Taking a first step in to the property market remains tough, with lenders asking for big deposits and house prices continuing to outstrip wage inflation. So will the new auto-enrolment pension rules make it even harder for first-time buyers and provide another obstacle that will prevent the mortgage market from getting moving again?
Despite the flat-economy, property prices in England have have continued to rise. According to the Office of National Statistics, the average price increased by 2.1 per cent in 2011, with a 6.3 per cent rise in London alone, while the average deposit needed to buy the typical first-time-buyers is now £26,000, according to Yorkshire Building Society.
Although these difficulties are putting many people off ever trying to buy, a recent survey from the Building Societies Association reports that 29 per cent of first time buyers have given up trying to buy because they are unable to get a large enough deposit, many young people remain determined to buy and take their first step in to the housing market.
With automatic enrolment in to the Workplace Pension Scheme coming in to effect this month, disposable income will decrease even further, potentially leaving some first time buyers short of funds when trying to save for a deposit on a property. The 4 per cent contribution that employee will eventually have to pay in to their pension scheme may look like a small amount, but for a generation with less disposable income, it could determine the decision of whether to invest in their first property or look ahead to the rewards of a pension.
Hargreaves Lansdown head of pensions research Tom McPhail (pictured) says: “I think you’re going to see pockets of high opt-out activity, and almost inevitably, amongst people in their 20s, there’s going to be a lot of pressure to opt-out.
“It’s inevitable that [Workplace Pensions] will suck some disposable income away from other spending activity, whether that’s fuelling house purchases or investments into Isas.”
A recent report from Alliance Trust Asset Management showed that under-30s currently face the highest rate of inflation at 2.8 per cent, compared to other age bands at two per cent. This is partly due to an increase in higher education costs, with many graduates expecting to leave university with debts of nearly £30,000 according to the Money Advice Service. Household bills such as gas and electricity have also risen, with British Gas recently announcing an increase of six per cent, adding £6.67 to the average monthly bill.
Average rents have also risen considerably recently, with the Halifax reporting that the average rent has increased by 11% since 2010.
Evolve Financial Planning director Jason Witcombe says: “Potential first time buyers are hit with the fact that the costs of living have increased a lot. They are possibly still paying off student debts and are possibly finding their incomes are not going up as much as expenditure.
“I think auto-enrolment into the workplace pension is quite a difficult one for people who want to get on to the property ladder. I think that will be the first financial aim, and people will thinkpensions is something that can wait until later. Whether it can wait until later is another matter.”
Opting out of the auto-enrolment process would mean missing out on a three per cent annual contribution from the employer, and a one per cent annual contribution from the government.
Witcombe says: “If you do opt-out, you are missing out on free money from your employer. I think you do need to weigh that up. If you can afford to do both, even if it means waiting an extra six months to get on to the property ladder because you’ve been making use of the pension scheme as well, it is going to be in your long term best interest. Employer contributions are not that big, it’s going to give you a very basic pension. Paying in to the pension is not going to stop you getting on the housing ladder. The numbers are not big enough.”
It could be said that many of the young first time buyers who choose to opt-out will simply be doing so due to lack of understanding of how the workplace pension works and what benefits they will receive from it in the future. According to a survey carried out by Friends Life, 90 per cent of the UK population are unaware of how auto-enrolment pension contributions will be invested and 60 per cent do not know what auto-enrolment is.
Chapters Financial managing director Keith Churchouse (pictured) says: “I’ve come across a lot of scepticism from younger age groups about the benefit of pensions and sadly that is an indictment of the generic bad news stories that have come out of the pensions industry over the last 10 to 15 years. I know that workplace pensions and auto-enrolment are designed to rectify that in allowing people to save some money towards retirement. However, we are also aware of the difficulty youngsters are having of creating a suitable deposit to get themselves in to the housing market.”
Anyone opting out could be missing out on a not inconsiderable amount of money over the long-term and chosing not to save at an early age makes it harder to catch up as people get older due to the effect of compound investment returns. Employees on a salary of £26,000 could be giving up approximately £6,000 of employer pension contribution over a 10-year period if they decide to opt-out, according to an estimate from Fidelity Worldwide Investment. This is a valuable pot of money that could be used to support essential needs during retirement.
McPhail says: “There will be some who recognise the merit of early funding in terms of retirement provision and recognise the benefit of of employer contribution and run with the pension. But I also think there will be a lot of people in their mid-20s, who have perhaps got student debts, or aspirations to buy a house, or have other spending priorities rather than simply saving for retirement.”