Property is best for retirement, says Bank of England chief economist
The Bank of England's chief economist Andy Haldane has claimed that property is a better investment for retirement than a pension, in a recent interview with the Sunday Times. This follows his previous comment made in May that he doesn't understand pensions.
When asked whether he thinks property or pension is a better investment for retirement, he responded: “It ought to be pension, but it's almost certainly property. As long as we continue not to build anything like as many houses in this country as we need to meet demand, we will see what we've had for the better part of a generation, which is house prices relentlessly heading north.”
“Pensions are too complicated”
He added that he “would like the day to come when that wasn't the case, but we've got a lot of catching up to do”.
“I must admit that when I said that pensions were complicated, I hadn't expected it to be a statement of great controversy. My experience since then has rather reinforced the impression that most other people find them quite complicated too.”
Commenting on Haldane's response, Tom McPhail, head of retirement policy at Hargreaves Lansdown, says: “It's probably quite easy for someone with a gold-plated final salary pension to dismiss the importance of saving in a pension for retirement.
“Andy Haldane's pension benefits are estimated to be worth in excess of £3 million, which is not bad going for someone who professes not to even know how pensions work. Perhaps we should take away his final salary pension and just give him another house instead.”
McPhail adds that the reasons why pensions are a good way to save for retirement include the government's top-up through tax relief, and employer contributions.
“Property is no substitute for pension”
Additionally, a quarter of the money people take out of their pension pots is tax-free, and pensions also allow you to diversify your investments, spreading your money across a range of funds, stocks, asset classes and even properties if you wish.
Further, pensions are cheap to run, typically costing around 0.75% a year per pot, while the running costs of a property can easily be as much as 10% of the value.
Andrew Pennie, head of pathways at Intelligent Pensions, says: “Property as an asset class has undoubtedly been on a strong run in recent years, but for the vast majority of us it isn't a substitute for a pension.”
Not only does a pension benefit from tax relief on contributions and likely employer contributions, Pennie notes, but it also delivers flexibility and liquidity in retirement to use your savings to meet your retirement income needs.
With many people struggling to buy their own home, the chances of buying additional property is only really available to a small, more affluent minority.
“And let's not forget, property is not without risks - purchase costs, maintenance costs, periods of non-rental and lack of liquidity could all have devastating effects if being used as a sole source of providing retirement income.”
This article was originally written for our sister magazine, Money Observer.
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
All limited liability companies registered in the UK are compelled by law to compile a report once a year on the company’s accounts and directors’ statements must be issued to shareholders and filed at Companies House. A report details a company’s activities throughout the preceding year and its contents will include chairman’s statement, auditor’s report and detailed financial information such as cash flow and balance sheet statements.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.