Mortgage lenders are standing by their stance on pension contributions despite a warning from pensions minister Steve Webb that he is “deeply concerned” by the practice.
Last week, Webb wrote to the Council of Mortgage Lenders and the Association of Mortgage Intermediaries after Money Marketing reported some lenders take pension contributions into account when assessing affordability while others do not.
Brokers had warned the practice unfairly penalised more prudent borrowers and could cause intermediaries to take the controversial step of advising borrowers to opt out of their pension schemes.
In a letter to CML director general Paul Smee, Webb said: “It appears utterly counter-intuitive for a person who demonstrates financial prudence by saving for a pension to be penalised in the mortgage market.
“I would welcome any reassurance you might be able to provide that, in future, responsible borrowers who choose to save into a pension scheme will not be penalised.”
But despite the warning, all four of the major lenders which told Money Marketing they take pension contributions into account say they have no plans to change their stance.
Barclays, Coventry Building Society, HSBC and Santander will continue to deduct pension contributions in affordability assessments.
A spokeswoman for Santander says: “We take into consideration all deductions including pensions although schemes such as Sharesave can be ignored if the customer says they would cancel in the event of a problem. But pensions are a fixed outgoing which you cannot cancel.”
But amid a growing row between pension advisers, mortgage brokers and lenders, many argue a borrower can and probably would cancel their pension if they got into financial difficulties.
There are also increasing concerns among pension advisers that brokers are giving “immoral” advice that threatens to undermine the progress of auto-enrolment.
One pensions adviser, who did not want to be named, says: “I have seen several clients who have been advised to opt out of their pensions and it is outrageous.
“These are people who have been auto-enrolled and I cannot think of a worse piece of advice. Borrowers may say they will opt back in [later] but in reality they will not.
“Legally, mortgage brokers should not be giving advice on pensions and, secondly, it is totally immoral. We have two pieces of legislation – auto-enrolment and the MMR –which are totally at odds.”
Plan Money director Peter Chadborn says: “There is a danger where an adviser is providing focused advice without considering other aspects of the client’s affairs. If a mortgage broker is telling a borrower to cancel a pension or anything else, such as a protection policy, they need to fully explain what the long-term consequences of that will be.”
But mortgage brokers say they have a duty to get the best deal for their clients and there is nothing wrong in telling borrowers to temporarily stop pension payments.
Highclere Financial Services partner Alan Lakey says: “If a borrower comes to me to gauge how much they can borrow, I will say ‘Your pension has cost you £6,000 of borrowing; how important is that to you?’ If the £6,000 is really important, I will say “You should opt out of your pension scheme and go back in at a later date.
“It is not wrong of me to do that. What is wrong is for lenders to not recognise that pensions are optional.”
Lakey has regulatory permission to give pensions advice but says that even if he did not, the borrower could deduce for themselves the impact opting out of a pension would have on their mortgage borrowing.
He says: “Anyone with half a brain and the ability to do this without breaching any regulatory rules would do it.
“My job is to do everything I can to get my customers the best mortgage deal. And in the same way I would advise someone to pay off a credit card before applying for a mortgage, I would also inform them of the impact of changing their pension contributions on the amount they can borrow.”
GDC Associates partner Derek Gair adds: “If the client wants a mortgage, you have to do what you have to do. The client will make up their own mind up about what to cancel.
“The situation has been created through a combination of lenders’ inflexible policies and the MMR rules being too open to interpretation.”
A spokesman for the Department for Work & Pensions says Webb is awaiting a response from the CML and Ami before taking any further action. The spokesman says: “Part of the purpose of writing these letters is to try to find out how much of an issue this is.
“If it is the case that brokers are encouraging people to opt out of workplace pensions, there is very much a risk of this undermining the Government’s efforts to encourage as many people as possible to stay in their auto-enrolled pensions.
“What is not clear at this stage is how widespread the problem is.”
Some lenders argue they must take pensions into account because to do otherwise risks consumers borrowing more than they can afford.
Nationwide, however, assumes a certain contribution level for all applicants so those paying into a pension are not disadvantaged. NatWest Intermediary Solutions and Lloyds Banking Group do not take pension contributions into account.
The DWP spokesman says: “Clearly there are some lenders which have managed to find a way through this – by assuming a certain contribution level for all applicants or not factoring in pension contributions at all.
“This would appear to be a much fairer and less dangerous approach than one which, even if unintentionally, provides an incentive to people to stop saving for a pension.”