Housing minister James Brokenshire floated recently the controversial idea that young people should be allowed to raid their pension pots to fund a home deposit as first-time buyers. He’s not the first to do so and he probably won’t be the last.
Brokenshire argued in a Policy Exchange speech intended to influence the Conservative party’s leadership contest that this would help aspiring home buyers to make that all-important, first-time purchase in a difficult housing market, where prices relative to incomes are stubbornly high.
“It seems rather obtuse that we would deny people the opportunity to do this, given that we know those who own their own home by retirement are on average a) wealthier and b) do not have the burden of the largest expense in retirement—accommodation,” Brokenshire said.
“And it is, after all, their money. Not the fund’s, not the state’s, it’s yours, and the next Conservative government should free that capital up, and trust the individual to make the choice for themselves.”
It’s not clear exactly how Brokenshire’s idea would work in practice. It could work in a way similar to the 100% mortgage products currently available to first-time buyers, where family members front the deposit in a savings account, which is returned to them after a few years.
This would carry risks, such as lower investment returns, but this might be mitigated by the eventual return of the money to the pension pot.
But Brokenshire may also have meant it as quite literally dipping into the pension pot to remove the required amount of savings and putting it into home equity.
There are several reasons this could be a terrible idea with potentially dreadful consequences for those who were to opt for such a scheme, as well as the wider housing market. Here are some of the main arguments against the proposal.
Young people are under-saving for retirement
Studies consistently show that, thanks to low incomes and a high cost of living, young people are simply not saving enough for their retirement. Though the auto-enrolment scheme is helping, the low minimum contribution rates for employees and employers put a brake on its success.
Letting young people raid what little they do have saved for a pension to buy property will worsen this unpreparedness problem and leave some facing pensioner poverty.
They can’t rely on a state pension top-up
Our population is ageing and state pensions are putting a huge strain on the treasury. The state retirement age is being pushed later and later, meaning it will take many more years for today’s young people to be entitled to claim their state pension.
And the truth is, it probably won’t be worth much by then anyway, eroded by inflation and rises suppressed by the treasury’s bean counters. So it is imperative that private pensions are sufficiently large to offset this loss and allow today’s young people to retire at a reasonable age.
Your home is not a good investment
The property market is turbulent and returns are typically not as good as other investments, such as stock market tracker funds. Tying your pension savings up in your property puts your wealth at greater risk because the housing market is volatile.
In order to cash in if you need the money for a retirement income, you must sell your home. You might find you’ve lost money because its value has fallen, not to mention the costs of moving, such as stamp duty, if you’re downsizing.
It fuels housing demand not supply
The fundamental problem in the housing market is a severe shortage of homes. That is why house prices are so high, locking out many aspiring homeowners from the market.
This supposed pension savings solution actually worsens that problem by fuelling more demand, pushing prices higher and benefiting existing property owners. It does nothing to address supply-side issues, such as planning reform, and delivering more homes.