Money

Raiding your pension to buy a house is a very bad idea


Let me tell you something you probably don’t know. The UK pension system is in fabulous shape.

Take a look at the 2018 Pension Markets in Focus report from the OECD. It’s full of relatively boring tables and charts, but one number jumps out. The UK has total pension assets worth just over 105 per cent of its gross domestic product.

This puts us near the top of the global pension savings league. The US, Canada, Australia and some Scandinavian countries also come in at over 100 per cent (Denmark is, as in almost everything, the clear winner). But the rest of the world is an unfunded mess. France and Italy have funded pension assets of about 6 per cent of GDP, for example, and Germany has only 7 per cent.

In another piece of good news, our absolute levels of pension assets have been rising rather faster than everyone else’s, up from 73 per cent of GDP in 2007 to 105.3 per cent now. The rise might slow a bit from here, as we cut back on offering defined benefit pensions, but thanks to the rare brilliance of our pensions auto-enrolment policy, which is adding something like £10bn-£15bn a year to our savings, it isn’t going to stall.

From this week, the contribution rates for auto-enrolled pensions will rise from a total of 5 per cent of salary (3 per cent from the employee and 2 per cent from the employer) to 8 per cent (5 per cent and 3 per cent respectively). That’s going to have fabulous results, particularly given the UK’s 76 per cent employment rate.

According to Interactive Investor, if you start on £20,000 at 30, stay opted in, see your salary rise by 1 per cent in real terms a year and make annual net returns of 5 per cent you will end up with savings of nearly £200,000. Make 7 per cent — unlikely given the iffy default funds offered by most providers, but one can dream — and that number goes up to nearly £300,000.

Start work at 20 and the magic of compounding makes the numbers even more marvellous: £340,000 and £620,000. Wow. You can complain about the devilish details buried in our pensions system — the tapering of the £40,000 annual allowance, the hideous lifetime allowance, and the freedom to draw down at will from 55 — but the point is that for all the worrying, in terms of the absolute levels of assets in its pensions, the UK is one of the best set countries in the world.

Nobody, you might think, would want to mess with that. You’d think wrong. Wherever there is money, there is someone with a cunning plan to use up that money. And in the UK it is generally accepted that all money should somehow or other be funnelled into the residential housing market. Hence the regularly returning idea that pension fund cash should be available to be used for deposits for those looking to buy houses.

Gordon Brown was persuaded out of it when the Labour prime minister introduced his “A-Day” reforms in 2006, but former pensions minister Steve Webb was pushing it back in 2013. This week it raised its head again when Robert Colvile, director of the Centre of Policy Studies, suggested it was a fine way to help Generation Rent into the market.

On the face of it you can see the logic. Most of us worry about the young not being able to afford homes. So if the same young people that can’t afford houses have piles of cash compounding in pension funds, why not let them use that to buy the houses? All spending involves a trade-off between the needs of the present and the needs of the future — perhaps we should fetishise retirement funding less and the living standards of the working more.

The problems with this are obvious. It doesn’t solve one problem, it just swaps it for two more. The first is that it destroys the integrity of the pension system. A pension is a backstop. It comes with tax relief for the very specific reason that it is designed to stop you being reliant on the state in your retirement. Once the money is in it is in, you can’t lose it gambling or in bankruptcy; you can’t create negative equity with it; and you can’t fritter it way on the internet (not until you are 55, anyway).

Even Mr Brown, who had only just finished phasing out tax relief on mortgage payments in 2000, had the Treasury point out in 2006 that the aim of a pension was to ensure “that tax relief is only given to those whose purpose in making the contribution is to provide themselves with a secure retirement income”.

The second problem, of course, is that in the absence of a rise in supply a cash-driven rise in demand pushes up prices. And rising supply is tough to create in the UK: the latest data show the number of houses starting to be constructed in the UK is down 2 per cent year on year.

A better solution to the problems of unaffordable houses in the UK is to stop trying to think of clever ways to help people find the cash to pay high house prices and address the actual problem — the high prices. This process might well be beginning naturally, in part thanks to the cuts in tax relief to buy-to-let investors.

Figures from HM Land Registry have UK house prices growing at only 1.7 per cent in the 12 months to January 2019, the lowest annual growth level since mid-2013.

On a monthly basis, prices actually fell, albeit only 0.8 per cent. This means that houses are getting cheaper relative to wages (currently rising at 3 per cent) and in real terms overall (inflation is 2 per cent).

This is an almost perfect situation. If prices are flat in nominal terms, existing owners have no risk of negative equity but real prices still come down for buyers. The process could be accelerated by rising interest rates, a reversal of QE (one of the things that has forced prices up so much in the past decade) or perhaps an offer of tax relief for downsizers. But even without that, things are heading in the right direction.

With that in mind, here is a recommendation. The UK should count its pensions blessings. We’ve pretty much solved one problem. How about we leave it solved rather than unsolving it in a vain attempt to solve an entirely different problem? Particularly one that might solve itself over the next few years.

Merryn Somerset Webb is editor-in-chief of MoneyWeek. Views are personal. merryn@ft.com. Twitter: @MerrynSW





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