Plan to allow first-time buyers to dip into workplace pension pots to pay for home deposits

FIRST-TIME buyers may be allowed to access their pension early in future if they need the cash to pay for a house deposit.

Pensions minister Guy Opperman said he is keen to explore the idea of using workplace pension auto-enrolment to fund both home deposits as well as "rainy day" savings funds.

He made the comments as part of an online discussion today on the future of pensions alongside Prospect Magazine, Lloyds Banking Group, and the Resolution Foundation.

Mr Opperman explained that in a few years' time young savers may have stashed away more than £10,000 into pensions due to workplace auto-enrolment, yet they may struggle to save the same as a house deposit.

He added that he's also keen on the idea of using auto-enrolment to fund emergencies, such as the cost of repairing a car or washing machine.

Mr Opperman said: "The alternative approach [to raising automatic-enrolment minimum contributions] that I'm look at myself… is that when you reach a certain amount of your auto-enrolled pot you can take a certain amount of that and put it into rainy day money.

What is pensions auto-enrolment?

HERE’s what you need to know about pensions auto-enrolment:

What is pension auto-enrolment? 

Since October 2012, employers have had to enrol their staff into workplace pension schemes as part of a government initiative to get people to save more for retirement.

When does auto-enrolment apply? 

You will be automatically enrolled into your work's pension scheme if you meet the following criteria:

  • You aren't already in a qualifying workplace scheme.
  • You are aged at least 22.
  • You are below state pension age.
  • You earn more than £10,000 a year in 2019/20.
  • You work in the UK.

How much do I contribute? 

There are minimum contributions that you and your employer must pay.

Your minimum contribution applies to anything you earn over £6,136 up to a limit of £50,000 (in the tax year 2019/20). This includes overtime and bonus payments.

A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3 per cent.

What if I have more than one job? 

For people with more than one job, each job is treated separately for automatic enrolment purposes. 

Each of your employers will check whether you’re eligible to join their pension scheme. If you are, then you’ll be automatically enrolled in that employer’s workplace pension scheme.

Can I opt out?

You can choose to opt out, but you’ll miss out on the contributions from the government and from your employer. If you do choose to opt out you can opt back in later.

"Then, once you reach a particular level, are you able to ring-fence some or all of the money to use as a deposit or to effectively act as a loan to a deposit system?"

He added: "Hypothetically, if it's going to be in five years' time that the A pot is the largest amount of savings an individual has, and if home ownership is beyond the reach of people, what are the mechanisms you can look at to try and address that?"

It comes amid a backdrop of mortgage lenders pulling low deposit deals leaving first-time buyers scrimping to save yet more cash to get onto the ladder.

But Mr Opperman and the Department for Work and Pensions both stressed this is not government policy and is merely an idea of Mr Opperman's at this stage.

This concept isn't new though; it was floated by then secretary of state for housing, communities and local government, James Brokenshire, back in June 2019.

At the time, he said savers should have the choice over what to do with pension cash, although his comments were quickly rebuked by the government.  

When can I access my pension?

Since the so-called pension freedom changes took force in April 2015, workers have been able to take 25% of their pension as a tax-free lump sum.

But most people can't access this cash until they're 55 – and this age is rising to 57 from 2028.

One of the key concerns over early access is that savers won't have enough to survive on in retirement given the state pension alone isn't considered to be enough to live on.

State pension age rose from 65 to 66 last week and is set to rise again to 67 in 2028, and to 68 from 2044, although there are plans to bring this forward to 2037.

The new state pension currently pays£175.20 a week, while it's £134.25 for those on the old (basic) state pension.

Is using pensions for house deposits a good idea?

Pete Glancy, head of policy, pensions and investments at Scottish Widows said: "It makes sense to allow people in the future to elect to be auto-enrolled into a lifetime savings product that benefits from employer contributions, allows young people to get onto the housing ladder and to save for their retirement.

"More and more young people will in the future find themselves handing over a large part of their pensions income to landlords, leaving them impoverished in retirement, unless the long term savings landscape is modernised.”

But Nathan Long, senior analyst at financial provider Hargreaves Lansdown argues otherwise.

He said: "Granting early access to pension savings for a deposit could potentially derail future retirements, so could only be considered if it brought new levels of excitement, interest and interaction with pension saving from a younger age and with the right controls to limit quite how much could be accessed."

What are the different types of pension?

WE round-up the main types of pension and how they differ:

  • Personal pension or self-invested personal pension (Sipp) – This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
  • Workplace pension – The Government has made it so it's compulsory for employers to automatically enrol you in your workplace pension, unless you choose to opt out. These so-called defined contribution (DC) pensions are usually chosen by your employer and you won't be able to change it. Minimum contributions rose to 8% in April 2019, with employees now paying in 5% and employers contributing 3%. This is up from the 5% of contributions workers and companies were required to pay in previously, where employees contributed 3% and employers 2%.
  • Final salary pension – This is a also a workplace pension but here, what you get in retirement is decided based on your salary, and you'll be paid a set amount each year on retiring. It's often referred to as a gold-plated pension or a defined benefit (DB) pension. But they're not typically offered by employers anymore.
  • New state pension – This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £175.20 a week and you'll need 35 years of national insurance contributions to get this. You also need at least ten years' worth of national insurance contributions to qualify.
  • Basic state pension – If you reached the state pension age on or before April 2016, you'll get the basic state pension. The full amount is £134.25 per week and you'll need 30 years of national insurance contributions to get this. If you have the basic state pension you may also get a top-up from what's known as the additional or second state pension. Those who have built up national insurance contributions under both the basic and new state pensions will get a combination of both schemes.

Steven Cameron, pensions director at financial provider Aegon added: "Allowing individuals to dip into their individual or workplace pension to fund a first house purchase deposit may have short term appeal.

"But once the money has been spent on the house, it’s no longer there for retirement, meaning many people would have to start again on their retirement savings journey.

"The power of compound interest means it’s the pension contributions paid in the early years that have longest to grow and make the biggest difference in ultimate retirement income."

Both Mr Long and Mr Cameron added that savers can already build either apension or a house deposit using a Lifetime Isa (Lisa).

With a Lisa, those aged 18 to 40 can save £4,000 a year until they're 50 with the government adding a 25% bonus up to a maximum of £1,000.

The cash must be used to either buy your first home or to fund retirement from age 60.

Mr Opperman's comments come as the government has this month launched a consultation, which runs until October 30, on the governance and charges associated with workplace pensions.

Workers aged between 22 and state pension age who earn at least £10,000 a year have been auto-enrolled into workplace pensions since 2012.

Minimum contributions rose to 8% in April 2019, with employees now paying in 5% and employers contributing 3%.

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