FCA chief executive Andrew Bailey says consumers can use their homes flexibly to fund retirement income, rather than saving for both property and a pension at the same time.
Speaking today at the Pensions and Savings Symposium in Gleneagles, Bailey warned of the challenges facing retirement savers in the current low-interest rate, low growth environment.
Bailey’s theory-heavy speech touches on behavioural economics and the lifetime savings model – which is based on the assumption that consumers make decisions about spending based on the resources they have access to at the time and irrespective of income at each point in their lives.
He told delegates the two big investments in the lifetime model – a home and a pension – have both risen in cost which is changing consumer behaviour.
Bailey was wary on holding housing as part of a pension because of uncertainty of returns.
He said: “An alternative approach, again best viewed within the lifetime model, is that rather than save for housing and retirement income at the same time, people would use the former to fund the latter…Here the focus is on how much they invest in their own dwelling over their lifetime.”
Bailey says, depending on how much people invest in their property over their lifetime, they could choose to downsize their home at retirement or buy an equity release mortgage to access funds without moving.
However, he issues the following caution about equity release products: “While the approach has an appeal in terms of the lifetime investment pattern, the accompanying financial instrument is made much more complicated by the need to embed in it a no-negative equity guarantee. This can have both prudential and conduct consequences.”
He said he did not believe in the idea of using housing as part of a pension portfolio.
He said: “There is an argument that pension saving would be assisted by people holding more housing in their stock of pension assets, based on the real appreciation in the value of housing. I don’t subscribe to this argument.
“Why? First, because given the scale of uncertainty over long-run real returns on assets, I would not favour overweighing to any one asset class, while recognising that a balanced portfolio can be exposed to property. But, increasing the weight on housing investments could be self-defeating.
“If the effect of increasing the demand for housing as an asset to own is to push up the cost of ownership, an increase in holdings of housing as pension assets will tend to increase the real cost, and thus household indebtedness.”