Opinion: Pensions for property scheme is profoundly flawed and illiberal

One can just imagine the proposed pension for property scheme (which Nick Clegg has announced) being the product of committee thinking, for, typical of the produce of many committees, it tries to cram all of the trendier topics of the day into one proposal, resulting in something which is less than the sum of its parts.

The current scheme, the product presumably of the Liberal Democrats’ desire to create popular policies which differentiate us from the Tories among the voters of middle England, is closer to the more base Tory instinct for short-term economic populism than the liberal tradition.

The policy is wrong-headed because it acts contrary to everything else this government has attempted to do economically. It’s a policy which chases short-term growth at the expense of long-term stability. It was as a critic of such policies in the Labour years that Vince Cable made his name. This government has steadfastly resisted such policies, choosing instead the far less popular route of longer term stability and lower growth in the short term.

The pension for property scheme may have a positive impact on growth, but it risks returning the UK to a situation where growth is secured against the vagaries of the housing market, the collapse of which has caused a number of UK recessions and was a key component in turning the ‘credit crunch’ in to a recession.

The other long-term concern regarding this policy is that many UK pension funds are in deficit. Indeed it is a reasonable argument that if the financial crisis had not occurred when it did, current political discourse would concern the need to address the looming pensions crisis.

Tagging people’s potential future pension income to a volatile housing market threatens to exacerbate the future pension deficit issue. And all for the short-term gain of ephemeral economic growth this side of an election.

Apart from the practicalities the policy is profoundly illiberal, as it encourages the transfer of wealth from one generation to the next within the same family, perpetuating and disadvantaging those from a less well-off background. Meritocracy, rather than class envy, is at the heart of liberalism. The pension for property policy moves the party a step further away from its meritocratic origins.

For the British economy to achieve anything like its full potential, this government, and subsequent ones, must pursue a policy almost the polar opposite of ‘pension for property’: reducing the incentives for people to invest in residential property that is not their own home, and encouraging investment in other sectors of the economy, by taxing investment in residential property other than one’s own home, and giving greater tax reliefs for investment in other sectors, such as green industries.

The ‘pension for property’ plan is a terribly unsubtle attempt to chase voters of the mid-,market tabloids who are apparently obsessed by house prices regardless of the consequences for the wider macro-economy.
The Liberal Democrats have traditionally been far more rounded in their economic analysis than that, and while ’differentiation’ and strategies to achieve growth are welcome, they must not come at the expense of the bigger picture.

* David Thorpe was the Liberal Democrat Prospective Parliamentary Candidate for East Ham in the 2015 General Election

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20 Comments

  • @Simon Shaw
    The main difference is that the money in the pension fund has not been taxed. If I looked at my situation, I am lucky and therefore pay a proportion of my income tax at the 40% rate. If I save some of that and then use it to guarantee a house purchase for my children I am accepting the risk alone. If I instead choose to risk a proportion of my pension fund HMRC are also sharing a large portion of the risk.

    This would allow people with the means to do so to invest more into their pension with the sole reason of providing a guarantee. They would require 40% less capital to do so and would be taking a lower risk.

    The idea is not a bad one, and I can’t agree that enabling ones children to enter the housing market with prices so high is illiberal. It should perhaps be limited to those without the means to provide a guarantee without utilising their pension, or at least not apply to recently added funds.

  • Tony Greaves 1st Oct '12 - 8:50pm

    Whther or not the idea is fundamentally illiberal ora wonderful liberal proposal, it will do little or nothing for the poorest half of the population.

    But apart from such considerations, it is politically inept. And in its take up it would be a damp squib.

    All a one week wonder really.

    Tony Greaves

  • Richard Dean 1st Oct '12 - 10:34pm

    Transfer of wealth from one generation to the next within the same family is something that many parents want to do. Even those with no natural heirs make wills. To fight a natural instinct seems illiberal, as well as a big vote-loser.

  • Matthew Huntbach 1st Oct '12 - 11:02pm

    One of the biggest problems in this country at the moment is the way money in the housing system is recycled back into the housing system through inheritance, thus benefiting those who are lucky enough to have chosen the right parents and to have kept then sweet, and pushing into lifelong misery the underclass who are cut out of inherited wealth. The feedback mechanism of money from housing being pushed back into housing is just serving to push prices higher and higher. We hear so much from Tories about how enterprise is stifled by high taxes, but this is just the same. High housing costs suck money from those who work and give it to those who do not. Having an enormous mortgage or having to pay an enormous rent (because you can’t afford a mortgage) stops you from being adventurous or willing to invest in some new enterprise – its leads to a heads-down keep quiet to earn your salary mentality.

