Concerns around the longevity of the policy will lead many to forego pension savings in favour of a deposit
The highlight of yesterday’s Budget was the scrapping of stamp duty for first-time buyers purchasing properties of up to £300,000. Those buying higher valued properties up to £500,000 will not pay any duty on the first £300,000.
This announcement is clearly aimed at helping people get on the housing ladder, particularly in expensive areas such as London. But while it will certainly give first-time buyers a boost, they still need to save a sufficient amount to pay for a deposit. With incomes stagnating in real terms, this may reignite the age-old property versus pension debate.
With the current rate of inflation at 3 per cent outstripping wage growth, the upcoming increases in automatic enrolment contributions are likely to hit people’s take-home pay.
Currently, member contributions need only be 1 per cent, which, after tax relief, is a relatively small dent on pay packets. But these ramp up to 3 per cent this coming April, before hitting 5 per cent from April 2019 onwards. While tax relief limits the impact to some degree, this increase will be very noticeable to many.
For those who want to buy a first property and take advantage of the Government’s stamp duty change, it may be a case of saving towards their pension or saving for a deposit. Many will not be able to afford to do both.
Our love of property in the UK, and perhaps some worry about the longevity of this policy, will lead many to forego their pension saving in favour of a deposit.
The downside of that, of course, is that people will lose the employer contribution, which will be at least 3 per cent by April 2019, with some employers paying in more. And we all know the cumulative effect of starting to save early can have a huge impact on the size of a retirement pot.
Some people may be able to get help in raising a deposit (with family members being the most likely to assist), enabling them to continue pension payments.
Recent research we carried out shows a significant number of Generation X and Y are receiving gifts from older relatives, with these “living inheritances” helping out with the everyday cost of living, as well as one-offs such as getting on the housing ladder.
And there are newer alternatives for raising these funds. In the first half of 2017, we estimate 13 first-time buyers were helped onto the housing ladder every week thanks to equity release.
As the equity release market continues to boom and products grow in popularity, helping first time buyers consistently comes up as a reason for choosing to release equity. It is likely this will grow significantly in the years to come.
The scrapping of stamp duty will be a popular change for many. However, the Office for Budget Responsibility has predicted property prices will rise as a result, so this may negate much of the savings to be had. We also need to make sure the impact on pension savings is as limited as possible.
Andrew Tully is pensions technical director at Retirement Advantage