Why Nick Clegg’s housing scheme won’t work

John Stepek wrote a humdinger of a Money Morning this morning: This crackpot scheme proves that British houses are too expensive. One tweet even called it “his best essay yet”. So what kicked off this particular bit of brilliance?

You can read it here but it was of course the idiotic suggestion from the Lib Dems that those with pension savings should use them to secure mortgages for their offspring in order that those offspring are better able to participate in the Ponzi scheme that is the UK property market.

John covers most of the problems with the idea in his piece, but it is so very stupid that more keep popping up. To help you keep track, here is a short and no doubt far from complete list.

• Even if those with pension pots wanted to help their children out this way there is no need for this change. In the UK, investors can already take their 25% tax-free lump sum at 55. It is hard to imagine that too many of them have children who want to buy houses before their parents hit this age. The fact that the Lib Dem spokesman floating the arguments claims a mere 12,500 people would take part shows just how very pointless it is.

• At the moment, it is specifically prohibited in UK law for a charge to be put against a pension. So as Tom McPhail at Hargreaves Lansdown points out, this would need a change in legislation. And of course, once the door is opened to third parties having charges over pensions it is hard to see how it would be closed.

• Note too that new legislation means more rules and more interference from HMRC. I can’t imagine anyone is really up for that.

• Another from Hargreaves – most people are already horribly exposed to the housing market via their own house and mortgage. Suggesting they double up via their kids is not good financial planning. Indeed, as one reader notes under John’s piece, if an independent financial advisor (IFA) suggested anything similar, we’d all be absolutely horrified.

• How will the money used to guarantee the loan be dealt with? Presumably, if it is guaranteeing a mortgage, most lenders won’t tolerate it being used to take any capital risks. Will it therefore have to be held in cash with all the corresponding impact on long-term investment returns?

• It solves the wrong problem. The problem is not so much that young people don’t have enough money (that’s another issue), but that, thanks to the asset-price inflation Western governments have encouraged for decades, house prices are too high. 

• It assumes that house prices will rise. They probably won’t. People coming up to retirement are short of pensions savings already. If they do this, they could end up even shorter. A spokesperson from the National Association of Pension Funds (NAPF) points out that “the Government has already looked at letting people have early access to their pensions and decided against it. People need to keep their pension for their retirement, especially with rising longevity and the costs of long-term care”. Quite.

• Most people have more than one child. Think of the family rows.