Josh Collins
This article has been sent me by Josh Collins who describes himself on Linked In as an “Aspiring pensions consultant, interested in improving the UK’s standard of living. Particular interests in: pensions, the care system (child and elderly), the NHS, homelessness and housing, realistic alternative energies and energy poverty”
Currently, he’s studying for an MEng in Mechanical Engineering at the University of Bolton. I don’t know much about the circumstances of the homelessness that Josh suffered as a child but he tells us it’s what’s driving him.
His idea is radical but it makes sense. Had this come from from Politas or the IPPR, it would have made national news. That it came from someone in his early twenties should give it more (not less) credence. Ignore this man at your peril!
” Different to pension linked mortgages. These mortgages would vary depending on the client’s contributions (not the pension performance). If the client has contributed a reasonable amount then the interest rate would drop, if not then it would rise.
The idea is to reward regular and early investment in pensions.
A lot of young people feel like they need to save for a house/car/family before they invest in pensions, this scheme would encourage young people to consider these investments together, alongside pensions and not before.
The interest rate drop could be covered through government funding or it could be covered through the tax free element of pension contributions in a similar way to how pension linked mortgages are.
Another way may be to keep the interest the same, but to allow a portion of the payments to be taken out of an employee’s salary before tax.
A significant benefit of linking pensions and mortgages in this way is that the information would need to be regularly updated and it would give mortgage and pension holders an idea on how much is considered to be enough of a contribution to support their lifestyle.
There are a lot of products available that allow clients to track mortgages in a way that they currently can’t track their pensions and rather than developing new apps it could be possible to develop existing ones to display pension performance, this would mean that clients only have to look in a single place as opposed to scattering information which could be difficult to keep track of.
By regularly tracking their pension, there would be a reduced likeliness of policy holders reaching the maturity of their pension and finding that what’s been accrued doesn’t meet their needs, which is a particular concern with the current pension linked mortgage system.
More developed systems could tailor targets to individual needs, clients could be asked what kind of income/lifestyle they’re hoping for during their retirement, from which a pension pot value, alongside contributions needed to meet that target could be estimated.
If a customer meets those targets, then their interest rate would drop, if not then it would rise, the kind of scale that the interest would rise and fall and whether it would vary in stages would be up to the provider.
While auto-enrolment has seen an increasing number of young people contribute to their pensions, there is now a risk of complacency. Young people may feel that what they are currently saving will be enough to maintain a certain lifestyle, but may find that that isn’t the case upon maturity.
Despite the fact that the average age of first time buyers is currently 35, this may serve as a beneficial refresher course in pensions for many people.
It could be argued that the positive response to auto-enrolment by employees (for example, ASDA has claimed around 90% retention of auto-enrolled colleagues) is actually an indication that many individuals are interested in saving for a pension, but don’t understand what it involves.
Auto-enrolling employees has ensured that a substantial amount of individuals are saving in some way for retirement, but they may be disappointed with what they receive upon maturity. By discussing an individual’s targets further down the line (such as at 35), it would be possible to allow the individual to understand if they are on track and allow them to adjust their contributions accordingly.
The typical first time home buyer is 35 and this is arguably a good age to discuss this issue, it would be late enough to assume that the majority of applicants have already initiated a pension plan, but not so late that any adjustments would need to be financially crippling.
While many employers discuss pension plans with employees in the early stages of work based pensions, some might not revisit the topic once a plan has been begun and so employees may appreciate this approach.
Others might have chosen to forgo work based pensions altogether in favour of private schemes. Either way, pension holders might feel the benefit of receiving a second opinion and review of performance. The schemes would be run by private standard mortgage providers and it would be their decision as to whether or not they involve themselves.
Finally, the scheme could be designed as a preventative measure against the potential housing bubble caused by the help to buy scheme.
Mortgages could be assessed before the adjustments were made for the pension contributions, meaning that borrowers would be assessed on the ability to pay back a higher value than would be expected, which would provide for a larger security margin which would cover the increase in payments which will likely occur at times throughout the lifetime of the loan.
Once the adjustment is made, borrowers will likely find that their payments are more than manageable. The leftover money would be there for the borrower to spend as they wish- meaning more money spread throughout the economy.”
This article first appeared at http://www.pensionplaypen.com