    This idea of finding a way to push yet more money into housing is nutty. How long will it take to get the message across that giving some people more money to buy housing does NOT in the long run help anyone buy housing, it just leads to prices being pushed up further?

    What this policy (which is not really a policy, just and idea that has NOT gone through the party’s democratic mechanisms) said to me is just how out-of-touch some senior members of our party are. It seemed to me that this was the sort of policy idea that would be pushed by someone who just didn’t realise that not everyone has rich parents and grandparents, and so makes disastrous mistakes out of pure ignorance of how most people live.

  • David Grantham 2nd Oct '12 - 12:01am

    So a young person with no family wealth has to save for the deposit out of taxed income, but someone with wealthy parents can get a hand with tax-free pension contributions. Or have I misunderstood?

  • Simon,
    I’m a little surprised to see your comment containing classic ‘woolly liberal’ thinking and exhibiting selective alzheimer’s!

    Firstly, lets address the alzheimer’s, which to be fair many people in the body politic are exhibiting around this scheme. Before the sub-prime crisis in 2007 (yes it was that long ago!), there were various officials – FSA, DWP etc. (?) and financial advisers/planning experts publicly voicing concerns about Pension-backed mortgages and the potential for mis-selling, because of the negative impact the necessary repayment will have on the both the flexibilty of when the pension can be taken and on the final pensionable income.

    Secondly the woolly thinking. Firstly, lets remind ourselves that a pension scheme is fundamentally about saving to create an income for retirement. The government through tax and benefit incentives encourages the use of such schemes, however, the government has also placed constraints on the levels of contribution that attract tax-relief and on the fund itself. We should also remind ourselves that at the present time, total contribution/funding levels need to be around 23% of pensionable salary per annum for a 1/60th scheme – a very sobering proposition when for the 80’s and 90’s total funding levels of my various employers schemes was 10~12%.

    Putting to one side whether either of the families have ‘spare’ disposable income to invest outside of a ‘pension’ pot, the two families, A and B, may have a choice as to how they invest their ‘pension’ pot (I use ‘may’ as I accept that for many people their pension pot is their employer’s scheme).

    Family B by using a pension fund are being ‘rewarded’ by the government, for having their money locked away in an ‘inflexible’ pension scheme, through favourable tax reliefs and having the investment discounted from benefits assessment. Family A on the other hand gain some benefit through effective use of tax efficient savings vehicles (such as ISA’s, endowments etc.), do not gain to the same extent (particularly with respect to benefits considerations) – however what they gain is greater control over the investment and more flexible access …

    This would seem to be fair and equitable?

    Going back to the point about ‘spare’ disposable income, I suggest a family which either does not have such income (ie. low paid) or has made the lifestyle decision to spend rather than save, will most probably need their full pension pot(s) to maximise their pension. Also I suggest it is in the government’s interest for people to take the full pension rather than a (tax-free) lump-sum and reduced pension, as someone with a reduced pension is at increased risk of requiring benefits to top-up the pension (although I could understand the government promoting the scheme if it could have the effect of reducing the total long-term public sector pension payout liability).

    However, we shouldn’t loose sight of what can be done today both within the (personal) pension wrapper and with the (lump-sum) proceeds of a pension fund; namely a (personal) pension fund can invest in property and you can use a pension to backup a mortgage. So I don’t really see what all the shouting is about…

  • “Officials predicted that 12,500 people could benefit from the scheme. ”

    A mere drop in the ocean; more than 300,000 people graduate every year from UK universities, the vast majrity of which will have been beneficiaries of the “bank of mum and dad” …

  • Richard Dean 2nd Oct '12 - 1:15am

    The idea that the individual matters most, which in this context leads to claims that inheritance is unfair, seems to me to be completely at odds with common-sense liberal democracy. The individual has rights, yes, including the right of life, but in practice it is the family that matters most.

    For many individuals, it’s the family that gives the individual life, and shapes the individual’s first experiences. It is a family that the individual then creates with another, repeating the cycle. In a family-centred liberal democracy, families own things, and families have rights. Individuals are just the temporary caretakers. Their rights are safeguarded by families, and are second to those of families.

    In a family-centred liberal democracy, different families have rights to make different life choices, of course, and those differences will no doubt lead to differences in incomes and of accumulated wealth and so power. Just like individuals can abuse power, individual families can to, and a population of families needs to develop liberal and democratic rules that prevent this.

    So in a family-centred liberal democracy, bank mum-and-dad is bank family, and the passing of wealth from one individual caretaker to another of the same family is natural and right. It is not a transfer of ownership, just of care. A forced diversion of wealth away from that splitting line of caretakers would essentially be equivalent to theft.

