Pension nudges could be linked to mortgage repayment

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Pension nudges could be linked to mortgage repayment
Credit: Gareth Fuller/PA Wire

Pension saving policies targeted at homeowners who come to the end of repaying their mortgage could have “particular traction”, according to a report published by The Institute for Fiscal Studies (IFS).

Rowena Crawford, associate director at IFS described a “trade-off” between how much to save in a private pension versus how much to save for, or spend on, owner-occupied housing.

According to a report co-authored by Ms Crawford and Polly Simpson, former research economist at the IFS, currently “very few” individuals increase their pension saving when they pay off their mortgage.

They estimated that only five out of every 100 individuals who pay off their mortgage choose, at that point, to increase their pension saving by at least £150 a month.

This was despite the fact that average mortgage payments among this group have been more than £200 per person, per month.

Ms Crawford said: “These are the two most important forms of wealth, and the difficulty of choosing how much to save in these forms (and when) is compounded by the fact that they are both illiquid: once made, pension contributions cannot be accessed until around ten years before the state pension age, while housing wealth can only be accessed through re-mortgaging or downsizing.”

Referring to “persistent concerns” that minimum default pension contributions set by automatic enrolment are insufficient, Ms Crawford raised the potential merit of using the point at which a mortgage is repaid as a ‘nudge point’ to increase pension saving.

She said: “Behaviour does not currently change at this point for most, but people could increase their pension saving without a decline in their recent standards of living.

“Targeted communications, facilitated by mortgage lenders, HMRC and pensions providers, perhaps asking individuals to precommit to increasing the pension contributions when their mortgage payments come to an end, could be one effective policy lever to encourage greater pension saving among those relatively well placed to do so.”

Outright homeowners could increase their pension saving without a reduction in the levels of non-housing spending that they will have been accustomed to before paying off their mortgage.

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