HBOS chief executive James Crosby went against what is arguably one of the biggest new trends in retirement saving last week when he argued that equities are a more suitable investment for pensions than property.
For the head of the UK's biggest lender to talk down property as an asset class reflects more than just HBOS's desire to sell more investment products than rival Aviva.
After 10 years of steady growth in house prices, Crosby doubtless feels that the ride must come to an end at some stage and that investors should not rely on property to fund their retirement.
Speaking to Money Marketing before the Clerical Medical Industry Leaders' dinner in London, Crosby said: “I do not see housing as anything like as appropriate an investment for a pension as equities. There is a huge requirement for individuals to fund their retirement provision. To the extent that in the short term people are investing in housing for pensions, I think they will switch emphasis in due course.”
Such a change in sentiment would certainly improve the prospects of first-time buyers who are unable to get a foot on the housing ladder as shortage of supply and the buy-to-let boom continue to fuel price rises.
Yet in last month's Budget, the Treasury confirmed that it is to press ahead with plans to allow investment in residential property across all types of pensions. What is the rationale for a move that is likely to push up prices even more by handing a tax break to buy-to-let landlords?
Central Financial Planning director Ian Smith suggests that the Treasury is trying to create a truly uniform pension system and it probably does not expect most non-institutional investors to put residential property into pensions.
Smith says: “Allowing residential property means that the British Gas pension fund will not have to sell that load of leases on a housing estate it has. But how many people have enough in their pension fund to want to do it? You can only borrow 50 per cent of the fund so people are likely to need a fund of over £100,000. I do not think we are talking of huge numbers who want to do this.”
But the possibility of 40 per cent tax relief on assets placed in pensions could prove more tempting than Smith thinks. Jordan Financial Management principal Mike Jordan says he has a long list of clients who are eager to use their pension funds to invest in property. He argues that the market creates serious opportunities for IFAs who are set up to deal with the business.
Jordan says: “There are two main benefits. First, while its value can go down, property is still a very good asset class. Second, if you are set up to manage the property, then you can add value for your client over the years and still derive income from it.”
The prospect of new pension money chasing the already limited housing stock may cause some to ask why the Treasury should approve such a proposal when the Bank of England's monetary policy committee has cited the need to calm the housing market as a reason behind its last two base rate rises.
Charcol senior technical manager Ray Boulger says: “Residential property in pensions will increase demand and have a knock-on effect on prices to some extent. The question is how much?” However, Boulger believes that the MPC overemphasises the influence that house price inflation has on its decisions in a bid to calm the public's appetite for borrowing. He says: “There is an element where the Bank of England likes to talk the talk to get the market to react. But equally, there are nine members of the MPC and some of them put weight on the importance of housing costs when deciding rates.”
Whatever the effect on the overall economy, this new area of pension investment is bound to create massive new opportunities for IFAs with a creative approach. Jordan says the flexibility of the new regime will allow IFAs to flourish.
His firm is already set up to deal with the management and letting of properties, including finding tenants and carrying out maintenance. He also believes a market will develop to find creative solutions for people looking to maximise value from their assets at retirement.
He says: “You could see IFAs setting up schemes where a 65-year-old client sells half the property to the pension, sets aside 10 years' rent, which goes back into the pension fund grossed up, and then downsizes 10 years later. This is a far more efficient use of capital.”
Boulger says borrowing for buy to let will be cheaper through a pension because of the security of the fund. He says: “A lot of lenders will look at this market because you can only borrow half the value of the fund. This will be a great incentive for them to want to do business with people's pensions and at better rates.”
So the Treasury will arguably be giving tax breaks to buy-to-let investors to use their pension funds as security to get cheaper borrowing. To some, this could sound like pouring more fuel on to the housing market.