The new Government has started a legislative blitzkrieg on the UK pension industry in an attempt to get more people saving for their retirement.
But could the best vehicle for saving be sitting under British homeowners’ noses?
At the Money Marketing Pension Summit in Dublin in July, independent pension expert Dr Ros Altmann stressed that the need to save is the most important issue and even savers’ mortgages could be seen as an accumulation vehicle.
She said: “It might be long overdue that we reconsider the picture of savings. I would say if you are putting money into a house and have a mortgage, that is a form of savings.”
Altmann said any accumulation must fit in with the way people live today. “We have to rethink pensions and also retirement. We need new approaches to adapt to the fact that we are living much longer and we need realistic and achievable savings targets.
“If you start saving for your pension early, you may come into your 30s and think ’Oh my God, I can’t afford a house, I need some of those savings for a deposit’ but you cannot do it. So flexible products are very important because saving is saving.”
So, is a mortgage a viable base to save through a person’s life? According to the Pensions Policy Institute, in 2008, many British people thought so, with 42 per cent of working adults reported as saying that property was the best long-term investment. This may be unsurprising as the
British have long seen value in bricks and mortar. The increase in property values over the last two decades suggest that this impression is not to far from the truth. Between 1990 and 2008, the FTSE increased by 263 per cent while the average house price increased from £68,950 to
£181,032 an increase of 262.5 per cent.
According to the PPI, there is also a bigger proportion of individual wealth accumulated in housing than there is in longterm savings. PPI figures show that 40 per cent of the £6,875bn UK household wealth is held in property compared with 30 per cent in pension wealth. And although a disproportionate amount of this wealth is held by the wealthiest (the top 20 per cent of households own 50 per cent of housing wealth), housing wealth is more evenly distributed than pension wealth.
But housing wealth can be more than simply accumulated equity in housing and can be incorporated into active saving plans.
John Charcol senior tech-nical manager Ray Boulger says an offset mortgage – where one or more savings pots are attached to the homeloan – is an excellent vehicle for younger people to begin saving.
He says: “I used to find that younger people would have debts and savings and they were paying maybe 9 per cent or more on their loan and getting 5 per cent on their savings and then paying tax on that. That is completely mad but people like to think they have some savings. The mortgage market could help that by giving people more flexibility on their mortgage and the ideal flexibility is the offset mortgage.”
The offset works by using savings to offset the mortgage amount – so someone with a £100,000 offset mortgage and £20,000 of savings would only pay the interest on £80,000, thus earning them a tax-free saving. But Boulger says while opting for an interest-only offset is the best choice for those looking to save with a mortgage, the FSA is currently hindering lenders’ abilities to offer such loans.
“It is becoming more difficult to use a mortgage as a savings vehicle but the FSA is strongly against interest-only in principle. Interest-only offset is the most feasible way to save long term because while most lenders offer 10 per cent or £500 overpayment on mortgages each month, very few allow you to take it out.”
Barclays head of mortgages Andy Gray agrees that offset can be seen as a vehicle to save for retirement. He thinks offset mortgages offer an example of how financial products can act as “personal balance sheet” that help people understand how their assets and liabilities work together through their life.
Gray says Barclays has evidence that by using a mortgage as a vehicle for saving, borrowers are more aware of the immediate benefits and flexibility and do tend to save more often. He says the key to this is using current accounts, savings accounts and Isas together to offset and reduce debt.
He says: “An offset gives people a ’jam jar mentality’, where they can see all their money working together. Ultimately, the job of the adviser is to bring those jars together and use them effectively.”
Aegon pension develop-ment manager Kate Smith says the bringing together of financial jam jars is key to get people to manage their money into retirement. She says: “It is all about trying to create a savings habit and how you reach those who do not save at the moment.”