So last week we had suggestions that the flagship £140 a week state pension reform might not go ahead after all and this week we have the announcement of a policy that will allow pensions to be used as guarantees for mortgages. The calls are for the politicians to “stop using pensions as a political football” and those in the industry seem to wholeheartedly disagree with this latest suggestion. So is it really a bad idea?
What’s good about it?
From my perspective the basic idea of putting more flexibility into what you do with pension saving is a good one. Certainly when you think about defined contribution (DC)/money purchase pensions; these aren’t pensions so much as tax advantaged savings schemes with strings attached. Loosening one of those strings is therefore a good thing.
On the basis that the idea is the pension pot is used to provide a guarantee rather than actually provide cash, it also seems like good economics as it’s allowing money to be worked harder.
What’s bad about it?
The biggest thing that is wrong about this is what it is trying to achieve. The idea is to help house buyers get on the ladder at a time when house prices and deposits are high. Is it desirable to increase housing demand at a time when house prices are still vastly over valued and being propped up by artificially low interest rates? Policy should certainly try to ensure there isn’t a complete collapse of the property market but it certainly doesn’t need stimulating past this.
Another key criticism is that, at a time when we are talking about a pensions crisis, this scheme is likely to mean at least some people end up with lower pension benefits if the guarantee is called in.
As Ros Altman has said, those who have pensions pots large enough to take part in the scheme, almost certainly have better guarantees they could use such as their own property. Also, the scheme would need the buy in of lenders to accept such pension guarantees, and on what terms would it be offered? The money won’t be available until retirement and that date is unknown.
Looking at DC schemes the main other flaw is the potential complexity introduced for so little benefit. Comments on the Guardian’s Reality Check yesterday suggested that it is expected only 12,500 people would use the scheme. For this number the complexity really isn’t worthwhile.
For DB schemes the complexities are huge. For example, cash in DB schemes is often not taken at fair value and the benefit won’t be available on early death etc.
I think for DC only pensions the scheme could work in the future when there are more and bigger DC pots around and when the economy & property prices are more stable. However, introducing it now is bad timing and really not worth the complexity.
For DB schemes I cannot see how the policy could ever be workable. But then they’re being legislated out of existence anyway…