Pension pot mortgage guarantee for FTBs gets the thumbs down

Pension experts have poured scorn on Government plans to allow parents to use their pension pots as a guarantee for first-time buyers get on the housing ladder.

Deputy prime minister Nick Clegg unveiled last week plans to allow individuals to use sizable pension pots as a guarantee to help their children raise a deposit to buy their first home.

And the Department for Work and Pensions and the Treasury are already working through plans to allow parents and grandparents to use up to 25 per of their pension to guarantee first-time buyer mortgage deposits by setting aside part or all of their future tax-free cash lump sum entitlement.

The policy was initially considered for inclusion in the Government housing strategy in December 2011 but was dropped when it was published.

But Treasury officials are now set to enter talks with mortgage and pension industry representatives to work through details of how the proposal could work, what products could be made available and any rules the Government needs to remove.

Around 250,000 people would be eligible for the guarantee, with a minimum of 12,500 expected to take it up.

But Standard Life head of pensions policy John Lawson says the figures quoted for the numbers of people that would be eligible for the scheme are “small beer” and as a result he failed to see why the idea was being pushed forward by the Liberal Democrats.

He says: “It would cost every provider about £1m to change systems and processes to make this possible.

“In the 1930s, Britain built its way out of recession and that is what we need to do here. Pension funds could play their part if the Government is prepared to act as a guarantor.

“If the Treasury would guarantee the income from a project without it costing the taxpayer a penny, a lot of pension money and insurance company money would go into infrastructure.”

NAPF chief executive Joanne Segars says: “At first glance, this idea [of using pension funds as a guarantee] leaves us feeling slightly uneasy. A pension can only be spent once and this policy could end up leaving retirees out of pocket. The UK already has a serious problem with people saving too little for their old age.”

Hargreaves Lansdown head of pensions research Tom McPhail says: “This idea is absolutely bonkers. I think this announcement had more to do with party politics than anything else and it absolutely should not be pursued.”