Guardian Comment – Don't use pensions for house deposits
Guardian Comment – Don’t use pensions for house deposits
by Dr. Ros Altmann
(All material on this page is subject to copyright and must not be reproduced without the author’s permission.)
This really does seem a very odd idea. There are not enough detials yet, but the concept of pledging future pensions to help young people buy homes is rather strange.
Surely it makes more sense to try to use some of the value of older generations’ homes to help younger people buy a house, rather than using their pensions.
Borrowing against future pensions has a number of drawbacks. Firstly, the value of people’s pensions many years’ hence is not guaranteed. Most pensions are invested in assets that will rise or fall over time, depending on the markets. Secondly, most people will need their pensions to support them in retirement, or perhaps for later life care needs. Thirdly, borrowing against a future pension lump sum would be more expensive than taking the money out of the pension fund and using it directly.
Of course, most people simply don’t have enough money in their pension fund to make this a viable proposition. The average defined contribution pension fund is worth around £30,000, which delivers very little pension income in retirement anyway.
Those who have much larger pension funds are likely to be much better off. So the children most able to benefit are likely to be from better off families. These are not the youngsters most likely to be struggling to buy their first home, and indeed these families are more likely to be able to support their offspring from other means anyway. Those with final salary-type pensions would have more confidence of receiving their pension lump sum, but even that is not necessarily guaranteed unless they work in the public sector.
The fundamental problem is that house prices are currently unaffordably high for many people. There is a shortgage of supply because we havnet build enough new homes and the Bank of England’s policies have tried to prop up house prices in order to protect the banks and mortgage lenders from bad debts. Buy-to-let demand has also left many homes beyond the reach of those on average earnings. But raiding older people’s pension pots to help young people buy hugely expensive houses is not necessarily a sesible long-term stratgey. Older people need their pensions to fund their ever-lengthening retirements.
Young people need to save for their future and there are currently few incentives to help them do so. Even saving in a tax-free cash ISA only attracts half the annual allowance, whereas if saving for a house deposit, it would not be adviseable to gamble on a stocks and shares ISA.
Perhaps auto-enrolment should be used to help people save for a first house deposit, instead of a pension. Young people would benefit more from saving to buy a house than from locking their money into a pension which can’t be touched for decades. They would receive help from their employer and perhaps some tax relief if they use the savings for a first home.
As we are about to start auto-enrolment of all workers into workplace pension savings, let’s have some joined up thinking on savings policy, rather than knee-jerk reactions that could end up backfiring if older people lose the pensions they need and younger people do not learn the value of saving for themselves.
After all, if people’s families can help them out, they often do. And if they can’t, they either won’t have much money in their pension fund or will need whatever they have for their own retirement.
I’m all in favour of more flexibility for pensions – and helping people buy their own home – but any policy changes must be introduced in a well thought-through manner.