This week Schroders, one of the UK’s largest asset managers, called on the Government to allow would-be first-time buyers to get early access to their pensions so they can pay for a house deposit.
It’s not the first time such a proposal has been floated. Earlier this year, the Housing and Finance Institute (HFI) published a report arguing that young adults who want to buy homes but haven’t been able to save a deposit should be allowed to borrow from their pension pots.
The fact this idea is catching on is worrying.
Buying a home has become more and more difficult for young adults over the last 20 years. House prices soared above wages in the 2010s and then hit historic highs after the first Covid-19 lockdown. That has meant that the amount needed as a down payment has increased.
The median deposit for first-time buyers as of July 2024 was £41,750.
It’s not cheap, but there are many benefits to homeownership.
Living in a home that you own is more secure than private renting because you can’t be evicted unless you fall into serious arrears. Repaying a mortgage also fosters financial stability because, eventually, you’ll have equity in your home and, by the end of the term, own it outright. This presents a stark contrast to private renting, where people spend tens of thousands of pounds for long periods of their lives and have nothing to show for it in the end.
The fact that more and more young adults are locked out of homeownership presents a problem in its own way: it means they are not accruing capital or working towards owning an asset that will give them housing and economic security in old age.
Those millennials and Gen Zs who rent into old age will be significantly worse off than those who managed to buy homes.
It might sound sensible, then, to allow first-time buyers to take money out of their pensions and skip the part where they have to save for a deposit, which can take years.
But it’s a highly risky idea that says more about the state of housing affordability in Britain than anything else.
Paying money into a pension pot is an absolute necessity in modern Britain. If you don’t do it, you are much more likely to struggle in older age. The state pension is not usually enough to live on comfortably, so private pension pots are vital. Retirement might feel a long way off when you’re 25 and languishing in a mouldy flatshare, but it’s something younger people need to be thinking about and planning for.
Indeed, a recent calculation by the Pension and Lifetime Savings Association found that a single 65-year-old would need a nest egg of £635,000, or £43,000 a year, to maintain a “comfortable” standard of living. This did not include outgoings for housing – only energy, food, clothing and a two-week holiday.
Building up a pension pot takes time. Encouraging young people to withdraw cash from their long-term savings attempts to fix one problem – access to homeownership – by creating another: diminishing the retirement funds of a generation.
I spoke to two pensions experts about the fact that the idea of pension pots becoming home deposits seems to be catching on. They both raised red flags.
Ros Altmann is a pensions policy expert and former pensions minister. In her view, it’s really important that we do not confuse “saving for a home with saving for retirement”.
Pensions need to be saved for in a long-term way, over 30 or 40 years “in order to achieve long-term growth,” Baroness Altmann – a peer in the House of Lords – explained. “The idea you raid your pension pot along the way to buy a house undermines the purpose of the pension pot.
“I would worry about this becoming more normal. If you start incentivising [homeownership] in this way, you could drive up house prices even more if we don’t build lots more homes.”
Sir Steve Webb is a former pensions minister and now a partner at pensions consultancy LCP. He said that the need to make sure lots of people aren’t in precarious privately rented homes in older age needs to be balanced carefully with pension planning.
Mr Webb cautioned that “if the rules on using pension money for house deposits are too relaxed then people might take too much out of their pension, leaving themselves seriously short in retirement.”
There is no question that planning for retirement is about more than pension saving. There is also no question that so many young adults renting later and later in life is creating a ticking social and economic time bomb which no government has properly addressed in recent years.
Increasing homeownership for younger adults would therefore also be a very good pensions policy. But instead of using pension pots to boost it, the Government should look at other ways to make owning your own home more affordable. That could look like an expanded mortgage guarantee scheme, or something like Help to Buy, or a fair student loan-style scheme where first-time buyers can borrow deposits. This was also suggested by the HFI in their report.
It will be a disaster if huge numbers of those who are now 40 and under do not have homes that they can sell and draw down on in older age and, instead, are scrambling around to pay rents which keep rising – or becoming homeless if they can’t afford to.
But it would be equally disastrous if young adults raid their pensions to become homeowners and have little left over when they retire to do anything else.