Help homeowners boost pension when mortgage ends, government told

We’re not saving enough for our pensions, but there is something simple we can do about it.

Homeowners who have paid off their mortgage should be encouraged to use the spare cash to boost their pension savings, according to a think tank.

Analysis by the Institute for Fiscal Studies suggested policymakers wishing to increase individuals’ private pension saving, should target policies at the point when they finish repaying their mortgages. 

Such policies could work to increase pension saving without individuals having to cut spending on other goods or services at that point in time.

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UK pension savers are on average not contributing enough to their retirement pots. Current auto enrolment minimums mean most working people are adding at least 8% of their salary a month to their pension, split between their contribution and their employer’s.

But experts have calculated we need to be putting away closer to 15% a month.

The IFS found currently very few of us – just five out of every 100 individuals – increase our pension saving by £150 a month or more once we have paid off our mortgage.

This despite that being a time when cash is likely to be freed up and average mortgage payments among this group are more than £200 per person per month.

However Becky O’Connor, head of pensions and savings at interactive investor, said with mortgages increasingly lasting for 30 years and well into retirement, the point at which people finish repaying is getting later – and may well be too late to make up for lost time on pensions.

“The best time to pay the most into your pension is early in working life. The problem is this coincides with prime deposit saving time for young adults too, and on low incomes, paying rent – these are two very daunting life mountains to climb,” said O’Connor.

Workers aged 35 to 64 who own their home outright make higher average pension contributions than those who rent, after taking into account differences in their earnings, the IFS found.

However, differences are small, with the mean contribution around £150 per year higher in 2006–08 and the median contribution only £50 per year higher.

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O’Connor pointed out relying on people even getting a mortgage before prioritising pension contributions could also mean more miss out, as a growing number of people remain in private rented accommodation because they never manage to save up the increasingly large deposit needed to buy a home.

“For this group, increasing pension contributions is more necessary, as they will need a bigger pension to cover rent payments right through retirement, but also harder, as they generally have less disposable income," she said.

"Their housing costs continue in perpetuity – and that is a retirement renter crisis waiting to happen."