    And in this kind of liberal democracy, we can see clearly the natures of the individuals who want that forced diversion to occur. They are profoundly misguided and selfish. They have not learned the lesson of life, that families matter more. They need to be taught, and we should perhaps start by re-writing things like the Charters of Human Rights.

  • Matthew Huntbach 2nd Oct '12 - 6:08am

    Richard Dean

    And in this kind of liberal democracy, we can see clearly the natures of the individuals who want that forced diversion to occur. They are profoundly misguided and selfish. They have not learned the lesson of life, that families matter more.

    I have seen the utter misery caused to families by high house prices. The factor that is destroying family life more than anything else in this country is probably high prices, making it impossible for most families to afford family housing. Mums and dads run ragged by having to pay high mortgages when they just can afford it, and so splitting up and causing more damage to families is a big factor as well. In what way is it “selfish” that I point this out and wish to have a more equitable distribution of housing so that those with families can get housed in accommodation suitable to their family? It doesn’t affect me directly, I have a house – but I suppose indirectly it does, given that high house prices are leading to the destruction of decent life and so to the decency of society surrounding me.

  • This policy idea of mum & dad freeing up (say), £40,000 from their pension pot (assuming they have it), is looking at the problem from the wrong end of the telescope.
    House prices are too high, and indeed, unsustainably so. But this idea is just another attempt to feed the unsustainable.
    Isn’t it strange that Mr & Mrs Jones would bend over backwards to give their daughter £40,000 from savings, pension or whatever. But the very idea that the value of their house should fall by £40,000 would make them incandescent with rage. And yet:
    If they (and everyone else), accepted an equivalent fall in their house values, then Mr &Mrs Jones’s daughter would probably not need the £40,000 bung from dads pension pot.
    And yes, I do understand what this fall of house values would have on the balance sheet of banks that are ‘marking to fantasy’, to hide the fact that they are insolvent. But is it the job of Mr & Mrs Jones, and their daughter to keep the banks propped up in fantasy land?

  • The world we entered, sometime around 2007, means that we no longer function under capitalism, socialism, or liberalism. We are designing policy that attempts to live under Ponzism. And sooner or later ALL Ponzi schemes collapse.

  • @John Dunn
    They would be guaranteeing a loan not losing £40K as in your example. They would only lose it were the repayments not to be kept up…

    House prices are too high. But due to a lack of decent affordable rented stock many people have been forced to buy with excessive mortgages. Any attempt to rapidly change this situation would lead to a situation that would make the repossessions of the late 80’s seem a minor blip in comparison.

    I would guess that the current stagnation in the market needs to continue for quite some time yet and needs to be backed by better rental stock and stricter controls on lending.

    http://www.bbc.co.uk/news/business-19792133

  • Richard Dean 2nd Oct '12 - 3:08pm

    Matthew. May I politiely say that I don’t believe you when you say that “I have seen the utter misery caused to families by high house prices”.

  • Matthew Huntbach 3rd Oct '12 - 10:50pm

    Richard Dean

    Matthew. May I politiely say that I don’t believe you when you say that “I have seen the utter misery caused to families by high house prices”.

    Why not? I was for 12 years a councillor for a ward in an inner London borough which fell into the 10% most deprived wards in the country. A lot of my casework was on housing problems. It was not unusual for me to have to deal with constituents who were in tears over being unable to get decent housing.

  • Matthew Huntbach 3rd Oct '12 - 10:56pm

    Plus, Mr Dean, I’m a southerner, I was brought up on a council estate in an area where house prices are very high, the son of an unskilled manual worker on minimum wages. I don’t wish to go too much into detail on myself and my family, but I hope this may suggest to you I might have some background where I was not just an outside observer on this.

  • David Allen 3rd Oct '12 - 11:05pm

    Richard Dean said:

    ” in a family-centred liberal democracy, bank mum-and-dad is bank family, and the passing of wealth from one individual caretaker to another of the same family is natural and right. It is not a transfer of ownership, just of care. A forced diversion of wealth away from that splitting line of caretakers would essentially be equivalent to theft.

    … we can see clearly the natures of the individuals who want that forced diversion to occur. They are profoundly misguided and selfish. They have not learned the lesson of life, that families matter more. They need to be taught, and we should perhaps start by re-writing things like the Charters of Human Rights.”

    So, hands off accumulated wealth, what we have we hold, and to hell with everyone else. The Charter of Human Rights should now state that Might is Right.

    This is the political philosophy of the Mafia, of mediaeval feudalism, of the Russian oligarchy.

    Is this what Cleggite “”Liberal Democracy”” has sunk to?

  • The baby boomers are currently cashing in the 30 or 40 year windfalls whilst those of us who have the misfortune to be 20 years younger are slaving to pay the interest on the cash bung the have just received

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