I talk to Anna Brain about Nest Insight’s housing and pensions project
Pensions Goth: What were you trying to find out when you started the Housing and Pensions Project, and how did you go about it?
Anna: The Housing and Pensions Project started because there has been growing interest in allowing people to access some of their DC savings to buy their first home. At the time we had very little evidence on how a policy like this might work, and while other countries have done similar things, that is not enough on its own to understand the impact it might have in the UK. Nest Insight’s objective was to fill the evidence gap. We did not start with a view that it is a good or a bad idea. We wanted to build a set of evidence that others can use. We broke it into three research questions.
- Are people better off if they use pension savings to buy a home?
- How many people might be able to use pension savings if given the opportunity?
- How do people feel about the idea?
We conducted expert interviews, data analysis and modelling, a nationally representative survey, and a discussion forum.
Pensions Goth: What were the key findings?
Anna: There are benefits for some and risks for many, with a real need for caution about unintended consequences. There are several different ways it could work including withdrawing savings, withdrawing and then restoring savings, or leaving savings invested and using them as collateral against a mortgage. But in all cases the main benefit is where this makes the difference between renting and owning. For people who would never otherwise be able to buy a home, even the impact of having a smaller pension pot due to a withdrawal can be outweighed by not paying rent in retirement, and they also build property wealth; but this group of people is likely to be small. Those who most need help are often on low to moderate incomes and have lower pension savings, so the amount they could use towards a deposit may not be enough to shift the outcome. That may change as automatic enrolment matures, but it is a constraint now.
The risks affect a larger group. Many people might use pension savings to buy sooner or to increase their deposit, even if they would have bought later anyway. They may gain in the short term, but if they withdraw savings without making up the difference through higher contributions, they risk lower retirement income because their pension pot is smaller. People told us they were worried about how to make that choice. There is no clear advice route that looks at mortgages and pensions together. Under all scenarios, there are also risks if someone defaults on their mortgage. People could lose their home and part of their pension savings. We also found the potential for several unintended consequences, and two stood out. House price inflation, if demand rises materially, depending on design and eligibility. And impacts on pension funds: a withdrawal model changes liquidity needs, can shift investment strategy, and could affect returns.
Pensions Goth: How did housing market dynamics come into it?
Anna: Two big factors that could affect the impact of the policy are rising house prices and stricter lending rules. Even if people could use some of their pension for a deposit, many would still struggle with mortgage affordability. When we asked people about the idea, one of the biggest reasons they said it would not help them was that affordability would still be a challenge.
The housing market impact is hard to evidence internationally, but there are patterns we can learn from. New Zealand has allowed access to KiwiSaver for deposits for about 20 years. Last year, 77% of first-time buyers used KiwiSaver. Over the period it has been in place, house prices have risen and home ownership has fallen or not improved. That does not prove causality, but it shows why the inflation concern keeps coming up.
Pensions Goth: Is this a blunt way of trying to fix a housing supply problem with pensions?
Anna: The public certainly thinks so. Some people were angry at the idea they might have to use money set aside for retirement to solve what they see as a housing problem. Others said it is their money and they should be able to use it how they want. I think you have to look at it holistically. People need to be able to afford where they live through working life and in later life, and it can be hard for them to weigh up the long-term consequences of the decisions they make.
Pensions Goth: Did you look at a model where access depends on higher contributions?
Anna: We based our research on the UK pension system as it is now because policy design would likely have an impact on how people might be able to use pensions towards buying a home, who can use it, the benefits they might feel, and the consequences. Higher contribution models have some merit, but they have two problems. First, timing. If the problem around saving for a deposit is immediate for people already in their 30s and early 40s, a system which requires them to make higher contributions may not help them soon enough. Second, capacity. If you want to target the marginal group who might never otherwise buy, they are less likely to have spare income to save more.
Pensions Goth: What comes next?
Anna: I think the next steps are about understanding the trade-offs. There is room for more work on exploring individual trade-offs, beyond the pension pot, including how buying a home sooner, or as an alternative to renting, could impact household finances through working life. There is also room for more work on system level trade-offs, including house prices and impacts on pension fund liquidity and investment, as well as how the picture will change as automatic enrolment matures and pot sizes grow. The report also sets out several design questions that need answers. Who should it target? How much people should be able to withdraw? First time buyers only, or anyone who does not own a home?
Pensions Goth: Anything else that stood out?
Anna: Two things stood out. Our survey found that a third of private renters over 45 had owned a home before. People described life changes such as divorce, separation and redundancy as routes back into renting. If policy only targets first time buyers, it misses a large group who still need housing stability. This group also looks exposed in retirement. More than half of private renters expected to pay some or all of their rent from their own income when they retire. Of those, only 2% were very confident they could afford it. Around a third were somewhat confident. Around two thirds were not confident or had not thought about it. We also found that to some extent, people are already trading off housing and pensions. Six per cent said they had reduced or stopped pension contributions to save for a deposit. That rose to 10% among people aged 35 to 44, and was higher among ethnic minority groups.
Nest Insight’s full housing and pensions report can be found on their website, and will be followed in March by a short paper which looks at the potential for pension funds to invest in the supply of social and affordable housing.
Leave a Reply