Sara Benwell 1.43pm
Another day, another bonkers financial plan from Nick Clegg.
At the Lib Dem conference in Brighton, Mr Clegg announced his nascent “pensions for property” scheme.
How would it work?
The scheme aims to enable first-time buyers to tap into their parents’ or grandparents’ retirement savings and allow them to take out a deposit.
It is as yet hazy on details, but it seems that parents would be allowed to sign an agreement with their child’s mortgage lender promising that a lump sum will be allocated towards the child’s home financing costs.
Essentially, a retired (or nearly retired) parent with a £60,000 pension pot could promise that a chunk of this (around £15,000) would be used as a deposit on a child’s first home.
The scheme will be targeted at parents who have built up a pension fund worth around £40,000 and are nearing retirement. Lib Dem officials have estimated that as many as 250,000 households could fit these criteria, including public sector workers such as teachers and nurses. Those with more valuable pensions would be able to use the scheme, but ministers have argued that they are likely to have other financial assets that they can use to help their children.
Why is it bonkers?
There are two reasons that this scheme doesn’t make sense. The first is that it won’t solve the problem that it sets out to solve; the second is that it may cause further problems in a pensions industry that is already riddled with them.
Why it won’t solve the problem
We have an alarming lack of affordable housing for young people. It is nigh on impossible for most of us in their twenties and many in their thirties to buy their first home. Particularly in London. I’m a twenty-something and it’s depressing to consider the amount that I throw away on rent and that at this rate I’m unlikely to be able to save enough for a deposit and get a mortgage until I’m about 55 years old. Nevertheless, Mr Clegg is mad if he thinks that stealing from pensions will save the young.
This scheme will only make a difference to a relatively small group of people with a pension pot of a certain size. Furthermore, it seems likely that a lot of people who will be able to swap part of their pension for their child’s property may have other methods of helping their children out. Those whose pensions sit below this threshold will not be able to join in the fun, and those with a pension pot of significantly higher than the 40k mark are unlikely to take this route anyway. Also remember that at 55, most people will be able to access this tax free sum anyway and do with it what they wish – be that go on a cruise or help their children to buy a house.
If you believe (how could you not?) that we have problem with unaffordable housing for the young, how can you possibly think that a scheme which will change the fortunes of so few will solve the problem? If the problem is that houses are too expensive, allowing the vast minority of the populace a potential solution won’t make an iota of a difference to the fact that houses are too expensive for the majority.
What we need is more affordable housing, which would allow people to buy property that is within their means. If anything, this scheme is likely only to make houses more expensive, as it pushes more people into putting up deposits for houses they can’t afford.
Why it might make the pensions crisis worse
Firstly, one has to question how a scheme like this would actually work. Would it apply to all pensions schemes? How can lenders assess the risks involved if a pension scheme were to go bust? It seems likely that lenders would be very cautious when it came to lending to occupational pensions schemes, for instance.
One must also ask how well this policy would sit with other pensions policy and regulation. If changes are made to the access that people have to their pensions or to the tax-free lump sum entitlement, where will this leave the scheme? It seems that if this is even to get off the ground it needs to be more fully integrated with wider pensions policy.
The biggest problem is that this could leave retired people short of funds when they eventually come to giving up work. Already, the country is faced with a problem where not enough people are saving adequately for retirement and various schemes such as NEST are being implemented to try to change this. Guaranteeing this money as a deposit for a child’s home could mean that when it comes to retirement people are left with insufficient funds. What we don’t need is a system where people aren’t left with enough money to retire on.
Otto Thoresen, director general of the Association of British Insurers, told the Independent: ”Pensions are designed to mature into a decent retirement income, not for other purposes. Any scheme which uses pensions as a guarantee must ensure that it does not inadvertently make the saver worse off when they retire.”
One also wonders how this scheme will work amidst a move towards defined contribution pension schemes, when annuity rates are falling as a result of QE and falling stock markets. How can you guarantee a lump sum of your pension when you don’t know how much it will eventually be worth, and if the downward annuity rate trend continues you’re likely to have a much lower retirement income than expected?
It’s all very well saying that we’ll help parents to help their children get on the property ladder, but this is all for nothing if it comes at the expense of increasing the problem of Britain’s underfunded retirement system. It seems bizarre that when we already have a pensions crisis caused by people not saving enough for retirement, Mr Clegg seems to think that we can use people’s pensions to try and solve the problems of unaffordable housing for the young.
Let’s only hope that this idea gets shelved in that cupboard of bizarre Lib Dem economic policies before we worsen the pensions crisis without helping the mortgage finance problem at all.
If by some miracle it does go ahead, I’m looking forward to the look on my mother’s face when I tell her she has to give up part of her retirement fund so that I can buy a house…
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