Should we allow young people to use their pension savings to help get on the housing ladder?

By Gareth Jones

Last week, the pensions minister Guy Opperman caused a mini-storm among certain sections of the pensions industry and social media by suggesting that young people should be able to use their pension savings to act as a deposit on a home, in order to help them get on the housing ladder.

Speaking at a webinar organised by Prospect magazine, the minister suggested that the workplace pension system could be extended to allow young workers to dip into their pensions for home deposits. Thanks to the introduction of auto-enrolment, he noted that there could be considerable demand for such an arrangement, stating that: “Within two, three, four or five years, [savers] are going to be facing the wonderful reality of having over £10,000 or more in pensions but not necessarily having enough money for a deposit” – and then considered if the industry could create a product by which people could borrow money from their automatic workplace pension scheme for a housing deposit, but also keep the savings for their retirement.

As soon as his comments were reported on social media and elsewhere, there was a swift backlash from pension industry commentators.  The criticisms of the idea were numerous. Firstly, there are fears that such a move would undermine pension pots at a very early stage and would unlikely be replenished, further widening the ‘savings gap’ (the amount actually saved and the amount needed to live a comfortable life at retirement), as diverting savings out of a pension pot would also mean that benefits of compound interest would be lost. There is also a significant inherent risk in staking your retirement future on the value of your house and, if adopted widely, would risk storing up a crisis by linking people’s pensions to the housing market – particularly in the event of a future housing crash. 

Others criticised the scheme as the wrong solution to addressing the UK’s housing crisis and helping people get on the property ladder. A common critique of any initiatives to help people get on the housing ladder is that the government needs to be addressing the supply of homes, rather than stoking demand. 

These criticisms may all be entirely valid, but I’m not sure they are compelling enough to kill-off the idea completely or prevent the future development of a financial product that could deliver this. There is likely to be high demand for such an arrangement and, in theory, it could work — although there would need to be a clever way of using an illiquid asset (housing equity) in pension savings and extracting an income stream from it at retirement age (there are, of course, precedents for this in equity release).

The pensions industry is rightly concerned about the potential impact on people’s retirement savings and the confidence and integrity of the savings industry. However, the issue of unaffordable housing and sharply declining rates of home ownership is perhaps a more pressing concern for many working-age people in their 20s and 30s. The latest Nationwide housing tracker showed that the average UK house price is now £226,129 with prices in London hitting a record high of £480,857, meaning a 10% deposit would now require nearly £50,000 — unobtainable to many young people and likely to mean ever more people living in the private rented sector. Such concerns and frustrations associated with the inability to get on the housing ladder are likely to be intensified for many young people and families living in cramped rented accommodation during this time of lockdown. 

Declining homeownership rates are also a pressing concern for policymakers and politicians, not least for those in the Conservative Party, who are aware that home-ownership is one of the key factors in voting Conservative (renters, conversely, are far more likely to vote Labour). Without addressing these long-term trends, many in the party understand that the consequences could be serious. And while addressing housing supply is undoubtedly a priority (see the recent proposed changes to planning), they are unlikely to deliver major changes in home ownership for many years. The compelling point about this proposal is that it provides a solution that, once devised, could be implemented relatively quickly. 

This has considerable appeal to the government at the moment which is looking for new ideas and solutions. Speaking at a Newgate pensions industry roundtable event last month, the pensions minister put it succinctly by saying “Come to us with solutions, not problems – the government has enough problems as it is”.