Hard numbers and harsh truths in property vs pensions debate


The provocative comments from Bank of England chief economist Andy Haldane that property trumps pensions when it comes to retirement planning have reignited an age-old debate.

The comments come off the back of worrying research from Citizens Advice that suggests large numbers of consumers are eschewing pensions in favour of bank accounts, and after Money Marketing columnist Nic Cicutti argued last week that a consumer pensions boycott was underway and set to continue.

Taken together, they point to at best a general air of malaise among consumers about pensions, at worst outright apathy.

Money Marketing has comprehensively crunched the numbers on property versus pensions over the past 40 years to introduce hard facts on returns into the debate.

We also speak to providers, consumer champions and advisers about whether they agree pensions are falling out of favour with savers, and what can be done to dissuade consumers from the notion that it is property, rather than pensions, that should be core to their retirement plans.

Popularity contest

Figures from the Council of Mortgage Lenders show the number of buy-to-let loans has been steadily increasing since the financial crisis, with a more marked increase over the past three years.

Changes to stamp duty imposing a 3 percentage point surcharge on buy-to-let and second homes have dampened appetite somewhat since they came into effect in April, but buy-to-let portfolios continue to make up a significant part of the housing market.

The Financial Inclusion Centre director and former FCA board member Mick McAteer says: “Pensions have been falling out of favour with consumers for a while – this is evident given the rise in interest in buy-to-let over recent years.

“The pensions industry’s legacy of misselling has left a lack of trust and this has been around for some time. It is early days but the pension freedoms are very likely to provide a boost to the notion of property as an investment, as people are much more driven and attracted to tan-gible assets.”


Architas investment director Adrian Lowcock agrees there is a disconnect between the esteem that pensions are held in among the financial services industry and the consumer perception.

He says: “There is more of a realisation in our industry that pensions are just not popular with many people. In more recent years, pensions have been seen as the preserve of the very wealthy as generous tax relief and contributions allowances have meant that some people have built up significant pension pots.  They are still viewed as complex and treated suspiciously.”

Lowcock says pension freedoms were aimed, in part, at driving engagement with pension savings. But he says when this is set against the stream of policy change over recent years the net effect is consumers end up deterred from saving into pensions.

He says: “The constant tinkering and changes to the lifetime allowance, contributions and rumours of changes to tax relief have undermined confidence in the system. Pensions have become a political battleground and the poor condition of state finances means many suspect pension benefits could be removed in the future and pension pots could be raided.  An unlikely scenario, but it does put people off.”

But not everyone is convinced that consumers are shunning pensions en masse.

Aviva head of financial research John Lawson says: “Pensions are more popular than ever particularly due to the unprecedented success of automatic enrolment. In terms of contributions coming into pensions, the amount of money being paid has never been higher. The number of people actively saving in a pension is also at a record high. Some wealthier customers have stopped funding their pension but that is not because pensions have become unpopular, rather because the annual and lifetime allowances make other forms of saving more tax-efficient for this population of savers.”

Tisa policy strategy director Adrian Boulding argues consumers’ preoccupation with property and buy-to-let as a vehicle for retirement is partly down to the industry’s failure to articulate the benefits of pensions.

Boulding says: “Consumers tend to have very short memories. Property prices have gone up a lot over recent years but given the new tax obligations with buy-to-let, it has become less attractive as an asset class. In addition, people need to remember what goes up can equally come down. For example, we saw property prices in Ireland collapse during the crisis. As an industry we have been guilty in regards to not shouting enough about the benefits of pensions. Property can be a poor alternative to a pension, too, given it is very inflexible and an illiquid asset class.”


He adds: “We need to display the strong points of pensions – the key thing is to communicate this. In the industry we know the benefits of pension saving but we take that for granted as not all of the public feel the same. We need to make pensions, and their benefits, easier to understand.”

Unsustainable returns

In plugging the benefits of pensions, advisers have to contend with the widely held and often unchallenged notion that house prices will continue to rise.

Lawson says on top of the clear tax advantages of a pension, returns are also comparable for pensions versus property. He says: “While residential property has produced strong returns as an asset, both in terms of rental income and capital growth, the inability to hold this asset inside a pension means that direct property investment is significantly less tax efficient than investing in a pension. Pensions allow investment in equities and commercial property, asset classes which have produced similar long-term returns to residential property. It has therefore been possible to get attractive returns and tax efficiency by saving in a pension.

“Nevertheless, residential property is a useful asset in retirement planning because of the strong British tradition of home ownership, particularly among older savers aged 45-plus. People who have chosen to save via home ownership now have the option of releasing some of the equity that has built up as a result of the strong growth trend in residential property prices. As a consequence, there has been strong growth in the use of equity release products, particularly lifetime mortgages.”

Lowcock argues that although property returns look attractive on the surface, he does not expect house prices to continue rising exponentially. He says: “The returns on property over the last 20 years have been pretty impressive so the benefits have outweighed the costs. However, I cannot see a situation where property will continue to perform at that level.  This is really the point: if consumers are able to buy a property they should live in it and then diversify, using their pension, as no one can predict which asset class will be the best performer over the next 10 years.”

Size of pension pot that could be achieved for the cost of an average house

Comparative value of the average UK house after 25 years, based on the value increasing 5 per cent a year

Proportion of adults who own a home worth more than their pensions

Proportion of adults who see property wealth as key part of retirement income planning

Multiple of house price values as at the end of 2015, compared with the previous 20 years

Number of years over which pensions beat property in terms of returns

Source: Architas, Aviva, Danby Bloch

Turning tide?

Yet there are clients who have been convinced by the argument that pensions are their preferred vehicle for retirement saving rather than rising house prices and an ever-expanding buy-to-let portfolio.

Rowley Turton director Scott Gallacher says many who choose property over pensions are likely to be unadvised.

Gallacher says: “If anything we’re seeing it the other way around, as I have been contacted by several potential clients over the last few months who have fallen out of love with property due to the low returns, increasing tax issues and problems with tenants.

“It also must be remembered that when the general public think of property investment they are thinking of buy-to-let and this is only available to a relatively small number of people with significant savings available to make up a sizeable deposit. Meanwhile, pensions are practically available for anyone with a £1 to put away.

“Pensions are now in vogue with our clients. It sometimes takes a little client education but generally our clients can see the huge tax advantages and financial planning opportunities that pensions now offer, especially in terms of passing wealth down the generations.”

Fairey Associates managing director Ed Fairey says: “Investment returns from property have been very good. But the tide is starting to turn in the wake of higher stamp duty costs and the removal of tax relief. Investors in property are starting to realise it is not the liquid asset it once was. Post-credit crunch, Britain is looking much more like the continent, as ownership levels are down.

“Legislation is turning against would-be landlords but there will always be people who want to own an asset class that they understand more than equities and bonds.”

Fairey says the firm still has clients who are more interested in property than pensions, and in some cases those with less money are more comfortable with property.

But he says although some consumers may tend to agree with Haldane, there is still no excuse for his comments that property is “almost certainly” better for retirement than pensions.

Fairey adds: “It is the kind of irresponsible comment one expects from senior politicians and policymakers – they are always too fast to indict one area. Some people would not be suited to property at all.”

Gallacher says advisers need to explain the role of gearing in buy-to-let – and the inherent risks.

He says: “Advisers need to continue to educate both our own clients but also the wider public, to try and get the message across that pensions are the key retirement planning vehicle.”