Nick Clegg yesterday suggested that people should be able to use their pension savings, ahead of retirement, to help their children or grandchildren buy a home.
As a cost-free means of re-distributing cash across the generations and a method for boosting homeownership in the downturn, the policy sounds appealing. And, as the state increasingly steers individuals towards diverting their income to long-term savings, debates on whether individuals should be able to access their pension pots more flexibly are only likely to become more prominent in the years ahead. But, closer analysis suggests the impact of the proposal is likely only to be marginal and could lead to some unintended negative consequences.
Pension groups – such as the National Association of Pension Funds – have predictably, and with some justification, raised concerns that many people are not saving enough money for their retirement. Raiding these funds could leave retirees out of pocket. That could also leave taxpayers out of pocket if tax-free savings earmarked for retirement are instead pumped into property.
But it’s also highly questionable whether this policy will give a leg up to those who really need it. Evidence from Social Market Foundation research suggests that possession of different types of wealth is highly correlated. Those who have retirement savings typically also have other forms of wealth, including accessible savings and investments. Those who have little in the way of retirement savings also tend to have little else. Therefore, if you have a pension pot that is big enough to be raided without leaving you in penury, you are also very likely to have other money set aside that can be – or already has been – distributed to the next generation. These pension flexibilities are likely to help few individuals onto the housing ladder that would not have been helped by their parents in any case.
What’s more, the policy could potentially aggravate inequalities within the younger generation. Wealth transfers between generations serve to concentrate advantage within the next generation – those with wealthy parents get a leg-up, while those without are increasingly denied the prospect of home-ownership.
So, the proposal seems unnecessary. And to the extent such a change will be helpful for some, it may simply help the children of the more wealthy get two rungs up the housing ladder, whilst leaving the others languishing at the bottom. For a party committed to improving social mobility, that seems like a strange idea.