Housing affordability remains a serious issue for younger people, especially those living in the capital, but there are many reasons why allowing house hunting Millennials to raid their pensions for a deposit is not the solution to the problem, says PLSA's George Currie .
On 3 June, Housing Secretary James Brokenshire raised the idea of allowing first time buyers access to pension savings to fund a deposit.
It has been debated before. And at first sight it has some potential appeal, especially for Generation Rent.
But unfortunately the proposal doesn’t stand up to scrutiny.
Here are four key reasons why we think this isn’t the right solution for potential house buyers and pension saving consumers.
Great news – the introduction of auto-enrolment in 2012 has done much to improve the pension savings of younger people. But this is not the full and final answer to the pension savings challenge and it’s time to get real about what people need to save for their retirement. Removing savings early in the journey will not serve the average consumer well.
PLSA research shows even without the ability to withdraw money early, 51% of all pension savers (13.6 million people) are unlikely to meet the Pension Commission’s Target Replacement Rate (TRR) in retirement with current auto-enrolment contributions. For the increasing proportion of savers who have only defined contribution pensions, the percentage of those likely to meet their TRR is just 3%.
We need to focus on how to make the system work to provide adequate outcomes for members, not seek to address wider social policy issues. That is why we have called for minimum pension contributions to be increased to 12% of salary by 2030, and for the Government to consider moving to a 50/50 employer/saver split.
Emptying the pot now and plunging it into the housing market means savers will have to start again. This will result in considerably lower pots by the time they retire.
SUPPLY AND DEMAND
The idea of adding new money into the system may very well be counterproductive for very many prospective house buyers, and even push them further out of reach of buying their first home.
Increased demand means higher prices – it is a basic principle of economics. Whatever the start date of the proposed policy, you can bet there will be a glut of prospective buyers making offers on homes. Sellers will be acutely aware of the opportunity this increased demand gives them to raise asking prices. All those pension savings released for houses will go straight into the pockets of sellers and estate agents. We need a solution that won’t further detriment consumers; we need to
address supply by building more houses – this one area where pension funds can provide funding through their investments.
IT SETS A PRECENDENT FOR FURTHER PIGGY BANK RAIDS
Once we open the gate to allow pensions to fund house purchases, why not also allow people to pay off credit card debt or renovate their homes?
Pensions exist to provide for people in their retirement. We must not allow them to become a piggy bank for policy problems faced by this or future governments.
We know from behavioural economics that the majority of us find it hard to prioritise long-term financial needs over more immediate ones. This is one of the reasons many people find it difficult to engage with pensions. But a key benefit of the pension system is that it is set up to support the ‘long-termism’ many of us find difficult. If we move away from that, we risk placing Millennials in further financial crisis in their retirement future.
You can only spend the money once. As we travel together down an uncertain path in respect of other future financial pressures, such as social care, we need to be clear about what pension saving is for.
WE ALREADY HAVE THE LIFETIME ISA
More great news – there are financial product solutions out there.
The Lifetime ISA already offers people under 50 the flexibility to save for a first home (or, alternatively, save for retirement). It allows you to contribute up to £4,000 each year, until you’re 50, on top of which the Government will add a 25% bonus, up to a maximum of £1,000 per year.
You can use your savings to help you buy your first home provided the property costs £450,000 or less, you buy the property at least 12 months after you open the Lifetime ISA, you use a conveyancer or solicitor to act for you in the purchase, and you’re buying with a mortgage.
We also have the Help to Buy Equity Loan scheme, whereby the Government lends first-time buyers up to 20% (40% in London) of the cost of a newly built home, so long as they have a 5% cash deposit. The LISA and the Equity Loan scheme already enabled first-time buyers to build a deposit for a house purchase.
We don’t think using pension savings as an additional financial product is the answer – the current system could be built on – but more importantly, the supply issue needs to be addressed.
The PLSA is keen to enter into debate on new proposals and fresh thinking about how to solve national problems. However, as we look to the evidence-base this is not a position we can support.