Could early access to pensions be a path onto the property ladder?

In a speech at the JP Morgan Pensions and Savings Symposium delivered on 28 March, Rathi asked if more could be done to integrate positive pension saving behaviour into mortgage and credit affordability assessments. He asked whether pensions could play a role in helping prospective homeowners with a deposit – noting that other countries, such as Australia, New Zealand, the United States, Singapore, and South Africa, all permit citizens to leverage their pension savings to buy their first home.

However, he said such a move would rely on individuals having engaged with their pensions and saved in the first place. He also noted that there would be trade-offs and any move in this direction would need to consider the ability of savers to replace withdrawn funds, the impact on house prices, and whether individuals might be better served by investment in a wider range of productive assets.

Research from the Resolution Foundation published in December found young people today are less likely to own their own home compared to those in the early 1990s, with 31% owning their own home in 2022-23, compared to a peak of over half (55%) in 1990. Furthermore, research published by the Equity Release Council showed two-fifths of those currently renting in the UK believed they would still be renting in retirement.  

Having seen other countries take measures to permit early access to put a deposit down on a property, and to alleviate the concerns of those who fear they will be renting in retirement, should the UK government consider measures to follow suit? If so, how should the proposals work, and what can we learn from the examples set by other countries? The Lifetime Savings Initiative (LSI) has assessed some of the available models - scroll through below to find out more.

Pinch points

With other countries implementing measures to enable pension savers to get on the housing ladder, does the UK pensions industry believe similar proposals could be implemented here? The results of a Professional Pensions Buzz survey earlier this year found 57% of respondents were not in favour of permitting UK savers early access to help them purchase a house.

PMI chair Ruston Smith says the institute's work with Schroders on the LSI sought to understand the key "pinch points" that people have in saving for the future over the short and long-term, particularly in the years since the Covid pandemic. He says the research showed many households had a lack of short-term or "rainy day" funds, and people also were finding it difficult to save as well as make a deposit on their first home.

"Home ownership has reduced, particularly over the last ten years," he explains. "It has gone down from a peak of 71% to around 64% more recently, and the average age at which somebody buys their first home has gone up to 34. That also has a bigger consequence as it means more people are likely to be renting in retirement. The statistics suggest that over the next 20 years, three times more people will be renting in retirement."

Smith adds that for people who will be renting in retirement, the cost is expected to be equivalent to "around a 9% pension contribution rate from the age of 22". He adds that it will therefore be beneficial for people to get to retirement owning a home, as this would mean they have an "asset" and would be able to "release some of the equity" in the home to "supplement" their savings if that was right for them. However, for those who do not have their own home, not only will they not have an asset to use in retirement but they will also have to find extra income to meet the cost of the rent in retirement.

Legal & General (L&G) chief executive of DC and workplace savings Paula Llewellyn notes there are "huge affordability" challenges for first-time buyers and, while early access to pensions could be a solution, it would need to be set in the context of broader measures to "tackle the lack of affordable housing".

She says: "The next step on this would be to better understand any risk of negative consequences of using pensions to fund home purchases, such as increased house prices and/or the impact on a member's long-term financial resilience, and to ensure any such measure helped those who most need support."

‘Successful framework'

The PMI's Smith says while the issue of inadequacy in pensions is set to be addressed in the second phase of the Pensions Review, any changes to improve adequacy in retirement are likely to take decades – adding we are likely to be facing at least half a century of inadequate retirement savings where broader lifetime savings will be critical in helping to make ends meet in retirement.

He explains that the work the LSI did in examining the other more developed models implemented by other countries showed they were "well ahead" of the UK in terms of understanding that people need "more than just pure retirement savings" when they stop working.

He explains: "The frameworks that the other countries have put in place allow people to save for many different things throughout their lives and therefore think about lifetime savings rather than just pure retirement savings and pensions. Auto-enrolment (AE) in the UK has been a huge success, we have a successful framework where we have got high levels of people saving for retirement. But when we looked across to those other countries, they extended AE frameworks to support people more broadly for lifetime savings.

Smith adds that, influenced by other countries' models, but specifically considering the challenges in the UK, the LSI proposes to extend AE to allow early access only to the value of savings that relate to contributions ‘above the statutory minimum' of 8% – limited to paying a deposit on a first home and/or to remove "problem debt".

Smith acknowledges that, with the current rate of under-saving, we would be "storing up bigger problems for the future" if we allowed employees to get early access to their savings from the 8% statutory minimum contribution.

"This initiative would help move people from renting to home ownership, and therefore they would have an asset and won't be renting in retirement, and a big risk would be reduced – a financial risk that could sit at the Treasury's door. Also, by removing problem debt, it would put people in a better position to manage their money in the shorter term, and equally, once they get to retirement, it means they may have no debt, or they won't have the level of debt that was hanging over them before and it would put them in a stronger position."

