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MM leader: Costs outweigh the gains of Govt’s pension deposit plans

On cue the political conference season kicked off with a financial services policy suggestion received with derision.

Unlike some of the headline-grabbing nonsense churned out this time of year, at least plans to allow people to access part of their pension pot to help family members get a mortgage were not quite dreamt up on the back of a fag packet.

Pensions minister Steve Webb has long been a strong supporter of early access to people’s tax-free lump sums while the Treasury consulted on plans last year but failed to find evidence that savings rates would increase.

It appears individuals would be able to ring-fence a portion of their future tax-free lump sum to guarantee funds required for a family member to use as a deposit to gain a mortgage.

The Treasury suggests around 250,000 people could be eligible and is looking to talk to lenders and the pensions industry “as a matter of urgency” to work through the details.

Details are where this proposal starts to unwind. Presumably the lender will need to have easy access to the guaranteed amount in the event of a default, something which will require legislative change and new complex rules.

Pensions tax legislation is notoriously volatile. How will this policy sit with the inevitable changes we are likely to see in the future from one administration or another?

How would lenders assess the chances of a defined benefit scheme going bust? What would the advice requirements be for anyone using the scheme?

The size of the pension pot required for this proposal to make sense would indicate the type of person who may well have other funds at their disposal to help out their kids. The current rules allowing access to your tax-free lump of sum from age 55 are likely to offer the required flexibility for many.

Central to the debate on early access to pensions has been the dilemma of whether such flexibility will encourage more saving versus the dangers of limiting your pension pot. The driver for any early access reform should be to stimulate additional saving not to neatly solve a separate Government headache.

Given the likely costs and complexities of this proposal versus the small numbers likely to benefit, it appears likely this plan will go the same way as many bright ideas publicised in the autumn by the seaside and never to be seen again.

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