Alison Hatcher: Why can’t the largest savings pot that most people have in the UK be used to help them own their own home?
What should the new government focus on when it comes to pension reform? In the run-up to the election, it was a question found somewhat wanting, wouldn’t you say?
Sure, the usual policy suspects raised their all-too-familiar heads – triple locks, collective defined contribution (CDC), dashboards, defined benefit funding code etc, but these have been and are pretty much in hand already.
With political events what they are, pension reform is something I've been asked about quite a bit of late. The first two replies that always seem to jump front-of-mind before any of the (hopefully) informed returns I could automatically fire out is this: "Is reform needed as we (the industry) see it? Is it going to bear any tangible interest and relevance to every-day working people?
I know most of my industry colleagues would answer: "of course!", followed by some bewildered expletives. But, truth be told, just because we have been working on certain concepts for years, does that mean they are still the right ones?
What are pension pots for?
Essentially, pensions are long-term savings that the public is incentivised to pay into by (think tax benefits) during their working lives, so as to ensure they can have a regular income when they need or choose to retire.
The importance of pensions for an individual's future wellbeing is difficult to dispute, especially for those of us who work within them. We often see what the average value of an individual's DC pension pot value might be at the point of retirement in the coming years and, frankly, shudder at the thought.
However, are we as an industry really aligned to the actual financial needs of the millions of people who begin to rely on a pension income each year? More importantly, do the reforms we've advocated for years address them?
A case in point – since 2010/11 the number of 55+ households in the private rented sector has grown by 70%. What's more, nearly half (48%) of private rented sector tenants aged 65 or over are in the bottom 20% of all household incomes (Source: Office for National Statistics (ONS), Older people in the private rented sector, 2023).
Now consider this. Last month, Standard Life published research showing that renters need around £391,000 more at retirement compared to those who have paid off a mortgage. Yet the median average UK pension pot for 55–64-year-olds is £107,300, says the ONS.
I put it to any who reads this – the fear that you might not be able to retain a home as you enter retirement vastly outweighs any thoughts on tax-free lump sum, investment pathway, annuity or drawdown options. What's more, this real anxiety can only expose more people towards making rash decisions or worse becoming victim to predatory scammers.
The fact is, Guy Opperman (the pensions minister from 2017-2022) might have been onto something when he asked ‘Why can't pensions be used to purchase a home?" It's not even that novel an idea. SIPPs and SASSs already allow for the purchase of commercial property, why can't the largest savings pot that most people have in the UK be used to help them own their own home? Indeed, it's an idea the Association of Consulting Actuaries (ACA) and others have previously supported.
We know most don't care about their pensions, but we know their common desires
It's a pensions tale as old as pensions time – long-term savings lack engagement from individuals because they are not tangible or relevant. This needs to change and it can only be done if we genuinely tackle tangibility and relevancy this time.
Imagine if a regular saver knew that at some point, they could extract capital from their pension pot and put it towards a deposit for their first mortgage. If this were the case today, I'm willing to bet the house that a 18-21-year-old entering working life for the first time might actually start paying attention to their monthly contributions, get clued up on the power of compound interest and begin analysing what their pot might be worth in five, 10 or 15 years.
Then think about a 21-year-old individual who, let's say in 15 years, extracts 30 or 40 percent of their pension pot and puts it towards a home deposit. They would still have 30 years to save for a retirement income (66 or current State Pension eligibility age), while at the same time having achieved what most of us have done or aspire to do – owning our own home.
We know that large chunks (the 25% lump sum) of pensions are already often used to pay off the final years of a mortgages. A proposal that they be used to help with the beginning of the ladder stage, instead of just the end could surely only improve these more realistic and tangible stages in a saver's life.
Overnight this proposal would make long-term savings more appealing to individuals, we would achieve better outcomes and drive long-term pension savings (young people having already born fruit from their saving labours). What's more it would create larger sums for investment within the UK economy, boosting the housing market and fostering a community of happy homeowners.
Pie in the sky?
This concept has always been considered too complex with alternative structures such as LISAs or Help to Buy schemes offered as solutions.
Again, I must argue that we need to address the core need for savings directly instead of applying temporary fixes that have only added to what we can all agree is an increasing an overly confusing market for pension savers.
We can learn a lot from other countries. New Zealand officials discussed this topic with our industry when auto-enrolment came into effect. However, while many savings schemes, such as LISA accounts, have been created, they only really compete with long-term pension savings products if we're honest.
So here it is
What if the government allowed a percentage of pension savings to be used for home deposits? The rules would need to be agreed, but essentially, why not invest a percentage of a member's pension in a "house fund portfolio" within occupational pension schemes via a self-select option? Something that would consist of low-risk investments that could allow for the consistency needed for mortgage companies to allow an offset mortgage approach.
The idea is to help create a habit of saving and the value of home ownership could significantly reduce the risk of default. By retirement a mortgage would be more likely to be paid off, removing the charge. While leveraging personal investments may seem risky, taking on debt personally when you have savings to offset is also risky and financially unsound.
Final thought
We need ideas that incentivises saving and addresses the relevant interests of individuals. Let's find a new way to give people what they really need. Down with temporary fixes and sticky plasters!
Alison Hatcher is a trustee and non-executive director. She was formerly chief executive of HSBC Retirement Services
This article comes as part of Professional Pensions' PP Pensions Commission – which is looking to bring together industry opinion and ideas on the future of pensions ahead of the general election on 4 July.
Send your thoughts and ideas to the PP Pensions Commission via email to [email protected]
