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Pension-for-property scheme a non-starter

The government’s idea that parents or grandparents use their pension schemes to help their children or grandchildren buy their first home will never come to fruition, says a Leicester-based independent financial adviser.

25 September 2012

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Deputy prime minster Nick Clegg suggested at the Liberal Democrat’s party conference on Sunday (23 September 2012) that parents and grandparents could set aside future tax-free cash lump sums from their pension funds to be used as a guarantee or protection for mortgage lenders.

“We are going to allow those parents and grandparents to act as a guarantee, if you like, so their youngsters... can take out a deposit and buy a home. It is a pension-from-property scheme,” said Clegg.

Mortgage lenders would then be guaranteed this tax-free lump sum in the event of the child or grandchild being unable to repay the mortgage. This would persuade lenders to offer a mortgage to the child or grandchild without them having to save up for a large deposit as at present, Clegg said.

Scott Gallacher, director at Rowley Turton, believes that the scheme is unworkable for several reasons. “First, unlike endowments, there is no way for the tax-free cash lump fund from a pension to be assigned to a mortgage lender,” he said.

“Second, the parent cannot be compelled by the mortgage lender to take the tax-free cash lump sum. As a result, the proposed scheme is also unlikely to be popular with lenders as, in the event that the child defaults on their mortgage, the lender risks being unable to recover the money owed for many years.

“Unfortunately this appears to be another case of government meddling with little thought as to the practicalities or the likely outcomes. The fundamental problem with the housing market at the moment is that house prices, relative to incomes, are too high.

“The government might be best to simply let house prices remain static and allow wages to slowly catch up thereby making it easier for everyone to buy,” said Gallacher.

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