Deputy prime minister Nick Clegg has revealed plans to allow parents to help their children onto the property ladder, by using future tax-free cash from their pensions.
This idea is currently under investigation by the Department for Work and Pensions, along with the Treasury, so the details are fairly scant at this time.
We understand that such a scheme would allow parents to guarantee the deposit on a mortgage for a first time buyer by ringfencing part or all of their pension commencement lump sum (tax-free cash).
Because pension tax-free cash is not accessible until age 55 at the earliest, such a plan would effectively offer early access to pension cash for a sole purpose of helping kids onto the property ladder.
We think this plan is bonkers.
Figures released by the Liberal Democrats show that around 250,000 people have pension savings of at least £40,000. Tax-free cash from this of at least £10,000 could be used to guarantee a mortgage deposit for a first time buyer.
If 5% of these people proceeded with such a scheme, 12,500 adult children could benefit from the proposals and make a first step on the housing ladder.
However, if the child defaulted on their mortgage payment, the pension tax-free cash would be at risk.
Any plan to borrow money against the expectation of an unknown future tax-free cash payment from a pension plan is incredibly risky. It is for this reason that pension backed interest-only mortgages are so rare.
In order to implement such a scheme, the Treasury would need to agree a very conservative set of projection rates to determine what tax-free cash would be available in the future.
Any projections would probably not want to take into account future contributions, as these could stop for any number of reasons. Instead, an expectation of a future pension lump sum should only be based on the existing value of a pension fund.
We look forward to a closer examination of the detail of this scheme.
Something is needed to get first time buyers back into the market, but this is probably not the right solution.
If pension assets are to be used to help boost the economy, a better solution would be to relax pension investment rules to allow direct investment in residential property, or give earlier access to pension tax-free cash (but not income) for any purpose.
Photo credit: Flickr/Liberal Democrats
