Encouraging younger savers to spend their pensions before retirement runs huge risks.
- Confusing shorter-term cash savings for house deposit with long-term investing for pensions will damage retirement prospects for many.
- People need pensions to supplement very low State Pension in retirement.
- More money for house deposits may be popular short-term but could just raise house prices further – boosting demand without expanding supply of homes for sale is not a solution.
Don’t muddle pensions with house-buying: Policy proposals suggesting people should be allowed to use their pension money to buy a first home are understandable, but misguided. The purpose of private pensions is to ensure people have later life income to supplement the UKs exceptionally low State Pension. If people are encouraged to spend their pension money while still young, there is an increased risk of old-age poverty.
Saving for a house deposit is usually in cash, but cash pension saving will result in lower pensions: It is vital to separate the funds saved for house deposits from the money set aside for retirement. When saving for a deposit on a first home, most people would be best advised to have low-risk or cash savings, so that the money will be readily realisable at relatively short notice. Once you find a home to buy, you would not want to have to wait until any illiquid investments are sold, or until markets recover from a downturn. With pensions, however, all studies show that the best long-term returns are obtained by investing in higher-risk assets such as equities and holdings such as private equity, real estate or infrastructure. Those who hold their pensions in cash are likely to end up with much less in later life.
Initiatives such as Help To Buy may have boosted prices without improving affordability: The Government has, in recent years, introduced initiatives to try to help younger people more easily afford their first home. However, this simply adds extra demand to the housing market and there is also evidence it has added to upward pressure on house prices. Affordability has worsened, with younger people forced to take out ever-larger mortgages which poses further risks if interest rates increase in future.
First-time buyers would benefit more from increased housing supply and rising earnings: House prices have increased much faster than wages and a period of relatively stable house prices accompanied by rising earnings is needed to restore better equilibrium. Encouraging more people to buy in a market already suffering from supply shortages is not a long-term solution. There is a shortage of housing because Government has not facilitated sufficient new supply and focusing on expanding housebuilding and relaxing planning laws is more important.
Incentives to make it easier for older homeowners to downsize would also help: Incentivising older homeowners to downsize would be one of the more effective ways to help younger buyers. For example, reduced stamp duty for ‘last-time buyers’, coupled with encouragement of insurers or pension investors to build retirement homes, could also accelerate new supply to rebalance the market.
Owning a pension is essential for retirement – keep this separate from home ownership: The policy of auto-enrolment, with every worker automatically saving in a workplace pension, with money paid in by their employer too, has been a real success. Many young people are now building up investments to boost their later life income. This has tremendous social value and is designed to top up a very low UK State Pension and prevent future Governments from having to support millions of poor pensioners. If people are offered the chance to spend their pensions while still young, they are bound to be poorer in later life. Tax breaks for home ownership should not be confused with incentives for pension investing. Pension funds can help boost the economy and also invest in socially useful projects. This does not match the profile of short-term saving for a house deposit. The lifetime ISA has already muddied the waters between saving for a house and saving for later life. That has been unhelpful but so far has not damaged pension saving significantly. Any policy that accelerated withdrawals from pensions that are supposed to grow over decades to deliver good retirement lifestyles is a threat future taxpayers and using the money to boost demand for first homes risks raising house prices and reducing affordability further.
Let’s hope this proposal is not taken further by the Government.