Sympathetic

LCP partner and former pensions minister Steve Webb says he is "sympathetic" to the proposals but notes there are a "lot of different ways" they could be carried out. He adds that, while people may argue that pension funds are for money in later life, and, if taken out for other purposes, such as a housing deposit, they won't have those funds once they reach retirement, he says if people are living in rented accommodation in retirement, this will also lead to poor outcomes.

"If you have to pay rent, you will be poor when you are old", he explains. "All the figures show you roughly need double the pension pot if you have got to pay rent as well, and most people aren't going to get the basic pension pot they need. If what we as pensions people are trying to achieve is quality of life in old age, we have got to look broadly, and that means making sure you're not a renter in retirement."

Webb notes the question would be whether this would be done through a pension or another financial product. He says it would be "simpler" for people if it were a single product that they are familiar with, like a pension, and that there is an argument for exploring such a proposal.

"Exactly how you would do it, how much you can borrow and whether people will have to pay the money back is a debate to be had, but we should certainly be looking at it."

Hymans Robertson head of DC corporate consulting Hannah English echoes this and says it is an "important" area to tackle due to the growing lack of homeownership in retirement and the ongoing issue of tackling adequacy in retirement.

"If you're using pensions to pay for rent, that's going to be an issue. But, if you're actually using pension for pension, that is a position we would be supportive of getting to. We've got a pensions adequacy crisis looming, which is only compounded by a housing crisis or lack of home ownership in retirement. Anything that could be done to tackle that would be a good thing."

Not effective

Pensions UK head of DC and master trusts Ruari Grant says while the trade body acknowledges there is a problem around affordability of housing, particularly for younger people and those in the South-East of England, it is important to recognise the difficulties people have had in saving for a pension since the decline of defined benefit and the transition to DC.

He explains that AE has been a helpful initiative to turn this around, but many are still saving at "quite low levels" with a large number on track to fall short of the retirement living standard (RLS) they would be hoping for. Therefore, he argues taking the money out of the pension and using it to put a deposit down on a house is not the most effective way of helping savers get to their aspired level of RLS.

Grant says: "If you do this, it would theoretically make housing more affordable, but it also would put more money in the system which could quite easily result in house prices going up. This means they wouldn't be more affordable at all and would boost the existing problem where there is increased demand from buyers and consequently pushing prices up."

He adds the situation would be better solved by addressing the issue of housing supply and increasing the degree to which pension schemes invest in productive finance.

"If we can facilitate more schemes to invest in affordable housing and more house building across the board, that would probably be a better of way of going about it because it will increase the supply of housing to bring down house prices to make them more affordable, as opposed to flooding the housing market with more cash at the bottom end".

PensionBee chief business officer Lisa Picardo also says she would be against such a proposal and says, while there is a need to address the issue of home ownership and the challenges people face in buying their first home, using pensions to solve this would be "exacerbating" the issue of inadequate pension savings in retirement.

She says: "Millions of people aren't saving enough for their retirement, and so the pension is there to provide a retirement income, and the state pension alone probably won't be sufficient for people to have the happy retirement that they really deserve. It's vital they are saving into a personal pension alongside that to be able to have choice when they get to retirement."

‘Pump-up' demand

LCP's Webb agrees there is a risk that allowing savers to access their pensions early would end up "not helping" people, as it would "pump up demand".

He explains: "You enable them to buy a house, but the house costs more because there aren't any more houses than there were before. So, people who sell properties to first-time buyers just put the price up, and the advantage is all capitalised by those who own houses. You have to think about what you're doing in the housing market."

He adds there is also the risk that if funds are withdrawn from a pension without being replaced, this would result in the loss of the investment return and would damage a worker's pension.

Webb adds: "For some people, that damage won't be undone."

Boosting engagement

One of the many ongoing challenges for the industry is getting DC savers to be engaged with their pensions. Therefore, if such a proposal was to be implemented where their pension could be used to help pay for a deposit for their first home, could it boost engagement?

The PMI's Smith says engagement with younger members is challenging as retirement may be a long way off and they have other shorter-term competing priorities.  However, he argues that, if their retirement savings could help them with these more immediate key challenges, it is more likely to encourage engagement and perhaps encourage them to pay more to their pensions.

He says: "We know how important retirement savings and saving for the future are. But if you think about what is going to be on their mind on a Friday night, it may not be: ‘I'm not paying enough into my pension‘. However, like these other countries, by making retirement savings and supporting people more broadly with some of their lifetime savings, it makes it much more relevant to them and helps them today as well as tomorrow."

Hymans' English echoes this and says engagement with pensions is "low" due to the challenges people face in today's economic climate, but notes that such a proposal could bring pensions to the "forefront" of savers' minds".

She explains: "If you look at people today, they're facing so many challenges as to what to do with their money. Do they need it for take-home pay? Do they need it for getting on the property ladder or deposit money? Do they need it to pay off student loan debt? Or do they need it for later life in retirement?"

English says that, since retirement is the furthest away, it is area that people have the least focus on, but wonders if allowing people to unleash the potential within their pension to help tackle some of those other issues, particularly housing, could boost engagement with pensions.

