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The Guilfordian

The student news site of Guilford College

The Guilfordian

The student news site of Guilford College

The Guilfordian

UK pension pots are wide open: dig in

A friendly reminder that the U.S. is not the only country suffering from a poor economy: the U.K. has proposed a plan allowing residents to tap into their pensions for financial assistance. Primarily, the scheme was designed to help boost the housing market, as many citizens were struggling to afford homes.

Though the concept is currently still in the planning stage, the Liberal Democratic party in the U.K. hopes it will increase the housing market by about $200 million.

“We are going to allow … parents and grandparents to use their pension pots to act as a guarantee so their children and grandchildren can take out a deposit and buy a home,” said Nick Clegg, deputy prime minister at a Liberal Democratic party conference.

Homeownership is common in the U.K., but the recent economic struggle has pushed the cost of buying property to the point that many first-time buyers simply can no longer afford it.

Clegg revealed the plan to the public, explaining that pensions meant for retirement, which were previously untouchable, have now been made accessible for the benefit of families across the U.K.

“People who borrow from themselves tend to make wiser investment choices — they are less likely to buy a house they cannot afford,” said Natalya Shelkova, assistant professor of economics at Guilford College, in an email. “What is likely to happen is that their pension fund will get hurt, but at the same time they’ll have an asset that is the house. In addition, people who borrow will not pay the interest to the bank, but rather pay it to themselves in the future.”

The Liberal Democrats claim the plan will help people climb up the property ladder rather than force them to save exorbitant sums of money solely to put down on a deposit. Party aides also claim that about 5 percent of people with pensions large enough will use this plan, with an estimated 12,500 U.K. citizens benefiting from the new policy.

“We have thousands of young people who are desperate to get their feet on the first rung of the property ladder, but deposits have doubled and the number of young people asking help from family members to get a mortgage has doubled,” Clegg told BBC television.

But some are not yet convinced. Critics claim that the plan will be counterproductive, as it would raise prices in the housing market where high prices are already an issue. Those opposed also point out the falling value of the average pension, leaving the ability to tap into pensions only applicable to those who are wealthy enough.

“The obvious way to allow more people to get their foot on the housing ladder is to bring prices down,” British journalist Larry Elliott wrote in the Guardian. “Clegg’s idea would have the opposite effect. It would push up prices and only help young people with well-off parents. Bad economics and regressive to boot.”

Another component of the plan worth considering is that this arrangement also takes money from retirement funds, which are already reportedly low in the U.K. and can only be used once by each citizen.

“Pensions are designed to mature into a decent retirement income, not for other purposes,” said Otto Thoresen, director general of the Association of British Insurers, to CNBC. “Any scheme which uses pensions as a guarantee must ensure that it does not inadvertently make the saver worse off when they retire.”

With luck and much participation, the new allowance should help the British housing market find its footing in the U.K. economy once again.

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