and a top-up from the State.

For employees already in a pension scheme, they have a head start on their pension savings and have the option to pay higher than the AE rates (through AVCs) and make greater savings through tax relief at their marginal rate. The introduction of AE may also have an impact on their outcome too. Once AE is fully implemented, it will raise the bar for higher pension contribution rates for all pension schemes.

As stated in my 2017 article, the housing crisis does not simply affect low paid workers, it has the potential to affect an entire country, albeit 20 to 30 years into the future. It is the decisions
made today as a society that will change what that future looks like. Furthermore, it is the decisions you make today, as an individual, that will determine what your own future looks like.

CPAS provides the administration support for the construction sector’s dedicated pension schemes and is registered to provide the core administration services to the Trustees of the Construction Workers Pension Scheme (CWPS) the Construction Executive Retirement Savings (CERS), and provides additional financial support services through Milestone Advisory DAC.

For more information, contact:
Susan O’Mara on (01) 223 4942, susan@cpas.ie
or visit www.cpas.ie.