As I have written before in this column, it is an indisputable phenomenon that the value of residential property deeply influences the financial planning of individuals in this country.
On the day I was writing this piece, I read that Nationwide has reported the biggest annual rise in house prices for a year. The average rise is almost 20 per cent.
This means the proportion of the wealth of UK individuals represented by residential property is likely to be increasing too. Few other asset classes are showing such consistent and strong growth.
Much has been written recently about the resilience of the residential property market to rises in interest rates. So far, the rate rises we have seen have been gradual but this latest news on sustained and high rates of growth in value may change this.
Regardless of what the future may bring, it is likely to take something quite significant and sustained to make any noticeable change to the asset mix of most individuals. It is hardly surprising that increasing numbers are viewing their residence as an alternative to investing in more traditional means of pension provision.
In looking at this trend, it is as well to remind ourselves that an approved (or, in future, registered) pension scheme is nothing more than a tax-effective structure for holding investments. It is well known that, until comparatively recently, pension funds were substantially invested in equities, which was a significant reason (along with the inability to reclaim tax credits and general economic hardship for employers) why fund values fell so heavily.
But there is an underlying difficulty in persuading individuals to save more for retirement. With the severe reduction in levels of state support and the economically necessary retraction of employers from defined-benefit schemes, combined with a reduction in contributions to money-purchase schemes, the savings gap is unlikely to be narrowed.
It is well known to anyone who has been in the business of delivering financial services advice for any length of time that individuals need anxiety to take action. The anxiety can be negative (fear) or positive (greed) but, either way, it needs to exist for an individual to change his savings habits.
A key role of advisers, like it or not, is to create justifiable anxiety. I stress justifiable. The case for taking responsibility for one's financial welfare is irrefutable but clients need to be made to face reality – the reality that, if they do not change their habits, the majority of them will not achieve their financial goals. Actually, before an adviser gets to this point, there will often be a need to ensure the client knows what his or her financial goals are.
Powerful presentations can do an excellent job in this respect but the adviser's job is not made any easier by the inexorable increase in house prices – the thing that gives the homeowner comfort. Comfort is the enemy of anxiety.
Advisers over the years have quite properly had to address the objection to saving for retirement put forward by business owners, namely: “My business is my pension.” Business owners need to be made aware of the risk in relying on a single, usually unquoted and, thus, often difficult to realise share in a business as their sole means of financial security. A similar argument will need to be raised for those relying on their home.
There is also the added factor that if you wish to carry on living in your home and use it as a means of providing future financial security, you will need to consider one of the increasing number of arrangements designed to release value from your property.
Advisers may wish to consider the following extracts from a recent report from the Pensions Policy Institute.
The first gives corroboration to the gut feeling that property represents a significant part of the wealth of UK individuals: “Total net household wealth in the UK in 2002 was over £4,800bn. More than £1,900bn of this was net housing wealth in residential property. Around £1,120bn was held in pension assets, with most of the remainder in other financial assets.” A pie chart that followed showed that:
The next extract encourages some caution, however: “Although more wealth is held in housing than in private pensions, not all housing wealth can be converted into an income. Equity release products typically allow only 20 per cent of the house value to be realised at age 65.
“Housing wealth, like other forms of wealth, is not evenly spread. Most houses are worth less than £130,000. Only 10 per cent of homes are worth more than £330,000, which is how much is needed for equity release to provide an income of £100 a week.
“Rather than choosing property or pensions, most people will need both. Saving in property can supplement private pension saving but by itself will not increase future retirement incomes up to the level of income enjoyed by people retiring today. For the vast majority of people, property will be at most a complement to private pension saving rather than a substitute.”
An overreliance on a single asset class (whatever that class is) for your financial security feels like it could be a risky strategy. This is something that clients and advisers will certainly need to keep in mind post-A-Day when residential property will be capable of being held inside registered pension funds.