As a 20-something graduate, my decision to snub a company pension scheme in favour of saving for a property deposit was a sacrifice I felt I had to make.
I couldn’t afford to do both at the same time as repaying my student loan, even though it was minuscule by today’s standards, so I left the “free money” of employer contributions on the table. Buying my first flat was a far more pressing priority than locking up money for retirement.
Decades later, the question of whether to prioritise “pension or property” has become even more loaded as house prices soar, and the average age of first-time buyers increases. So could we find a way for the savers of tomorrow to do both?
Well, someone who has been sharing some unusually radical thoughts on this topic is Nikhil Rathi, chief executive of the Financial Conduct Authority.
Buying a first home, paying down a mortgage and building a pension should not be seen as isolated events, he said in a speech last week, but “junctions on the same financial journey”. Referencing countries where first-time buyers are permitted to access pension funds early or borrow against them to finance a deposit, he asked: “Can we do more to design policy, regulation, products and services that reflect that?”
Had I been in the room, I think I would have fainted! While the FCA won’t specifically be consulting on this in its mortgage review this summer, the fact that Rathi is giving thought to such possibilities is a bold move.
There’s a growing body of research in the UK pensions space looking at the international examples Rathi cited — notably Australia, the US and South Africa — and what impact similar initiatives could have over here.
An important feature common to all is limiting the amount of cash that first-time buyers can actually withdraw. Some countries, such as Australia, have created a “pot within the pension pot” to house additional voluntary contributions that could be used for this purpose. The objective is offering a more tax-efficient way to save for a home alongside saving for retirement. There’s a similar “separate pot for property” model in South Africa and Singapore, meaning workers in these countries won’t face the same binary choice that I did.
So, as an experiment this week, I asked British Gen Zs whether they would engage more with pension saving if there was also a property deposit savings angle. The answer? An overwhelming “yes”.
Making the UK pensions system more relevant to young people’s lives today creates a powerful incentive to increase the amounts saved from a younger age. If a small part could be used for a property and the main part for long-term retirement, you’d hope the benefits of investing, employer contributions and tax relief would be better understood.
However, raiding pensions early is a huge risk. Many international countries have far higher mandatory pension contribution rates than the UK’s 8 per cent of qualifying pay under automatic enrolment.
Even if UK workers saved more, permitting younger generations to sacrifice their pension savings to get on the property ladder is not going to build any more houses. As we have seen with past UK policy experiments such as Help to Buy, stoking demand without meaningfully increasing housing supply just means house prices will rise even further.
Nevertheless, former pensions minister Sir Steve Webb has raised another risk — growing numbers of people priced out of property ownership who face renting during their retirement. Nearly 40 per cent of those currently renting believe they will still be doing so when they retire, and they could need up to £400,000 more in savings to fund this, according to a separate study by Standard Life.
To return to my own example, I reckon the pension contributions I passed up in my first job could be worth £60,000 now. Deciding to prioritise buying a property in my 20s (which I now own outright) has arguably been a much wiser investment. However, there are no guarantees that future generations will experience the same increase in property prices and longer mortgage terms mean buyers pay much more in interest costs.
More nuanced international solutions involve taking a loan from your pension to fund a property deposit that is gradually repaid, or using your pension pot as collateral for a housing loan.
The first is common in the US, where nearly one in three Americans have taken out a pension loan in the past five years. More commonly used for debt consolidation than property deposits, the risk is that workers will pause pension contributions while they’re repaying the borrowed funds.
Leveraging pension savings to supplement a mortgage is more common in South Africa, where low-interest loan repayments can be deducted directly from workers’ pay cheques. However, such loans can be immediately repayable if workers change jobs, or worse are laid off.
In his speech, Rathi wondered if regularly paying into a pension could boost creditworthiness in the eyes of mortgage lenders. He cited research from Nest, the state-backed pension fund, linking regular pension saving with higher credit scores. UK credit agencies already offer a “rent reporting service” to help first-time buyers boost their scores, although these would need to be factored into lenders’ affordability tests to make a real difference.
The UK may not have innovated with pensions, but it has with Isas. Previous governments have created savings incentives for first-time buyers, though the Help to Buy Isa has been discontinued and the Lifetime Isa has attracted huge criticism. Obvious flaws since its inception in 2016 mean no major UK bank has ever offered it and young savers who fell foul of the complicated rules have lost tens of millions to penalties.
Regulators should be mindful of this debacle if they are ever tempted to dream up a better scheme — but for now, there are more pressing items in Rathi’s in tray.
Delivering the long-overdue pensions dashboards and helping workers consolidate sprawling numbers of previous workplace pension pots would boost engagement for savers of all ages. So too would plans for “targeted support” on retirement pathways, bridging the gap between factual guidance and costly personalised financial advice.
UK ministers would be wise to focus on hitting housebuilding targets, but they should also watch the political row in Australia as MPs debate extending early access to pension pots beyond the current limits. Until the root causes of housing affordability are addressed, borrowing from the future can only ever be a temporary stop-gap.
Claer Barrett is the FT’s consumer editor and author of the FT’s Sort Your Financial Life Out newsletter series; claer.barrett@ft.com; Instagram and TikTok @ClaerB
https://www.ft.com/content/8c455079-84bf-4d42-a43f-56f3ec715cd4
