David Kingman explores Nick Clegg’s idea of letting older relatives use their pension pots to help their children and grandchildren fund the deposits on new homes
Addressing his party’s conference in Brighton on September 23, Deputy Prime Minister Nick Clegg announced a plan to allow parents and grandparents to use their pension pots to fund young peoples’ deposits on new homes.
As he explained to BBC1’s Andrew Marr show:
“We have thousands of young people who are desperate to get their feet on the first rung of the property ladder but deposits have doubled and the number of young people asking help from family members has doubled.”
“So I can announce today that the Government is going to do something that hasn’t happened before: 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, 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.”
A concrete proposal?
So far, the specifics of how such a scheme would operate have not been fully explained. According to the BBC article which accompanied this announcement, the principle would be that older people who expect to receive a significant lump sum when they retire and start receiving their pension could borrow against the value of that lump sum on their children’s behalf, providing a guarantee for the deposit.
Making sure that the remainder of the pension pot was secure would be a critical part of any such scheme, and it has been proposed that this would be unaffected in any circumstances, even if the new homeowners defaulted on their mortgage payments. However, under such a scenario, the lump sum would probably be lost.
The Liberal Democrats estimate that there are about 250,000 people in the UK who have a pension pot of suitable size to take advantage of this scheme. A lump sum is often a quarter of the value of the total pension pot, and they say they think about £10,000 would be the minimum lump sum needed to take part, so people would need a pension pot worth over £40,000 to qualify.
Of these 250,000 people, they anticipate that only about 5% would actually use the scheme, benefiting 12,500 young people who could become homeowners. This is not very many in the context of a national housing shortage affecting millions of people – but at least the politicians are thinking about this issue and proposing solutions.
But would this idea actually work?
Something to build on
A range of objections have been raised since the scheme was announced.
Firstly, there are significant practical problems. People often have an awkward habit of being more complicated than politicians imagine they are, and this is definitely the case when it comes to both pensions and families. Many people have their money invested chaotically, in a number of small pension pots, none of which is likely to contain enough capital on its own to act as the guarantee for a deposit.
Secondly, the figures they talk about suggest that even most people who have a decent pension would only be able to raise enough money to provide the deposit for one child, creating an awkward situation for many families.
Ros Altman, the Director of over-50s business Saga, and a former government pensions advisor, also raised some important economic objections to the proposed scheme. Most pension pots are invested in assets which will go up and down during the lifetime of the investment, so the value of a lump sum is fluctuating. This means that using a lump sum to guarantee a mortgage deposit will probably have the result of adding increased instability to the world of pensions, at a time when far too few people are saving enough for their retirements already.
She also argued that, as wealthier people tend to have bigger pension pots, this scheme would only benefit people from better-off families; hardly a progressive remedy. A better solution would be to let people use some of the liquidity in their own homes to help their children get on the property ladder, she suggests, as this would be “far less socially dangerous” for both young and old.
It’s also worth asking whether parents need any more encouragement to help their children buy houses. According to a report from the Centre for Economics and Business Research which came out in the same week as Clegg’s proposal, 13% of all first-time buyer transactions between 2008 and 2011 involved some financial assistance from the “Bank of Mum and Dad”, affecting 104,000 people. This is nearly ten times the number that the Liberal Democrats estimate would actually take advantage of their proposed scheme, making it doubtful that the intervention they propose is really necessary.
However, the biggest problem of all with this proposal is that it suffers from the same flaw as virtually all the other attempts different governments have made to deal with the housing crisis: it merely tries to help younger pay the inflated costs of buying a house, rather than seriously examining why those costs are so high, and trying to reduce them.
This will require a much more comprehensive range of policies, including looser planning permission and more new house building. Yet at least the housing crisis remains on the political agenda, and is being viewed in intergenerational terms.