Our year-long study brings evidence to the debate on linking housing and pensions – highlighting potential benefits for some, risks for many, and caution over unintended consequences for the housing and pensions systems.
Over the past twelve months, Nest Insight has conducted an extensive programme of research into a question for which there is growing debate yet very little UK-specific evidence: Should people be allowed to use pension savings towards home ownership in the UK, and could it help support financial security among low- to moderate-income households?
The problem behind the question is clear: industry and policy research consistently finds that housing security is a cornerstone of financial and wider wellbeing yet across all working-age groups, fewer households own their own home than those of the same age twenty years ago. The rationale for using pension savings as a solution is less clear cut. For some, it has intuitive appeal: by making funds more flexible and available for a deposit, a pension access scheme could help people overcome a major barrier to buying a home. For others, there are clear risks: increasing demand for housing without a commensurate increase in supply could push house prices higher, while potentially compromising pension saving and retirement outcomes at the same time.
“I feel like I move between good and bad idea frequently, it does have some potential but I worry that it feels like gambling with the future.”
(Recent homebuyer and Nest Insight research participant, UK)
We’ve recently concluded our analysis and this article gives an insight into what we found. The goal of the work has not been to argue for or against the idea but rather to provide evidence to ensure a more informed debate. Over the course of the year, we’ve consulted widely with experts from the housing and pensions industries and with the public themselves through surveys and a discussion forum. We have undertaken data analysis and modelling and looked at what we can learn from other countries, developing not only evidence that reflects both sides of the debate, but also a series of important questions that remain to be answered about any potential model.
Overall, our findings do not point to a definitive answer. We find evidence that supports some of the reasons people are attracted to the idea, primarily at household level. However, we also find evidence which suggests that implementing such a scheme could involve complexity, dependencies, and the risk of unintended consequences which together warrant significant caution and further thought, across both the housing and pension systems.
Our research addressed three key questions:
- Would people be better off if they use their pension savings to buy a home?
- How many people might be able to use their pension to buy a home?
- How do people feel about a pension access scheme, and would they use it?[1]
A pension access scheme could bring greater financial security to a relatively small group, with more complex benefits and wider trade-offs for a much larger group.
Throughout the work, we found an important distinction between a relatively small group of households who might need to use a pension access scheme for a deposit (those who might never otherwise be able to buy a home); and a much larger group who might choose to use their pension to supplement or substitute existing cash savings (but could otherwise go on to buy a home without it). For the first group, a pension access scheme might increase home ownership, for the latter group it might accelerate it, but differentiating between them is difficult.
- For those with no other route to home ownership, a pension access scheme could mean higher disposable income after housing costs in retirement, and greater property wealth compared to renting through working and later life, even if access involved withdrawing some pension savings.
- For those who might use pension savings to accelerate home ownership, buying a home earlier, or using pension savings to access lower mortgage rates through a larger deposit could bring some financial benefits in working life. But were people to withdraw pension savings for a deposit, it could also mean reaching retirement with smaller pension pots, unless any withdrawal is offset through higher contributions or change in circumstances.
Recently, a number of proposals linking housing and pensions have emerged in the UK and further afield, as well as wider proposals to support financial security both within and alongside the pension system. As this analysis is the first of its kind in the UK, we based it on the UK pension system in its current form. As a baseline scenario, we looked at a scheme that could allow people to withdraw part of their savings; but we also considered a pension access scheme that allows people to rebuild their savings or leave them invested, such as pension pledging or pension loan schemes. Relative to a withdrawal-based model, these approaches could address concerns around smaller pension pots at retirement, but may be more complex to implement.
The design of a pension access scheme and the lending landscape in which it is used could determine who benefits, but also raises the potential for unintended consequences…
… and designing a scheme to target those groups who stand to gain the most while also minimising unintended consequences could be very difficult, for the reasons set out below.
It’s challenging to estimate how many people would use a pension access scheme to buy a home, but our analysis suggests that those who truly need the option to do so are likely to be a relatively small group – at least in part because in a relatively immature Auto Enrolment system, many pots are just too small to make a material difference under this kind of change. More broadly, it could be most effective at helping lower-income couples and single-income households with higher earnings into home ownership, particularly those who rent privately, are over the age of 35, and will not receive help towards a deposit from friends and family. It also has the potential to help older renters, among whom many have owned a home in the past but lost it due to life events. But a pension access scheme could also be used in much higher numbers by people who simply haven’t been able to buy a home yet, including above average earners and those with help towards a deposit, without substantially increasing long-term home ownership among these groups. Our modelling also found that:
- External factors such as smaller deposit requirements have a greater impact on the potential reach of a pension access scheme than design factors like the share of pension savings people could use. However, pension savings will grow under the automatic enrolment system, meaning that they could make a greater difference to more people in the future than we find today.
- Much like today’s lending landscape, more prudent versions of the scheme would likely restrict take-up among low- to moderate-income households and those who need the most help to buy a home, without significantly affecting options for higher income groups.
- We found that the more flexibility there might be, the larger the groups became, raising the risk of wider implications for house prices and pension funds in the event that large volumes of people might use their pension towards home ownership, particularly if not everyone needed to.
Public opinion towards the idea is divided and nuanced, suggesting that even if people could use a pension access scheme, many would not choose to do so.
Overall, people told us they were more likely to be supportive of a pension access scheme if it might be of help to them, especially those who wanted more flexibility around their own savings. But even among this group, people were worried that a pension access scheme could undermine the security of pension saving while not effectively tackling the causes of low housing security and create new expectations that could erode their retirement income in the future. Some told us that it would incentivise them to save more into their pension, while others told us it could make them complacent about saving for a deposit outside their pension.
We also heard that lack of deposit is only one of the barriers people face to buying a home. Mortgage affordability, credit history and income variability are also major obstacles to buying a home that a pension access scheme may not help. A pension access scheme could also exclude those without enough saved in defined contribution pensions, including many public sector workers, and workers who don’t contribute regularly to pensions, perhaps because they are self-employed on low incomes.
Significant further questions remain around the viability and overall benefits of the approach, while there also needs to be a continued focus on those who may never be able to buy a home at all.
On one hand, a pension access scheme has the potential, to some degree, to reduce inequalities in home ownership, address the challenges of saving for a deposit for some groups, improve financial security in retirement for households for whom it really makes the difference between buying and not, and boost financial security in working life for those who might otherwise take longer to save. But it also brings complex risks and trade-offs, with no certainty that it could reach those who need the most help within the time they have left to buy a home, and without unintended consequences for the housing and pension systems.
To conclude this project, we also focus on a third, important group of people: those who will never be able to buy a home of their own, yet still need stability, safety, security, affordability and peace of mind from where they live. Our final output from this research will look at the role that institutional pension assets might play in supporting these people in the UK housing system, and will be available in the early Spring.
Anna Brain, Research Lead at Nest Insight
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[1] Throughout the work, we use the term pension access scheme to refer to the potential use of pension savings towards home ownership. This includes versions that might allow people to withdraw savings, pledge savings and or take a loan from their pension.
