I'm all for more pensions flexibility. But Nick Clegg's idea to use parents' pension funds to guarantee mortgages to help their children buy a property is bonkers.
On Sunday, the deputy prime minister tabled plans to allow parents and grandparents to use part of their retirement savings to act as a guarantee for their children to help them get a deposit for their first home. Current pension rules allow an investor to take up to a quarter of their pension pot as a tax-free lump sum after age 55. Mr Clegg's plan would allow this lump sum to be used to fund a "guarantee" for a child who has not built up enough cash in the form of a deposit to get a mortgage.
I see several problems with this. If we want any improvements to pensions, we want more flexibility over how the income is taken to help the many retirees who are already struggling to generate enough to live in comfort.
Most importantly, the fact that the housing market is out of reach of young adults does not mean that young adults don't have enough money, it means houses are overpriced.
But the debate raises the thorny question of whether you should help your child buy an overpriced property. I don't mean overpriced in terms of the market, I mean overpriced in terms of what your child can pay. This is an emotive subject within a family and you will, of course, want to assist your child. But you also need to see if the figures really add up for both you and your child.
First, are you on track to have a retirement pot (whether in pension or other investments) of at least £400,000 at your required retirement date? This is the benchmark I have calculated that you need to stash away in order to secure a minimum standard of living as calculated by the Joseph Rowntree Foundation (read The price of a decent retirement). If you are not, then I would advise that you abandon all ideas of helping your child with a deposit. Second, have you paid off your own mortgage? If you have not then you may be too exposed to the mortgage market when acting as guarantor - either via your own income or via Mr Clegg's pension plan.
Then let's turn to your child. Say your young adult has a good graduate job and is on a salary of £30,000. Say that the child has been prudent enough to save £10,000 as a deposit. The property that this salary can comfortably buy on three times the salary is £100,000. But if you want to stretch things further then based on four times the salary the child can borrow £120,000. If you then add in an extra £30,000 to the child's £10,000, that still means he or she can only buy a property worth £160,000.
This is similar to the situation I was in more than 10 years ago when I was fortunate enough to be helped out by my own father. I'm still living in that property now and raising my own young family in it, and very grateful. But I don't feel that I should have bought a more expensive property - the high cost of raising my children means I can't stretch myself further. If I had, I would now be calling on my father's guarantee.
Critically, the help I received from my father was a windfall from a long-term investment to pay off his own mortgage that turned out better than he had expected - not something that was factored in before investment progress was known.
In the case of pensions, your statements come with three different projection figures for what you might have at the end. It is only if you make the upper figure that you will be comfortable helping your child out from your tax-free lump sum. If you only achieve the lower estimate, that pensions lump sum may be crucial insurance you need to fall back on in retirement to generate extra income.
On the emotional and personal side of the argument, I wouldn't have expected my father to dig into a pension - the vehicle he was specifically investing in for his retirement. However desperate they are to get on the property ladder, most young adults want their parents to have a comfortable retirement and wouldn't do anything to jeopardise that. In my own circumstances, I insisted that my father and I made sure that an IOU was in place - if my parents ever need the money back for their retirement, I will pay.
