Experts are calling for a shake-up of the pension system that could allow first-time buyers to use their pension pots for a deposit.
One of the UK’s biggest asset managers, Schroders, wants the government to allow savers to use their pension savings early to buy their first home, the FT reports. They say it could be a game-changer for those struggling to get on the property ladder.
Schroders, along with the Pensions Management Institute, have put forward a plan for a “national lifetime savings plan”. This would give first-time buyers access to their retirement savings early as part of a revamp of how we build and use our wealth.
What’s the current situation?
At the moment, if you have a defined contribution pension, you have to wait until you’re 55 to access your hard-earned cash. And this age limit is set to rise to 57 from April 2028. If you do take pension cash out before you’re officially allowed to, you’ll be hit with hefty tax charges.
There is a Lifetime ISA designed to help those aged 18 to 40 with home deposits. But there’s a catch – contributions are capped at £4,000 a year. And while the government does give you a 25% bonus on top of your contributions (rather than tax relief), the funds must be used for a property worth up to £450,000. Anything more than that, and you face a hefty 25% withdrawal charge.
Why the radical proposal?
Schroders argue that while saving long-term is crucial, allowing people to use some of their pension early for a house deposit or to clear debts could actually benefit them in the long run.
The number of people renting in retirement is predicted to triple over the next 20 years. This will leave many facing a financial black hole in their golden years. The Pensions Management Institute reckons that renters need to put aside an extra 9% of their salary each year into their pensions to enjoy the same standard of living in retirement as homeowners.
Sir Steve Webb, a former pensions minister and now a partner at actuarial adviser Lane, Clark & Peacock, put it bluntly: “If you have all your savings in a pension but don’t buy a house, you have no hope of a good retirement.”
Would it actually work?
Schroders believe that if people knew they could access their pension savings for a house deposit, they might be more inclined to increase their pension contributions.
Experts seem to agree. Ruston Smith, chair of the Pensions Management Institute, believes that this proposal could be a winner, saying: “This proposal accelerates and evolves the use of the UK’s automatic enrolment [pension] framework to meet the needs of modern society whilst also addressing the lifetime savings challenge.”
But it’s not all plain sailing. Some experts worry that dipping into pensions early for a home could spell trouble down the line. Jason Hollands, managing director at wealth manager Evelyn Partners, warns: “Pensions are designed to provide a retirement fund first and foremost and there are other schemes designed to help you buy a house.”
A Pension Crisis?
Schroders’ proposals come at a time when the UK is facing a growing pensions crisis. 17 million adults in the UK aren’t saving enough for the retirement they expect, according to research by pension provider Phoenix Group.
What happens next?
The new Labour government has launched a review of pensions adequacy and is on the hunt for ways to improve retirement outcomes. Whether this radical proposal to allow first-time buyers to use their pension pots for a house deposit gets the green light remains to be seen. But one thing’s for sure, it’s got everyone talking!