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 on the train down to Brighton at the weekend.
Pensions minister Steve Webb has long been a strong supporter of early access to people’s tax-free lump sums as a means of better incentivising them to save in the first place. The Treasury consulted on early access plans last year but did not proceed after failing to find evidence that savings rates would increase, although it acknowledged the idea had some merit.
Earlier this year, the work and pensions select committee suggested a variation of the plan which would allow people to use their pension pots to fund mortgage deposits in a way that mirrored New Zealand’s KiwiSaver scheme.
Details of Clegg’s plans are sketchy but it appears individuals would be able to ring-fence a portion of their future tax-free lump sum entitlement as a guarantee to help a family member to gain a mortgage which would otherwise be out of their reach.
The Treasury suggests around 250,000 people could have pots that make them eligible with a minimum take-up figure of 5 per cent, or 12,500. It is looking to talk to lenders and the pensions industry “as a matter of urgency” to work through the details.
The 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 new rules and system updates which could see significant costs passed down to consumers.
So far the reaction from lenders has been wary. Those lenders that currently accept a guarantor do not offer products over 75 per cent LTV. It remains to be seen how much leverage lenders would get in terms of capital requirements, although regulators are likely to err on the side of caution. Much may depend on the structure of the scheme.
Pensions tax legislation is notoriously volatile. Not a Budget goes by without reports the Government is considering tinkering with pension tax relief, including the current tax-free lump sum benefit. How will this policy sit with the inevitable changes we are likely to see in the future from one administration or another?
Would the scheme be open to members of all occupational pension schemes? How will lenders assess the chances of a company with a defined benefit scheme going bust and individuals not being able to make good the guarantee?
What would the advice requirements be for anyone taking this route to ensure they are not making a big mistake?
The extra rules, costs and complexities could be worth considering if the proposal was to create significant consumer benefits. But is this the case?
The size of the pension pot required for this type of plan 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 already offer a route for many people whose kids are in their late 20s upwards and want to get on the housing ladder.
Central to the debate on early access to pensions has been the question of whether allowing such flexibility will encourage more people to save in the first place versus the dangers of people dipping into their pots and failing to save enough for their own retirement as a result.
The driver for any early access pension reform should be to stimulate additional saving, not to neatly solve a separate policy headache. As the Government found in last year’s consultation, research in this area is inconclusive.
We currently have the messy situation of policymakers both floating equity release as a solution to a future pensions crisis and pensions pots as a solution to a housing crisis.
The policy dilemmas around the lack of access to mortgage finance for those in their 20s and 30s are complex and unlikely to be solved by poaching a bit of pension money. The Newbuy scheme is achieving some limited success and there have been calls to look at ways of extending it to all property. The funding for lending scheme is having an impact at lower LTVs but much less at the LTVs likely to be available to most first-time buyers.
But what is the Government’s position on stimulating higher risk lending? How much is this a desirable policy objective? If it is, it needs to be open about it and push for a more pragmatic view from regulators on capital requirements. At present Government soundbites appear to be at odds with the view of regulators. If not, then again it needs to be open about the realities of a continued lack of access to mortgage finance for many.
Given the likely costs, risks and complexities of this proposal compared to the small numbers likely to benefit, it appears likely Clegg’s pension for property plan will go the same way as many bright ideas publicised in the autumn by the seaside and never to be seen again.
Paul McMillan is group editor of Money Marketing- follow him on twitter here