by Mark Johnston
Pensions for Property Scheme.
It seems that bank and building societies’ large deposit demands for the best mortgage rates and tough lending criteria are currently shutting many young hopefuls out of the property market.
However, Nick Clegg, the Liberal Democrat leader and deputy prime minister has recently promised to help thousands of young people desperate to get their feet on the first rung of the property ladder, but who are prevented by lack of deposits.
The new scheme being proposed will mean that Middle-class parents and grandparents will be able to use money from their pension funds to give grown-up children a helping hand on to the housing ladder. The scheme will be targeted at those who have built up a pension fund worth around £40,000 and who are nearing retirement age.
Some officials estimated that around 250,000 households have pension assets of around that value.
The new scheme is being looked at by both the Treasury and the Department for Work and Pensions and would typically involve borrowing around 25% of the value of the lump sum. So a pension pot of £40,000 would allow someone to borrow a deposit of £10,000 for a child or grandchild.
Experts behind this scheme believe that there are an awful lot of parents who do not have enough cash to help their children get on the housing ladder. Although, in many cases, they might well have built up a substantial pension pot which they will be able, when they reach retirement age, to release a tax-free lump sum.
Therefore the new plan would mean people would be to be able to guarantee other family members’ mortgages using their pension pots.
Under the new scheme, parents would sign an agreement with their child’s mortgage lender promising that the lump sum will go towards the cost of the child’s home.
So a parent with a £40,000 pension pot would be able to promise £10,000 as a deposit on a child’s first home.
However, while it remained as a guarantee, the pension saver would have no access to that cash andwould be unlikely to earn any interest on it, thus depleting their final pension amount.
Danny Alexander, the chief secretary to the Treasury said that the scheme was “focused on intergenerational fairness” to help those who could not currently help their children with deposits in the way his parents had done with him.
Though not everyone is behind this scheme, the pensions industry reacted cautiously to the plan, warning that it could “inadvertently” harm the retirement incomes of some parents.
Otto Thoresen, Director General, Association of British Insurers said: “Pensions are designed to mature into a decent retirement income, not for other purposes. Any scheme which uses pensions as a guarantee must ensure that it does not inadvertently make the saver worse off when they retire.”
Joanne Segars, chief executive of the National Association of Pension Funds, also raised doubts about the proposals. She said: “A pension can only be spent once and this policy could end up leaving retirees out of pocket. The UK already has a serious problem with people saving too little for their old age.”
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