Posted by: Jules Birch24/09/2012
Nick Clegg’s ‘pensions for property’ plan is the most breathtakingly stupid idea since, well, the last time a government proposed something similar.
Liberal Democrat leader Nick Clegg and Treasury chief secretary Danny Alexander put forward the proposal in interviews on Sunday as a way of allowing parents and grandparents to use their pension fund to guarantee a deposit for their children and grandchildren.
Party sources briefed the media that they believe 250,000 people with a pension pot of more than £40,000 could potentially benefit and that about 5 per cent of them (12,500) were likely to take it up.
The idea seems to be that the lump sum element of the pension – usually about 25 per cent – could be used as a deposit, so someone with a £40,000 pot could use it to allow their child or grandchild could borrow a deposit of £10,000
Reports suggest that the mortgage deposit scheme is more than just a Lib Dem conference idea and is being looked at by both the Treasury and DWP.
At first glance, and unless I’m missing something, this looks exactly the sort of tinkering with the housing market that politicians love because it puts them on the side of aspiration - but then they fail to think through the consequences.
First, what happens if things go wrong? What if the doomsters prove correct and house prices fall by 20 per cent? That would jeopardise the retirement income of parents or grandparents.
Many with spare cash outside their pension will already be using it to help so (as presented) this looks like it applies to people without many other assets. Since the income from their pension pot would already be tiny (a fund of £40,000 is tiny in the scheme of things and would deliver an income of about £40 a week) presumably that would force them to rely more on the state minimum income guarantee. Effectively the state would be paying for negative equity.
Second, what if things go right? Deposits guaranteed by the pension pots of parents and desperate grandparents desperate to help their kids simply help prop up house prices.
If house prices rise, that just increases the exclusion of young would-be buyers with no parental help. The divide between housing haves and have-nots grows ever wider and social mobility – something that Lib Dems are meant to be in favour of – slows down even more.
Just about the best that can be said for the pensions for property proposal is that it is too small to make much difference – though once accountants get to work on it who is to say that it could not end up applying to more pensioners too and have a much bigger impact?
Reaction within the pension industry so far has ranged from caution to hostility, with one anonymous expert describing it as ‘Maxwellesque’, Ros Altmann of Saga calling it ‘a political gimmick’ and the National Association of Pension funds saying that ‘at first glance this idea leaves us feeling slightly uneasy’.
Another downside could be that it concentrates the minds of pension funds on housing risks at exactly the time that the government is desperately trying to persuade them to invest directly in (private rented) housing.
The last time a government tried to relax the rules on pension funds for property it changed its mind at the last minute.
This was the idea proposed by Gordon Brown and the Treasury in 2005 to make residential property one of the eligible categories for investment by people with self-invested personal pensions (SIPPs). The changes were due to take effect in April 2006.
Campaigners warned over and over again that the consequences would be a boom in ownership of second homes and holiday homes fuelled by tax breaks on investment in pensions.
Finally, in the pre-Budget report in December 2005, the Treasury came to its senses and ruled that residential property (along with fine wine, antiques and racehorses) would not be eligible for investment.
Clegg’s ‘pension for property’ idea may not be quite as monumentally stupid as the SiPPs plan but the implication that it is being examined across government suggests that ministers have learned nothing in the seven years since Brown’s u-turn and the five since the credit crunch.
And the real shame is that the Liberal Democrats seem set to debate some sensible new housing policies later in the week.
From Inside edge
Housing commentator Jules Birch puts the latest news in context