"Those who earn a lot more than the living wage will realise they will need an income greater than the minimum pension if they hope to maintain their living standards in retirement."
I welcome the work done by the Resolution Foundation to develop the concept of a living pension. This builds upon the concept of a living wage. A living wage is higher than the statutory minimum wage to encourage employers to pay what is the minimum income a person needs for a reasonable standard of living.
As a concept, a living pension is brilliant. It provides an individual with a benchmark of the income they should be aiming for in retirement if they are going to afford a basic retirement. Those who earn a lot more than the living wage will realise they will need an income greater than the minimum pension if they hope to maintain their living standards in retirement.
Having decided upon their target income they can work back to see how much they will need to save to get to that level of income.
Unlike wages, where it is possible for Government and influencers to quickly create an environment where employers who pay less than a living wage are frowned upon, pension pots have to be contributed to and grown. It will therefore be many years before we have a retired population where the majority receive a living pension or more. This does not mean that we should lose sight of the concept of saving for a living pension.
As with the living wage, the living pension is an average of a number of factors. Those who live in areas with a higher cost of living, for example, London, may find that it is not as generous as those who live in areas with a much lower cost of living. For this reason, in London many public bodies pay, and insist their suppliers pay what is known as the London living wage which is higher than the national living wage.
The same will apply with a living pension. However, the Resolution Foundation research contains some very interesting findings. That is around the impact of home tenure on a Living Pension.
For a single homeowner, the minimum income for a reasonable retirement is calculated at just over £200 a week. For a single person in social housing that becomes £290 a week and if privately renting it increases further to around £310 a week. For couples who own their own home, the minimum is roughly £310 a week with similar increases for renters.
They are saying that a private renter needs £110 a week more for a reasonable retirement than someone who owns their home. To fund this a private renter will need over £140k more in their pension fund.
This shows the value of home ownership. How many people realise paying off their mortgage is contributing to a better retirement? Many retirees will look at younger family members and the deposits they need to get on the housing ladder. They may look at their housing wealth and consider what they can do to help.
Similarly, a large number of people may have - or soon will - be forced to retire early due to the economic consequences of the pandemic. Over 300,000 over the age of 50 have left the workforce since February 2020. How many of them will be able to return, how many are resigned to retiring earlier than they expected?
They face the need to pay off mortgages and other debts. Their pension savings will be incomplete. Do they have sufficient money to fund a living pension? They may struggle to sort out their own retirement finances without even thinking about helping the younger members of their families. This illustrates the role of housing in financial planning.
Owning your own home is owning an asset. As can be seen from the work of the Resolution Foundation, less needs to be saved for a living pension if you own your own home. Also, the value of that home offers the opportunity for a better retirement than the living pension will provide.
Without realising it, the Resolution Foundation and the living pension concept create strong arguments for holistic retirement planning that includes housing wealth.