She says: "Your pension is currently inaccessible until age 55, but could you use it now to help you get on the property ladder? There's quite a lot of psychology with that as it brings the pension forward and makes it more valuable today because you could use it to get on the property ladder."

LCP's Webb says it could boost engagement but notes that those who are motivated enough to put a deposit down on a house will use established products, such as a lifetime ISA. But he argues the lifetime ISA is a "deeply flawed" product and says incorporating it into pensions could lead to better outcomes.

"The lifetime ISA (LISA) is supposed to be a lifetime product, but you can't pay into it after age 50, but most people take out cash LISAs because they're saving for a deposit. If it turns out they don't buy a house, they end up in cash for 40 years. So, if you integrate it all into the pension, which is invested and managed for you, you're probably going to get better outcomes."

L&G's Llewellyn agrees that early access could boost engagement but warns that it may change the mindset of members to see their pension as a "pot of cash" to be used now, as opposed to thinking about the long-term and their retirement goals.

She says: "While engagement might increase, this would need to be balanced with education so that members understand their pension through a long-term lens, so they have enough to live on in later life, rather than a pot to use now."

PensionBee's Picardo adds that there is "a lot more to do" when it comes to improving the financial education of members, particularly around pensions, so that they start their journeys with finance in an "earlier and better way".

She explains: "I think around pensions, one of the great innovations that there has been in the UK is AE, which has forced people automatically to be enrolled in a pension. There is still a huge amount of education to be done on what that means for them and how much they should be saving into it."

Need for innovation

But even if ideas around early access do take hold, they will need innovation within the finance industry to make them work.

Hymans' English says: "For any of this to happen, the products need to be there so mortgage lenders would be able to use pensions as collateral for a pension-backed loan. The innovation needs to happen."

LCP's Webb adds that another idea the FCA has floated is a "mass-market equity release" product.

"The idea is you've got people coming into retirement with inadequate pensions living in £330,000 houses. That is not a sensible mix of wealth of wealth and income. At the moment, they could do equity release, but it is expensive, and interest rates are quite high, and you have to take financial advice, so you're heavily capped at what you could take out at retirement due to no negative equity guarantees.

"If we could have a mass market equity release, that would help people with inadequate pensions. Then, if more people through the mechanism we're talking about were homeowners when they reached retirement, they could then flex the balance between pension wealth and housing wealth."

The time is now

Having seen how other countries have taken the leap and introduced initiatives around early access, should the UK consider following suit? The PMI's Smith says the cost of living crisis and the hike in employers' national insurance contributions means that we could face "half a century" of inadequate retirement savings as it will take "several years" before employers and employees can pay the higher levels of contributions.

But he notes that, what we can do, is to  start recognising lifetime savings and to extend AE to allow people to save for more than just their retirement.

He says: "We could make AE, already a huge success, really fit for the future, which other countries have done and are more developed in this area. We could put that in place well ahead of higher contributions being paid when it's more affordable."

LCP's Webb agrees any prospect of the UK enacting significant reform of its pensions system is "some way off" and notes the next modification could be short-term savings buffers sidecars, as there is an "obvious" need for them. He adds that since any kind of AE reform is unlikely to be forthcoming, the government should consider doing "deep policy thinking" on future reforms. 

He says: "The Resolution Foundation has done work on the integration of pensions and cash savings, so if you were the government wanting to look busy whilst not achieving much in the short term, to rethink the product more creatively, this is the time to do it."

‘Undermining' AE

PensionBee's Picardo says while discussions about early access for housing are in the early stages, the key question for the industry to consider is whether pension pots have sufficient funds to enable them to put a deposit down in the first place.

"All the data very starkly shows that the answer is no", she explains. "Millions of people don't have enough for that retirement, and the state pension alone is not enough. I'm not sure we will get to the place where we think about using pensions for alternative purposes."

She echoes that the first priority for the government should be the expansion of AE to boost the amount of money that people are saving in their DC pots.

Picardo says: "What we really should be thinking about is how can we encourage people and businesses to change policy and to move the 8% contribution up towards, 10%, 12% or 15% as the gold standard, because that really then starts to get some way to sort of solving the retirement sufficient retirement income problem."

She adds that for anyone who may be looking to get on the property ladder, government products such as lifetime ISAs are available. However, due to the "overheated" housing market, it is important to ensure buyers' demands are met with a supply of "reasonably priced" housing.

Pensions UK's Grant says while the government could look to consult on such a proposal in the future, it would be a surprise if they approved of measures to let savers use their pension to pay for a deposit on a house, as it runs the risk of "undermining" AE.

He notes: "Lots of different government departments lobby the Treasury to implement an inertia-based scheme. The basis of AE is very effective, but they can't give that treatment to absolutely every initiative or sector. You can't overuse a mechanism like inertia or the nudge; it has been done effectively when it comes to pension saving, but there would be concern about undermining the success to date, and any future success, of AE."