The Liberal Democrats have unveiled a new idea to help young adults get on the property ladder: Parents could use their pension pots to act as a guarantor to help their kids get a loan.
How would that work? Well the idea seems to revolve around the 25% of your pension pot that you are allowed to take out as a tax free lump sum after you reach the age of 55.
In theory the parent could give a commitment to a bank or a building society that if their child’s mortgage goes wrong for whatever reason, then the bank could call on the parent’s pension pot to help repay the loan.
This would allow banks to take a more generous approach to lending money to 20-somethings, who would otherwise struggle to qualify for that first mortgage and get on the housing ladder.
What could possibly go wrong?
Quite a lot. Let’s start at the top. The problem with the housing market is that it is too expensive. Making more money available to buy houses just perpetuates the problem; the way to fix the problem is for house prices to fall, but no politician wants to tell you that.
Then there is the fact that if the loan guarantee is ever called on, it will mean the money isn’t available for the parent’s retirement; we don’t have enough money in the pension system as it is, so we should be putting more in, not looking for ways to take it out.
Even from an investment point of view this looks like bad news for the parent. Most people have a big slice of their personal wealth tied up in property, the last thing they should be doing is doubling up by issuing guarantees on a second property.
On top of all that, it would also be complex to police and to administer. This means it would cost money; not just for the few thousand people who might actually use the scheme but for everyone who has a pension.
Every time a new rule is introduced or a new option made available, pension companies have to adapt their systems. All this pushes up pension charges, for everyone. We don’t think that’s very fair.
Very few people would be in a position to use this scheme, mainly because most people’s pension funds aren’t large enough. The only people who might be able to use it are also likely to have other sources of capital available to lend to their children.
So we’re not sure that the scheme would be used much even if it was brought in.
What’s more, you can get at your pension tax-free lump sum from age 55 anyway, so unless you had your kids pretty young and they in their turn are now desperate to get on the housing ladder in their early 20s, the chances are you’ll be able to use the existing tax free lump sum rules to just pull out some cash at age 55 and give it to them without the need for any complicated rule changes.
I could go on, but you get the idea. We think this proposal is bonkers. We absolutely do want to get people interested in long term saving and investing, but not like this.