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Plan to let people raid pensions for a home deposit branded ‘bonkers’ by experts

Young people should be able to raid their pension pots early to help fund a deposit on their first home, a senior Government minister has argued.

Speaking this morning at think tank Policy Exchange, the secretary of State for housing James Brokenshire suggested that allowing savers to use pension savings as a deposit could help alleviate the financial barriers facing first-time buyers. 

He said: ‘We should be looking at allowing an individual to use part of their pension pot as a deposit on a first-time home purchase.’

However, one pensions expert has labelled the idea as ‘bonkers’ and ‘dangerous’.

James Brokenshire recently hit the headlines when an interview in his kitchen revealed he had four ovens – and later tweeted this picture

Mr Brokenshire added: ‘We should be changing the necessary regulations to allow this to happen, protecting the integrity of pension investments but allowing lenders to innovate and design new products to bring this opportunity to consumers.

‘It seems rather obtuse that we would deny people the opportunity to do this. It is, after all, their money.

‘Not the fund’s, not the State’s, it’s yours and the next Conservative Government should free that capital up, and trust the individual to make the choice for themselves.’ 

But industry experts have slammed the idea. Tom Selby, senior analyst at AJ Bell, said: ‘This idea smacks of dangerous political short-termism. 

‘While the housing market clearly has its problems, allowing people to raid their pensions is not a sensible answer.

‘Chronic undersaving for later life is one of the biggest challenges facing society today, so a proposal which encourages people to drain their pension pots risks making this problem even worse.’

Steven Cameron, pensions director at Aegon, added: ‘Saving for a house deposit and making provision for retirement are the two greatest financial challenges facing younger generations. 

‘But the same money can’t be used twice and there’s a huge risk that offering early access to pensions to pay house deposits will be a far too tempting ‘bird in the hand’ offer.’  

While the housing market clearly has its problems, allowing people to raid their pensions is not a sensible answer 

It isn’t the first time the idea of using pension savings to help fund a housing deposit has been floated.

In 2012, then-deputy Prime Minister Nick Clegg drew up plans to allow first-time buyers to use their parents’ and grandparents’ pension pots to help raise deposits, but the idea didn’t gain any traction.

The Lifetime Isa was later launched by then Chancellor George Osborne to allow people to save into a fund that could be used either for a home deposit or a pension, with contributions topped up by 25 per cent, mimicking basic rate tax relief on pensions. 

Brokenshire’s new policy suggestion would involve first-time buyers dipping into their own smaller pots to help get them on the ladder. A similar proposal was made by investing platform Hargreaves Lansdown in 2017.

The MP raised the plan despite first-time buyer numbers rising in recent years. Last month, building society Nationwide said that the number of first-time buyers in the property market was approaching levels seen before the financial crisis even as house prices stall. 

However, it added that the biggest hurdle they faced remained saving for a deposit – particularly in more expensive parts of the country.

Nationwide’s chief economist, Robert Gardner, said: ‘First time buyer numbers have been supported by the strength of labour market conditions, with employment rising at a healthy rate, and earnings growth slowly gathering momentum.

‘While house prices remain high relative to average earnings, low mortgage rates have helped to support mortgage affordability. Indeed, raising a deposit appears to be the major barrier for prospective first time buyers.’

First-time buyer numbers are approaching the levels seen at the peak of the 2000s property boom in 2007, according to UK Finance mortgage statistics published by Nationwide

First-time buyer numbers are approaching the levels seen at the peak of the 2000s property boom in 2007, according to UK Finance mortgage statistics published by Nationwide

Would the plan for pensions to help buy homes work? 

According to Halifax, the average first-time buyer is 31 and needs a deposit of around £33,000 to get onto the housing ladder. 

In 2015, research from provider Royal London found that the average 35-year old has put aside just £14,000 into their pension. Statistics quoted today by Brokenshire put the average pension pot of a 35 to 44-year-old at approximately £35,000. 

Either way, it would take a significant chunk out of the pot to afford a deposit, if it had enough to cover it at all.   

Cameron added: ‘There is merit in looking at how to make housing and pension policy work together, and the previous Chancellor attempted this with the Lifetime Isa which offers a tax incentivised vehicle to save for either a first house deposit or for retirement.

‘But those in a hurry to get on the housing ladder could face long-term regrets in retirement as money built up at younger ages in pensions is particularly valuable as it has far longer to benefit from investment growth.’ 

However, no matter who the next Prime Minister is and whether they support the idea or not, it’s very unlikely a policy like this could get enacted with the current Parliamentary arithmetic.

Selby explained: ‘Something as significant as this would almost certainly require primary legislation and a new Bill, which would then need to be voted on in Parliament.

‘I certainly can’t imagine it passing given the current balance of power, so there’s very little chance it’ll happen unless there’s a general election and a big majority for the Conservatives.

‘It’s a bonkers idea.’