Should First Time Buyers Be Able To Access Pension Savings As A Deposit?
It’s hardly new information that more and more people are struggling to get onto the property ladder.
Last year the number of tenants with the belief that they will never be able to afford a home deposit rose from 10% to 14%, with 44% citing the lack of ability to save a cash deposit as the main factor prohibiting them from buying (study by Your Move and Reeds Rains).
And there are now new figures, released at the start of April from mortgage provider Halifax, whose latest Generation Rent report shows that more people aged between 20 and 45 are giving up on saving for a deposit, with the percentage of savers dropping from 57 per cent last year down to just 43 per cent this year.
While there have been steps made to make it more achievable for first time buyers to afford a mortgage deposit, with help-to-buy schemes on new-build housing, as well as the government’s new help-to-buy ISA being introduced later in 2015, could there be another way to help people get the keys to their first home?
As auto-enrolment of private workplace pension schemes has begun rolling out across the countries workforce, more and more people have started saving for their retirement than ever before. In fact, the opt-out rate is actually below 10%, with the majority of these being Over-50’s (and more likely to already hold a private pension fund, as well as owning their own home).
So with more and more people being encouraged to save into their pension savings, but people still struggling to become homeowners, does it make sense to allow a portion of those pension savings to subsidise a home deposit?
Despite not yet outlining their pension’s policy for the 2015 election, a similar tactic has been alluded to by UKIP: allowing people to use their savings for specific life events such as helping relatives onto the property ladder.
Let’s take a look at some of the pros and cons that may be involved in such a process:
PRO: You could take advantage of the tax relief offered on pension contributions
Private pension savings are entitled to tax relief from the government. You are entitled to tax relief on pension contributions worth up to 100% of your annual earnings. As well as this, as part of an auto-enrolment workplace pension, if you pay in, your employer and the government will add to your contributions too.
As beneficial as it would be to allow people to take a chunk of their pension savings as a home deposit, it’s likely that HMRC wouldn’t allow this, purely because of the tax relief offered on private pensions.
CON: You would probably be taxed heavily
It’s also likely that, should this become a viable option then the tax you’d have to pay would be excessive. Only this year have the government eradicated the 55% tax on accessing your pension fund as a lump sum.
While accessing your pension fund is now only taxed at your marginal rate (20-40%) when you reach 55, to make up for the tax relief offered on pensions, the tax bill would likely remain at the 55% end of the spectrum. Even if it wasn’t, it may knock you into the 40% tax bracket for the year and may not be any more financially beneficial for you across the year.
PRO: You are diversifying your investments and assets
Having a private pension is important for when you retire, but it’s always important to diversify your assets. If you don’t own a property, your only investment is likely to be in your pension fund.
And because you can’t eliminate risk from your investments, it’s extremely important that you diversify these assets. Diversification also helps to preserve your capital, as if one investment doesn’t perform well, others might make up for this.
CON: Your pension fund will be worse off in retirement
Obviously the main reason given for not allowing access to a pension fund before retirement is so that you have a fund to draw an income from once you retire. Because your pension savings remain invested, even with low rates of interest they accumulate to provide a healthy pension fund.
Saving just £175 a month from the age of 30 would give you a pension pot of around £180,000 by the time you’re able to retire.
But with the average deposit for a first time buyer falling at £29,218, saving £175 a month would mean saving for over 13 years to be able to afford this, so taking a sum from your pension fund alone would likely not be an option, even if new legislation allowed it.
For many, and depending on where they are in life, it could be more beneficial to reduce their pension savings and invest in a good ISA. There will be less tax relief than investing into a pension fund, but if a home deposit is the priority over a pension, this could be the best move forward.
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