Averting the rental trap catastrophe
We recently set out proposals to the Treasury designed to get many more millennials into homeownership, and sooner, as well as getting them engaged with, and enthused by, pension savings.
I won’t go over all that again, as our ideas around allowing first-time buyers to save for a deposit within their pension savings have been covered extensively (if you want to read the document in full you can find it here or listen to my Tav on Money opinion on the matter).
In short, our ideas met with an exceptionally polarised response. Basically, pretty much everyone outside of the financial advisory business loved the idea and pretty much everyone within the industry (or anyone who commented, at least) hated it. So, for the majority, making pensions relevant and useful to younger savers is, apparently, heresy.
Anyway, that squabble notwithstanding it was interesting to read the output from the All Party Parliamentary Group (APPG) on Housing and Care for Older People.
The APPG has become increasingly concerned about the long-term prospects for employed renters who never make it into home ownership. Their recent report suggests that currently some six hundred thousand millennials face such a prospect. Whilst long term renting isn’t necessarily a problem, affordability is.
The high cost of private rents means that, on average, a younger employed person is paying something like 40% of their take home pay in rent, according to the APPG. The immediate effect on this is, of course, to significantly reduce the amount they can put aside for other financial essentials, such as saving for a deposit or long-term savings for retirement.
The bigger problems come later down the line, however. Even if they do manage to amass a meaningful pension pot most individuals can expect their income to halve in retirement meaning that instead of paying 40% over to the landlord, they would now be paying 80%. That’s real poverty and a route to homelessness.
The committee has stressed the urgency of building more affordable homes, recommending a target of 21,000 a year for the next twenty years. Whilst I cannot disagree that this is part of the solution, deposit affordability in a currently renting scenario still has a massive impact.
Pensions and property really are the cornerstones of most people’s long term financial security. And thus, using the generous tax breaks and employer contributions of one to help young people acquire the other makes perfect sense to me. For many young savers, it is probably the only realistic way out of the rental trap.
Yes, it is effectively a government subsidy on saving and property purchase but the net benefit to the economy, especially when contrasted with the APPG’s stark picture of future pensioner poverty and homelessness, is immense.
It is gratifying to see that, despite the (I suspect) somewhat self-serving response of sections of the IFA community, some pretty big hitters have come out in support of our ideas, including the secretary of state for housing, the Association of Consulting Actuaries and Scottish Widows, amongst others.
If we are to counter the negativity and make this a real option for brightening the future prospects for millions of youngsters who, through absolutely no fault of their own, are caught in a vicious cycle of ever-increasing house prices and high rental costs, then more influencers need to get behind the idea. At the top of my list would be the ICAEW and the ACCA. Come on guys…
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Adam is founder and chairman of Clifton Asset Management Plc, the innovators behind the designated business funding comparison platform Alternative Business Funding, providing high quality finance to SMEs across the UK. Adam hosts ‘...