FCA chief executive Nikhil Rathi Credit: FCA
Financial Conduct Authority (FCA) chief executive Nikhil Rathi has mooted the idea of using pension savings to help individuals get on the housing ladder as a potentially radical policy response to supporting homeownership.
In a speech at the JP Morgan Pensions and Savings Symposium delivered on Friday (28 March), Rathi asked if more could be done to integrate positive pension saving behaviour into mortgage and credit affordability assessments.
Going further, he also wondered if pensions could play a role in helping prospective homeowners with a deposit.
He said: "Australia, New Zealand, the United States, Singapore and South Africa all permit citizens to leverage their pension savings to buy a first home.
"Some have suggested we consider, carefully, similar approaches in some circumstances here in the UK."
Rathi said, however, such a move would rely on individuals having engaged with their pensions and saved in the first place. And he noted there would also be trade-offs.
He said: "We would need to take into account the ability of savers to replace those withdrawn funds, the impact on house prices, and whether those individuals – and the UK economy – might be better served by investment in a wider range of productive assets."
Rathi said thinking more radically about the mortgage market and options to support homeownership would also require thought as to what this might mean for saving, including for pensions, more broadly.
He noted the Equity Release Council estimates that 39% of current renters believe they will still be renting in retirement, while Standard Life suggests renters may need up to £400,000 more in savings – querying whether the UK pension market, which assumes high levels of owner-occupation, is prepared for this.
He also said those who do own a home in later life face an evolving picture.
Rathi said that, for many people, their home is their biggest asset, and the options and choices in retirement – on lifestyle, housing, care and tax, to name a few – are wider and more complex than ever.
He asked: "Learning from the past, and with the right product design and consumer protections in place, could later life lending benefit more people, as part of an individual's financial plan, rather than a last resort?"
Rathi said early consideration of how and when someone could access their housing wealth was increasingly important when helping consumers navigate their financial lives.
Ultimately, he said, the journey to financial security must start long before retirement – with early, clear, and practical understanding of saving, borrowing, investing and risk. He also noted improving financial capability must be a "core part" of the approach – noting the FCA would "say more soon" about how it could help tackle the impediment that poor financial education is to our country and society.
Rathi concluded: "If we continue to treat pensions, mortgages and savings as separate tracks, we will miss opportunities to help consumers get where they need to be."
A welcome development
LCP partner Steve Webb said it was encouraging to hear the head of the FCA talking to positively about thinking radically about how we save.
He said: "For too long we have saved in separate ‘buckets' with money for a pension in one place, short term savings for emergency needs in another, and money for a house deposit somewhere else.
"There is much to be said for trying to meet these needs in a single financial product, supported by workplace automatic enrolment, which could help more people become homeowners and reduce the risk of them having to fund a rent out of their modest retirement income. I look forward to the FCA's consultation later this year and hope to see these ideas investigated in greater detail."
One model of an integrated approach, which links short-term cash saving, saving for a house deposit and pension saving is the Lifetime Savings Initiative, jointly developed by the Pensions Management Institute (PMI) and Schroders, last year.
PMI chair Ruston Smith added: "Home ownership is declining in the UK and three times more people are expected to be renting in retirement in the next 20 years.
"The cost of renting in retirement alone could be equivalent to annual pension contributions of around 9% of pay from the age of 22. The statutory minimum of 8% wouldn't therefore even cover the cost of rent, never mind put food in the fridge."
Smith continued: "The proposed FCA consultation will be a big step forward and is hugely welcome. The Lifetime Savings Initiative considered the learnings of those countries who have more developed retirement savings models where they look to support people in building short term savings and buying a first home as well as putting money away for retirement. With expected inadequate retirement savings for the next half century, people depend on wider lifetime savings to make ends meet in retirement."
