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Warning raised over affordability impact of higher pension contributions

  • 04/04/2019
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Warning raised over affordability impact of higher pension contributions
The mortgage industry has been warned it needs to be careful about the potential impact of the increase in minimum workplace pension contributions.

The minimum contributions for employees who have been enrolled onto a workplace pension increases to 5 per cent from 6th April, from its previous level of 3 per cent.

This follows the rise from 1 per cent to 3 per cent last April.

David Sheppard, managing director at Perception Finance, noted that different lenders take a different approach to including pension contributions when assessing affordability, and suggested this could lead to issues.

The likes of Coventry Building Society and Virgin Money ask for pension payments when working out how much they can lend and could lead to them offering less than other lenders. So they will need to review if this is still the right approach, to effectively penalise someone for good financial planning.

Sheppard warned that the industry needs to be careful to ensure it does not inadvertently cause people to prioritise their mortgage over longer-term retirement planning.

Other outgoings are more significant

Charles Mungroo, senior mortgage manager at Yorkshire Building Society, noted the lender does take pension contributions into account when determining how much it is willing to lend to a borrower.

However, he said the society did not expect the increase in workplace pension contributions to have a significant impact on how much borrowers will be able to borrow.

“Other debts, such as loans or credit cards have greater significance on the amount we may or may not lend to a customer.”

Rate of increase shouldn’t make a big difference

Andy Wilson, owner of Andy Wilson Financial Services, noted that many lenders do not specifically itemise the actual contribution, and instead apply a ‘cost of living’ monthly figure to affordability calculations, while others use a ‘net monthly income’ figure which will be affected by the increased contributions.

He continued: “As a broker we will know who uses which method and make our recommendation accordingly.

“However, the rate of increase is also so small as to make little difference to the borrowing capacity – and frankly if the numbers are so tight that it makes a critical difference then the borrowers should perhaps be rethinking their intended borrowing commitment overall.”

The role of salary sacrifice

James Mole, independent financial adviser at Gingko Independent, suggested that the fact that contributions are made via salary sacrifice could be significant.

He explained: “Salary sacrifice is a much more tax efficient way of making contributions into your pension as you effectively can give up part of your salary, which the employer then pays into your pension, along with their contributions. The end result though from a lenders point of view is your salary is lower, therefore, you can borrow less.”

However, he argued that it was important that people were encouraged to put more money away for their retirement.

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