Anyone with an interest in the predicament currently facing first time buyers, who watched the BBC’s Andrew Marr show yesterday, could have been forgiven for thinking they had misheard the Deputy Prime Minister, Nick Clegg, announcing proposals that would allow parents and grandparents to use their pensions to help children and grandchildren get on the housing ladder.
Mr Clegg said: “We are going to work out ways in which parents and grandparents who want to help their children and grandchildren buy a property of their own.”
He continued: “We are going to allow those parents and grandparents to act as a guarantee, if you like, so their youngsters… can take out a deposit and buy a home. It is a pension from property scheme.”
Our first reaction, after we’d rewound and checked again what Mr Clegg had said, was to start thinking about how this might work. Would it be a loan from the parent’s pension to the child? Would the pension part own the property?
Both options looked complex, and would have required major changes to pension rules. However, as the day progressed and more details of the plan emerged, it became clear that Mr Clegg is thinking about something very different, and frankly, judging by the reaction on social media channels and in the media, completely unworkable.
Parent’s pensions to help first time buyers
First time buyers have been hit particularly hard by the credit crunch and the requirement of many lenders for larger deposits has often meant the need for parental help.
Nick Clegg’s “pensions for property” scheme is targeted at parents who are close to retirement and who have pension funds of at least £40,000.
Although the finer details are not yet available, the basic principle seems to be that the parent would sign an agreement with their child’s mortgage lender making the tax free lump sum will be made available, presumably at a future date, to help towards the cost of the child’s home by effectively guaranteeing the loan. If the child defaulted on the mortgage payments, the tax free lump sum payable by the pension could be at risk, although the remaining pension would not be touched.
Mr Clegg believes that such a move could potentially make first time buyer mortgages more attainable, with the additional security making lenders more likely to reduce the deposit needed by first time buyers.
Initial reaction though was far from favourable.
Director General of the ABI (Association of British Insurers), Otto Thoresen, said: “We would want to look closely at the detail of the ‘pension for property’ scheme announced today by Nick Clegg.”
He continued: “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.”
Pension experts were quick to point out that most people do not save enough for retirement in the first place and that potentially losing up to 25% of a relatively small, £40,000 pension fund, would seriously damage people’s retirement income, which in extreme cases, could increase the number of people claiming state benefits.
Other experts raised the issues of investment returns. Any investment made by a pension currently needs to be ‘wholly and exclusively for the benefit of the pension’. Nick Clegg’s proposals seem to run contrary to this principle, as on the face of it, there is no benefit to the pension fund, only the first time buyer child.
Questions have also been raised about whether mortgage lenders would be keen to participate in a scheme, which could see any losses only repaid when the parent actually retires.
A missed opportunity?
Whether Mr Clegg’s proposals ever see the light of day remains to be seen, but they did get us thinking about a possible alternative option.
First time buyers are certainly struggling to get mortgages, with lenders tightening criteria and insisting on larger deposits, whilst many people have found their pensions disappointing, often citing a lack of flexibility.
Tying these two things together, could the government perhaps have gone further and allowed parents to use their pensions to lend their children the deposit for their first house? With the child making repayments of capital and interest over a set period of time.
This route would have the benefit of providing a return for the pension fund, in the form of interest payments from the child, which is currently a key principle of pension legislation.
Furthermore it would require relatively simple changes to pension legislation, which already allows SIPPs (Self Invested Personal Pensions) to make loans to unconnected third parties.
Whilst there are benefits for struggling first time buyers, as well as those people who perceive pensions to be inflexible. There are significant disadvantages.
Firstly, it would probably mean that pension benefits need to be transferred to a SIPP, which could increase the costs of the pension itself and also introduce additional costs for any advice deemed necessary.
Secondly members of defined benefit or final salary schemes would probably be excluded, as it is rarely a good idea to transfer from such schemes.
Thirdly, would such a loan pass the ‘wholly and exclusively for the benefit of the pension’ test?
Finally, if such loans were made, and assuming they were repaid over a relatively long period, it would probably stop the parent being able to buy an Annuity in retirement, which is the most popular option at retirement, and the only way of providing a guaranteed income.
“Pensions for property”
We have to wonder whether Nick Clegg’s idea will ever get off the drawing board, the initial reaction has not been far from positive, and to make such proposals work, it would need the pension and mortgage industry to come together with government; that’s a lot of vested interests!
The first step must surely be to decide whether helping first time buyers is a reasonable investment for a pension fund, which is after all there to provide an income in retirement.
If it isn’t, Nick Clegg’s idea is likely to get buried in the same pile as Gordon Brown’s plan to allow pensions to buy residential property.
If however, enough people think that the position of first time buyers is so precarious, and that other options have been exhausted, surely more debate is then needed to come up with the best way possible of using pensions to help this beleaguered group.