Don’t use your pension to buy a house

published 4 June 2019

This article was first published in April 2019

Let me tell you something you probably don't know: the UK pension system is in fabulous shape. Take a look at the 2018 Pension Markets in Focus report from the OECD. It's full of relatively boring tables and charts, but one number jumps out the UK has total pension assets worth just over 105% of its gross domestic product.

This puts us near the top of the global pension savings league. The US, Canada, Australia and some Scandinavian countries also come in at over 100% (Denmark is, as in almost everything, the clear winner). But the rest of the world is an unfunded mess. France and Italy have funded pension assets of about 6% of GDP, for example, and Germany has only 7%.

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In another piece of good news, our absolute levels of pension assets have been rising rather faster than everyone else's, up from 73% of GDP in 2007 to 105.3% now. The rise might slow a bit from here as we cut back on offering defined benefit pensions, but thanks to the rare brilliance of our pensions auto-enrolment policy, which is adding something like £10bn-£15bn a year to our savings, it isn't going to stall.

The UK has one of the best pension systems in the world

From this week, the contribution rates for auto-enrolled pensions will rise from a total of 5% of salary (3% from the employee and 2% from the employer) to 8% (5% and 3% respectively). That's going to have fabulous results, particularly given the UK's 76% employment rate.

According to Interactive Investor, if you start on £20,000 at 30, stay opted in, see your salary rise by 1% in real terms a year and make annual net returns of 5% you will end up with savings of nearly £200,000. Make 7% unlikely given the iffy default funds offered by most providers, but one can dream and that number goes up to nearly £300,000.

Start work at 20 and the magic of compounding makes the numbers even more marvellous: £340,000 and £620,000. Wow. You can complain about the devilish details buried in our pensions system the tapering of the £40,000 annual allowance, the hideous lifetime allowance, and the freedom to draw down at will from 55 but the point is that for all the worrying, in terms of the absolute levels of assets in its pensions, the UK is one of the best set countries in the world.

Nobody, you might think, would want to mess with that. You'd think wrong.

Throwing more money into the housing market is a stupid idea

Wherever there is money, there is someone with a cunning plan to use up that money. And in the UK it is generally accepted that all money should somehow or other be funnelled into the residential housing market. Hence the regularly returning idea that pension fund cash should be available to be used for deposits for those looking to buy houses.

Gordon Brown was persuaded out of it when the Labour prime minister introduced his "A-Day" reforms in 2006, but former pensions minister Steve Webb was pushing it back in 2013. This week it raised its head again when Robert Colvile, director of the Centre of Policy Studies, suggested it was a fine way to help Generation Rent into the market.

On the face of it, you can see the logic. Most of us worry about the young not being able to afford homes. So if the same young people that can't afford houses have piles of cash compounding in pension funds, why not let them use that to buy the houses? All spending involves a trade-off between the needs of the present and the needs of the future perhaps we should fetishise retirement funding less and the living standards of the working more.

The problems with this are obvious. It doesn't solve one problem, it just swaps it for two more. The first is that it destroys the integrity of the pension system. A pension is a backstop. It comes with tax relief for the very specific reason that it is designed to stop you being reliant on the state in your retirement. Once the money is in it is in, you can't lose it gambling or in bankruptcy; you can't create negative equity with it; and you can't fritter it way on the internet (not until you are 55, anyway).

Even Brown, who had only just finished phasing out tax relief on mortgage payments in 2000, had the Treasury point out in 2006 that the aim of a pension was to ensure "that tax relief is only given to those whose purpose in making the contribution is to provide themselves with a secure retirement income".

The problem of high house prices will solve itself

The second problem, of course, is that in the absence of a rise in supply a cash-driven rise in demand pushes up prices. And rising supply is tough to create in the UK: the latest data show the number of houses starting to be constructed in the UK is down 2% year on year.

A better solution to the problems of unaffordable houses in the UK is to stop trying to think of clever ways to help people find the cash to pay high house prices and address the actual problem the high prices. This process might well be beginning naturally, in part thanks to the cuts in tax relief to buy-to-let investors.

Figures from HM Land Registry have UK house prices growing at only 1.7% in the 12 months to January 2019, the lowest annual growth level since mid-2013.

On a monthly basis, prices actually fell, albeit only 0.8%. This means that houses are getting cheaper relative to wages (currently rising at 3%) and in real terms overall (inflation is 2%).

This is an almost perfect situation. If prices are flat in nominal terms, existing owners have no risk of negative equity but real prices still come down for buyers. The process could be accelerated by rising interest rates, a reversal of QE (one of the things that has forced prices up so much in the past decade) or perhaps an offer of tax relief for downsizers. But even without that, things are heading in the right direction.

With that in mind, here is a recommendation. The UK should count its pensions blessings. We've pretty much solved one problem. How about we leave it solved rather than unsolving it in a vain attempt to solve an entirely different problem? Particularly one that might solve itself over the next few years.

This article was first published in the Financial Times

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.