How and when to save: interactions between owner-occupation and pension saving

This research used data made available via the Office for National Statistics (ONS) Secure Research Service, which is being expanded and improved with ADR UK funding. 

Author: Institute for Fiscal Studies

Date: December 2020 

Research summary

Private pensions and owner-occupied housing are two of the most important forms of wealth that many individuals accumulate over their lifetimes. Deciding how much to accumulate in these forms, and when, can be difficult. Using secure data, researchers examined whether individuals make a trade-off between saving for (or spending on) housing and saving in a private pension. The research found that before the introduction of automatic pension enrolment, working renters of all ages were less likely to save in a private pension than those with a mortgage. This research allows for recommendations around developing automatic pension enrolment and how default contribution rates might be altered.

The project received co-funding from the Institute for Fiscal Studies Retirement Saving Consortium and the Economic and Social Research Council-funded Centre for the Microeconomic Analysis of Public Policy. It aimed to understand how the timing of individuals’ pension saving interacts with the accumulation of housing wealth. This project highlighted implications for the future development of automatic enrolment, including whether and how default contribution rates might be altered.

Data used 

The project accessed the Annual Survey of Hours and Earnings (ASHE) through the Office for National Statistics (ONS) Secure Research Service.

The ASHE is completed annually by employers and contains various measures of pay and hours worked. The survey is based on a 1% random sample of employee jobs taken from HM Revenue and Customs’ Pay as you Earn (PAYE) records.

The researchers also used data from:

• The English Longitudinal Study of Ageing (ELSA), which contains data from more than 18,000 people in England over the age of 50. ELSA interviews the same individuals every two years. It explores the dynamic relationships between health and functioning, social networks and participation, and economic position as people plan for, move into, and progress beyond retirement.
• The Wealth and Assets Survey, which is a longitudinal survey that measures the wellbeing of households and individuals in terms of their assets, savings, debt, and planning for retirement.

Digital Object Identifier (DOI): Office for National Statistics, released 26 October 2022, ONS Secure Research Service Metadata Catalogue, dataset, Annual Survey of Hours and Earnings - UK, 10.57906/x25d-4j96

Methods used

To examine the overlap between saving in a private pension and the accumulation of housing wealth, researchers used data from the Wealth and Assets Survey between 2006-2008. This enabled them to investigate individuals’ behaviour before and after the introduction of automatic enrolment. The analysis focused on those doing paid work, as saving in a private pension is rarely undertaken by those not in work. Researchers estimated a multivariate model (a type of statistical model that uses multiple variables) to examine the association between pension membership and housing tenure, while controlling for individual characteristics such as age, gender, earnings, region, and occupation. This analysis was carried out for three age groups: 20-34, 35-49, and 50-64. It included four housing tenure types: own outright, mortgage, rent, and rent-free (including living with parents).

Researchers used fixed effect models to estimate the relationship between the median house price in the area an individual worked and the probability that they were a member of a workplace pension. Using data from the Annual Survey of Hours and Earnings, this analysis focused on young employees (aged 21-35) as this captures the age range during which most individuals are saving for (and getting on) the housing ladder. Those working in London were excluded, as house prices in London are likely to be less representative of house prices in the rest of the country. Researchers controlled for factors that affect pension membership (age, gender, occupation, industry, earnings, and employer size) and used sector-specific year dummies to allow for time trends to be analysed. The researchers focused on individuals’ behaviour between 1997-2007 as this time period had a relatively stable macroeconomic environment.

Researchers also analysed the relationship between pension saving and mortgage completion for those aged 50+. Using the English Longitudinal Study of Ageing, the researchers compared:

• the change in pension saving over the two years when a mortgage repayment was completed, and
• pension saving over two years for an individual that did not finish repaying their mortgage (because they were continuing to repay their mortgage or had previously completed repayment).

Researchers again controlled for age, gender, relationship status, change in earnings, and survey-year dummies. They focused on those under the state pension age with knowledge of their pension contributions and those who were in work both before and after their mortgage repayment was completed.

Research findings 

Before the introduction of automatic enrolment, working renters of all ages were less likely to save in a private pension than those with a mortgage, even after controlling for other factors. This is most likely due to differences in characteristics between renters and mortgage holders that are not observed in most household datasets, rather than renters saving for a housing deposit in preference to joining a pension scheme.

There was no overall association, on average, between local house prices and whether a young employee is a member of a private pension. This was evident even among those in the middle of the earnings distribution, who may find it more difficult to decide whether to save for a deposit or in a pension. The researchers found that if average local house prices were £100,000 higher, there was only a 2% lower probability of being in a workplace pension. Public-sector employees are impacted more by higher local average house prices than private-sector employees. This effect appears to be strongest in health and education, where employee pension contributions are often higher than elsewhere in the public sector. However, the effects are still modest.

Other key findings included:

• Workers aged 35–64 who own their home make higher average pension contributions than those who rent. However, differences are small: the mean contribution was only around £150 higher per year in 2006–08, and the median contribution was only £50 higher per year
• Very few individuals increase their pension saving when they pay off their mortgage. Only five out of every 100 individuals who pay off their mortgage choose to increase their pension saving by £150 per month or more. This is despite average mortgage payments being more than £200 per person per month
• Findings suggest individuals are very inert in their pension saving. Few individuals actively timed their pension saving relative to their saving for (or spending on) housing, even before automatic enrolment.

Research impact 

This research has taken an important first step in understanding how the timing of individuals’ pension saving interacts with the accumulation of housing wealth. As a result, the researchers were able to make recommendations around developing automatic pension enrolment and how default contribution rates might be altered:

• Policymakers must consider how changing default contribution rates for young adults might affect access to owner occupation. Younger adults will gain more from compounding returns on any given amount of pension saving than older adults. However, these returns may need to be set against the financial return from being able to purchase a home sooner or from being able to purchase a larger home.

• Industry or government policymakers wishing to increase individuals’ private pension saving should consider policies that target individuals after they finish repaying their mortgages. Such policies could increase pension saving without having to see spending on other goods or services fall at that point in time. Those getting on the housing ladder for the first time may have a greater capacity to save if mortgage repayments are lower than rental payments and deposit saving.

There is an opportunity for government and the financial services industry to work together. They could consider broader initiatives such as the mid-life MOT, encouraging individuals to save more to improve their standard of living in retirement.

Research outputs

Publications and reports  

• Institute for Fiscal Studies Briefing Note, December 2020: How and when to save: interactions between owner-occupation and pension saving
• Institute for Fiscal Studies Working Paper, December 2020: The impact of house prices on pension saving in early adulthood
• Institute for Fiscal Studies Briefing Note, May 2021: Life-cycle patterns in pension saving

Blogs, news posts, and videos

• Institute for Fiscal Studies Press Release, May 2021: Government should nudge people to save more into a pension when children leave home, mortgages are paid off or student loans come to an end
• Institute for Fiscal Studies blog, May 2021: Understanding the gender pension gap

Presentations and awards

• Institute for Fiscal Studies, December 2020: Pension saving in a world of personal responsibility

About the ONS Secure Research Service

The ONS Secure Research Service is an accredited trusted research environment, using the Five Safes Framework to provide secure access to de-identified, unpublished data. If you use ONS Secure Research Service data and would like to discuss writing a future case study with us, please ensure you have reported your outputs here: Outputs Reporting Form and get in touch: IDS.impact@ons.gov.uk