Savers faced with renting in retirement will need an extra £185,000 to achieve the UK’s average target income rate in retirement, analysis by Royal London has found.

Its latest policy paper, Will we ever summit the pension mountain?, examines the amount of money needed for different scenarios in retirement. It has based the analysis on the idea of targeting a combined pension income in retirement of two-thirds of a person’s pre-retirement gross wage. Taking the UK average wage of £26,728, this amounts to £17,819. With the full state pension currently paying £8,546 a year, achieving the target income would require a yearly income of £9,273 from a private pension.

The policy paper highlights how the money needed to secure the target income figure has increased since 2002. Sixteen years ago £150,000 would have secured an annuity paying just over £9,000 a year, and uprated by 3 per cent per annum. However, that figure now stands at £260,000, an increase of almost three quarters.

This is assuming the retiree owns their own home, however, as the figure rises significantly for those who do not. Royal London’s analysis revealed that based on current average rental costs, a social tenant would need a pot of £385,000 and a private tenant a pot of £445,000, an extra £185,000.

The latest figures for the UK show that in 2016-17, there were 6.55 million households in England headed by someone aged 65 or over, but only around three quarters were outright owners. Roughly 1.05 million were social renters and 0.41 million were private tenants.

Current figures suggest that home ownership among the over 65s has risen sharply in twenty years but for those in the 55-64 age group, home ownership has not improved. Furthermore, for millennials, recent research published by the Resolution Foundation found that one in three could find themselves renting ‘from cradle to grave’.

“This would substantially increase the pensions mountain faced by this age group and indicates that currently minimum savings rates for workplace pensions are likely to be substantially short of what this group needs to be saving if it is to avoid a sharp fall in living standards into retirement,” the report said.

As a result, Royal London said the best policy response in terms of pensions, it to help people build up a larger pension pot so they are better placed to meet the costs of renting in retirement. This includes improving the coverage of auto-enrolment to bring in the self-employed and low paid workers. Contribution rates also need to be increased, with default step-ups from the mandatory 8 per cent when people get pay rises.

In addition, Royal London said other issues need to be addressed such as labour market policy, housing policy and social care policy. It said action needs to be taken to tackle the declining home ownership rates among young people, including the supply of affordable homes.

Commenting, Royal London personal finance specialist Helen Morrissey said: "This research is a reminder that when we save for retirement we are chasing a moving target. If our retirement pot is going to support us through a longer retirement and in an era of lower interest rates, we are going to need to build a much bigger pot than in the past. More worrying still, we can no longer assume that we will be mortgage-free homeowners in retirement.

"For those unable to get on the property ladder during their working life, a large private rental bill needs to be factored in to retirement planning. For all of these reasons, we cannot afford to be complacent about current levels of retirement saving. This research also has big implications for the mandatory 8 per cent contribution rate from April 2019 for those who have been enrolled into a workplace pension. This is a great start, but the government needs to act quickly to nudge people up to more realistic savings levels. Without this, many millions of people will face a sharp drop in living standards when they retire."

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