Funding first time buyers with a pension doesn’t add up

Plans to help parents and grandparents to raid pensions to help young people struggling to raise funds for a house deposit look like they are will stick in the starting blocks.

Financial institutions and pensions experts have roundly criticised the proposal announced by Lib Dem leader and deputy prime minister Nick Clegg at his party conference.

He wants the government to back a scheme that lets retirement savers with £40,000 or more in their pension pot release the cash as a guarantee for a house deposit to younger family members.

“We are going to allow parents and grandparents to act as a guarantee if you like so their youngsters can take out a deposit and buy a home,” he pledged.

However, three factors may put a damper on his proposal:

  1. Pensions cannot invest in residential property
  2. Anyone under 55 years old is barred from withdrawing cash from their pension unless special bad health circumstances apply
  3. The average UK pension pot is between £30,000 – £35,000, according to older people’s financial adviser Saga.

Providing Clegg can negotiate these blocks, the scheme also raises other questions –

  • What happens if property prices fall?
  • What happens if the property is repossessed?

The risk is at a time when the government is starting pension auto-enrolment to encourage more people to save for their retirement, a scheme like this attempts to unlock pension funds and could deprive savers of money to fund their later years.

The worst case scenario is what happens if someone raids their pension to buy property for their children or grandchildren and then calls on the State to fund their retirement?

Otto Thoresen, director general of the Association of British Insurers, said:”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.”

Meanwhile, the idea received a lukewarm response from the Building Societies Association, who said: “New ideas to assist first time buyers to get onto the housing ladder are welcome. The use of elements of a pension pot as a guarantee however raises some particularly meaty questions which need careful consideration.”

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