Property or pension?
The Budget included a giveaway for first-time buyers, but beneficiaries should beware cutting pension contributions in response.
The Autumn Budget was, all told, far from radical.
One of the few significant proposals was a decision to remove stamp duty for first-time buyers on properties worth up to £300,000. For first-timers buying properties valued at between £300,000 and £500,000, the first £300,000 will be exempt from stamp duty.
Housing has become one of the UK’s most charged political issues in recent years, and the decline in home ownership has shown itself in a growing intergenerational disparity.1
For younger people keen to clamber onto the lower rungs of the housing ladder, the Budget therefore comes as a welcome fillip. Yet they still need to come up with the deposit, which could mean making far-reaching financial decisions.
At 2.2%, wage growth sits significantly below the rate of inflation, which is currently 3%.2 That mismatch means that putting money aside for a deposit is becoming ever harder for those reliant on their salaries. Moreover, forthcoming increases in automatic enrolment contributions will cut take-home pay still further for those affected. The current contribution minimum for employees is just 1% of qualifying earnings, but in April that will rise to 3%, and to 5% in April 2019.3
Faced with pressures from both inflation and rising obligations, some first-time buyers may be tempted to opt out of automatic enrolment altogether. Increasing numbers of first-time buyers benefit from family support, as money for a deposit is often taken from savings or freed up via equity release – earlier this year, one retirement provider reported that 2% of its customers were purchasing an equity release product in order to help a first-time buyer. 4 Yet for buyers who cannot access this kind of family support, it may not be possible to save for a deposit while also remaining in the automatic enrolment scheme.
Anyone facing such a decision should think carefully before opting out of auto-enrolment altogether. After all, property ownership comes with its own risks and obligations. Perhaps more importantly, auto-enrolment comes with its own benefits in the form of employer contributions. The downside of foregoing pension saving is that an employee will also lose the cumulative effect of his or her employer's contribution, which will be at least 3% by April 2019.
Likewise, the old rule applies that making pension contributions when you are younger is far more remunerative than making contributions as you are nearing retirement. Figures produced by Legal & General (based on Financial Conduct Authority assumptions) show that saving £269 a month in your 20s is the equivalent to saving £947 a month from the age of 55 – in terms of the income it ends up generating for you in retirement. 5
Discerning how best to allocate surplus income between a property deposit and a company pension scheme can be difficult. First-time buyers should beware assuming that the Budget giveaway will automatically make it worth buying as soon as possible. In fact, the Office for Budget Responsibility warned that the reform will probably push up house prices at the lower end of the market, thereby potentially negating the savings being offered.6 Seeking advice and weighing your options carefully is a more prudent approach than simply assuming there’s nothing as safe as houses.
The value of a pension will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.