Rachel Dalton looks at Clegg and Webb’s plan to allow parents to access pensions to help children get on the property ladder.
Conference season always throws up ideas from political parties that are towards the more fanciful end of the scale, but Nick Clegg’s plan to allow parents or grandparents to guarantee their children’s mortgages with pension entitlements has been labelled outright as “bonkers” by the industry.
Experts have already thrown up several problems with the proposed scheme, and many are hoping it will fall by the wayside before the Autumn Statement.
The Deputy Prime Minister announced on 23 September that the Liberal Democrats have proposed a system where parents or grandparents could use their pension commencement lump sum to guarantee their children’s mortgages.
This is in response to the problem of younger people being unable to afford ever-increasing deposits on properties, with the average age of first time buyers having grown from 28 to 35 over last decade, according to research by the Post Office.
Since Clegg’s announcement, further details have emerged. The Lib Dems believe around 250,000 people have a pension pot of around £40,000, with a PCLS of 25%. The party said around 5% of those with a suitable PCLS will take up the scheme, meaning 12,500 could use it to benefit their children.
If their children then default on mortgage payments, the PCLS would be at risk, but the remainder of the pension entitlement would not. It is not yet clear whether individuals would be able to use their PCLS to back any mortgage, or if it would be restricted to family members’ mortgages.
Some commentators dismissed the proposals out-of-hand as conference season bluster. However, there is evidence that the proposals are actually a step further towards the statute books than previously thought.
A Lib Dem spokesperson confirmed that Clegg has passed on the plans to pensions minister Steve Webb, who will now consult with the industry on which products it could design to make the scheme feasible.
Webb has already responded in the media to criticism of the plans, saying they will not reduce retirement income as they would only utilise PCLS money, which is usually withdrawn at the earliest opportunity to fund holidays or pay for home improvements anyway.
Given the negative reaction to the plans from the industry, it would appear that some bodies have been taken by surprise by the proposals.
Association of British Insurers director general Otto Thoresen said: “We would want to look closely at the detail of the scheme.
Adding your comment
I seem to be the only person outside of the Liberal Democrat party that can see merit in Clegg’s pensions to back mortgages idea. It makes pensions more immediately relevant, as people in their 50’s will be able to use the PCLS to help their kids get on the housing ladder, and people in their 30’s and 40’s will know that will be able to do this once their kids are grown up and ready to leave the nest. Making pensions more relevant with ideas like this can both increase contribution levels and improve persistency. Meanwhile, unlike early access, the money will actually remain in the pension fund, and only be used by the mortgage provider if there is a mortgage outstanding when they reach retirement age.
Posted by: Adrian Boulding, 27 Sep 2012
Suggesting that pensions can be used to fund the purchase of a property does not make a pension more relevant. It obscures the purpose of a pension as a necessary means to provide an income in retirement.
Rather than reinventing pensions as a savings plan with early access, we need to reinforce the very good reasons why access of the capital for a reason other than income in retirement is a bad thing!
There are other savings plans which give access to the capital before retirement.
And there is no property ladder. It's property snakes & ladders
Posted by: Karen Wake, 27 Sep 2012
Get the latest news direct to your inbox.
More from Industry
Pensions Buzz
Updating your subscription status 
This Aberdeen Asset Management hedge fund roundtable discusses what investors are looking for in hedge fund governance; lessons that have been learned from the past and how the industry is placed for the future.
The all-new Pensions and Benefits Show will be held on 12th-13th June 2013 at ExCeL, London.
The Pensions Institute provides 15 good practice principles in modelling defined contribution pension plans. These principles cover the issues such as: model specification and calibration, modelling quantifiable uncertainty, modelling member choices and modelling longevity risk.
After what has felt for many like an eternity, auto enrolment has finally arrived. As the UK's largest employers complete the process, now is an ideal time to consider some of the lessons learned so that employers with auto enrolment on the agenda for 2013, can avoid some of the pain and pitfalls that may occur along the way.
This whitepaper provides a checklist to ensure you are compliant with the new legislation.
Financial Library is a whitepapers, research and briefings distribution service that is designed to provide users a quick and easy way of keeping ahead of business and market developments.
Visitors comments Add your comment