Can pensions boost the next generation of homeowners?

The UK’s retirement savings system is heading for what has been starkly described as a “slow motion train crash”. FCA CEO Nikhil Rathi echoed this warning in a recent speech, reflecting on the disjointed nature of the country’s financial landscape and the urgent need for reform.

Rathi compares the current system to a fragmented transport network, where pensions, savings, mortgages, and housing wealth all operate on separate tracks. This lack of integration leads to confusion and missed financial opportunities for consumers. Rathi argues for a more joined-up approach, where the FCA and its partners work to create a seamless financial journey, helping people make informed decisions and move confidently towards financial security in retirement, while also supporting broader economic growth.

One of the most striking ideas Rathi floated was the potential use of pension savings to help individuals get onto the property ladder, a policy already in place in countries like Australia, New Zealand, and Singapore. Rathi does point out such a move comes with trade-offs. Would withdrawing pension funds for a house deposit ultimately leave individuals worse off in retirement? Would it push up house prices, worsening affordability issues?

While enabling savers to leverage their pension pots for home purchases could offer a valuable boost to first-time buyers, it’s important that safeguards are put in place. A key challenge would be ensuring that people who accessed their pensions early could replenish those funds over time, mitigating the risk of financial shortfalls in later years.

The idea of linking residential property purchases and pensions savings is nothing new. Before the introduction of pension simplification on A-Day in 2006, there were concrete plans to allow individuals to purchase residential property through their pensions. However, the government scrapped the proposal in late 2005 after media reports raised concerns that billions in pension tax relief could be exploited by wealthy individuals to fund second home purchases.

Although there has never been a formal ban on using pension funds to buy residential property, the taxable property rules mean punitive tax charges of up to 70% of the initial investment, along with ongoing annual levies, make investing through pensions virtually unworkable. Added to that, withdrawing from a pension scheme before the age of 55, or making a loan to the member or anyone connected to them, results in similar tax penalties, meaning using a pension to help fund a home is not possible.

Any move to allow pensions to help people get on to the property ladder would require a significant shift in the pension tax rules, which you’d imagine would have-far reaching effects.

A product already exists for this purpose. The lifetime ISA (LISA) was introduced by the government to strengthen support for long-term saving among younger adults, specifically those aged 18 to 39. It offers a 25% government bonus on subscriptions, which can be up to £4,000 per year – mirroring the tax relief available on pension contributions for basic rate tax payers. The accumulated funds, including the bonus, can be put either towards the purchase of a first home worth up to £450,000, or withdrawn tax-free from age 60, providing a flexible alternative to traditional pension saving.

While the idea of using pension savings to support homeownership is not new, implementing such a policy would require substantial reform to existing pension tax rules and careful consideration of the long-term consequences. The lifetime ISA already offers a more accessible, tax-advantaged route for first-time buyers, so rather than fundamentally reshaping pension legislation, policymakers might achieve greater impact by refining and promoting existing products.