Property or pensions for retirement – a very British view?

News this week from Bloomberg announced that US retirement account balances have again hit all-time highs for the third consecutive quarter in 401(k) and IRA accounts, according to data from Fidelity Investments. Whilst this is partly due to the US equity markets continuing to hit all-time highs it also reflects  increased employee and employer contributions to these retirement accounts.

This enthusiasm for pensions is in marked contrast to the UK where a bull market for UK property, particularly in London and the South East, since the late 1990s has led many to choose property over pensions for their retirement planning. For some this has become a kind of kneejerk response and for others almost like received wisdom. This was noted by Anna Mikhailova of the Sunday Times Money section at the end of May when she stated, “What’s better for retirement  – property or pensions? I ask this question every week in our Fame and Fortune column, and nearly every person I interview chooses bricks and mortar without a moment’s hesitation.”

Perhaps surprisingly the Sunday Times’ poster-boy for this view is none other than Andy Haldane, Chief Economist of the Bank of England who when asked this question last year noted that property was “almost certainly” the better bet. Well, earlier this month he voted against a rate rise, having indicated in June that he was considering voting to raise rates, so maybe he will change his mind again after reading a recent report commissioned by the Sunday Times Money section from the Centre for Economics and Business Research (CEBR) and the private bank  Kleinwort Hambros.

This research shows that even in London property has been outpaced by the growth in pension wealth since the 2008 financial crisis, with property wealth in the capital growing by 50% in this period versus 52% for pension wealth. This trend is reflected across every part of the UK but the gap is far, far wider outside the capital. In the South West, pension wealth has grown by 92% and property wealth by only 22%. In the North West and Yorkshire, the total wealth held in property has actually declined by 1% and 3% since 2008 whilst the total wealth held in pensions has grown by 69% and 42% respectively. The full article can be seen here:

Yet despite this many consumers in the UK still view pensions with suspicion. Whether or not this is due to a legacy of pensions misselling scandals or a public perception that they are too complex due to political tinkering with the pensions system, many plump for property because the reality they have experienced for twenty years is that property prices have gone up and continue to go up. However, this cannot be expected to go on indefinitely so having all one’s eggs in this particular basket poses its own risks. Many also ignore the leveraged nature of property investment which, as borrowers in the eighties and early nineties discovered, comes with its own risks from rate rises to potential negative equity. My own view is that whilst property plays a role in retirement savings so too do pensions and that without diversification across asset classes investors could be in for a bumpy ride. To this rationale can be added the tax benefits and incentives for pension investment which are in stark contrast to the current climate for buy to let investment in the UK where recent tax changes have made this an increasingly tax inefficient way to invest for many.

Whilst I would hope that the UK catches up with the US in terms of more balanced attitudes to the merits of pensions against property, the fact remains that there are many people in the UK for whom property has been the best investment they ever made. It remains to be seen whether this attitude will change amongst the young who are part of a generation that will struggle to afford to buy a property. For many of them pensions may be the only game in town for retirement planning.

Risk Warnings and Important Information
The value of investments can fall as well as rise.  You may not get back what you invest.
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.

MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice.  MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.

Leave a comment

You must be logged in to post a comment.