Andrew Haldane has once again put his foot in it, but this time the results could be dangerous, argues Sara Benwell.
In May this year when Andrew Haldane, the Bank of England’s chief economist, said he didn’t understand pensions, I cut him some slack.
The point, I argued, was that we’d fundamentally changed our definition of what a pension was without updating the rule book accordingly. And Haldane was a victim of this complicated landscape.
Never for a moment did I believe that just three months later he’d be proving once and for all how little he knew about pensions and long-term savings. Unfortunately, however, this month’s blunder could prove irrevocably dangerous.
It ought to be pension but it’s almost certainly property”
In an interview given to the Sunday Times, Haldane was quizzed on the best way to save for retirement. His answer: “It ought to be pension but it’s almost certainly property. As long as we continue not to build anything like as many houses in this country as we need to meet demand, we will see what we’ve had for the better part of a generation, which is house prices relentlessly heading north.”
This is shockingly short-sighted, ignoring the benefits of tax relief and employer contributions, not to mention the risks that people face by putting all their retirement funds in one asset class.
So how has Andy Haldane got things so drastically wrong?
A privileged position
Much has been made of the fact that Haldane himself has a gold-plated pension, which will be worth nearly £84,000 a year when he retires.
Perhaps we should take away his final salary pension and just give him another house instead”
Tom McPhail, head of retirement policy at Hargreaves Lansdown said: “It’s probably quite easy for someone with a gold-plated final salary pension to dismiss the importance of saving in a pension for retirement.
”Andy Haldane’s pension benefits are estimated to be worth in excess of £3 million, which is not bad going for someone who professes not to even know how pensions work. Perhaps we should take away his final salary pension and just give him another house instead.”
Of course, having a substantial personal pension arrangement does not automatically mean someone cannot comment on the correct way to save for retirement. However, suggesting that people should prioritise property over pensions is dangerous and foolhardy and a chief economist at the Bank of England should know better.
Haldane’s own pension is a DB arrangement so perhaps he is misunderstanding the benefits available to someone saving in a DC pension.
While he is right that returns on property in recent years have been phenomenal, savers who are automatically enrolled receive a 100% return on investment in the form of employer contributions and tax relief – before the money has even been invested.
This far outstrips the returns on property investment.
Sheffield city centre offers buy-to-let investors the best returns in the UK, according to research carried out across more than 2,600 postcodes by comparison website TotallyMoney. However, investors can expect a gross yield of only 11.6%.
In buy-to-let, gross yield is calculated by the annual rent as a percentage of the total value of the property.
Gross yields, which average 4.17% nationwide do not take tax, mortgage repayments, voids between tenants and maintenance costs in account. These will eat into returns further.
Haldane is also fundamentally misunderstanding the way that most property investment works. The vast majority of buy-to-let mortgages in the UK are not great income generators. In general, when people invest in rental property, the money they make is reliant on an increase in the value of the house, rather than the rental income.
This is even more pronounced if the investor is getting a mortgage, rather than buying a property outright. Once the rental income has had to cover the mortgage payments, there’s not a great deal left over to provide an adequate retirement income.
I really was shocked at the suggestion that people should save for retirement with property rather than pensions”
And while house price increases saw the family home’s value rocket by 8.7% in the last 12 months - that’s still nowhere near the 100% matching an auto-enroled saver will get every time they invest.
Former pensions minister, Ros Altmann, added: ”I really was shocked at the suggestion that people should save for retirement with property rather than pensions. Expert financial advisers would usually suggest pensions, for most people, are the best way to save for later life.
”Pensions have the benefit of an employer contribution and tax relief which can mean that each £1000 you put into a pension is worth at least £2000 straight away (and even more if you get 40% relief). So property would have to double in value before your money was worth more than in a pension. Employers don’t pay in for your property and you don’t get tax relief (even the buy to let mortgage interest relief is being abolished).”
Of course, for DC savers, the 100% return on investment (from the government and the employer contributions) are only the beginning of the story. On top of that there’s the returns the money sees once invested, which research from JLT Employee Benefits puts at from 3.5% to 9.5% per annum over the last three years.
This investment growth is tax free, while returns on property investments are taxed. Furthermore, at the point of retirement 25% of a pensions can be taken out tax free too.
Putting all his eggs in one investment basket
One of the biggest problems with Haldane’s philosophy is that it underplays the danger of relying on only one asset class for retirement savings.
If the housing market were to crash, something the BoE itself has suggested could be an outcome of Brexit, then people relying solely on property could find themselves impoverished in retirement.
Pension schemes, meanwhile, often pride themselves on their diversification with most default funds relying on a blend of asset types, often including property, to maximise returns while minimising volaitility.
We suggest his employers make a pension training course compulsory”
As former pensions minister Ros Altmann put it: “Recommending people rely only on property as their long term investment - especialy when property prices have been so inflated by shortages of supply and the Bank of England’s artificially low interest rate policy - could be dangerous.
”You shouldn’t tell people to put all their eggs in one basket, especially not one that’s at a record high. And of course you can buy some property within a pension fund and have both! It’s too risky to rely on any one asset.”
McPhail concluded: “After his previous comments, we wrote to Mr Haldane, offering to explain how pensions work. After these latest revelations from him, we suggest his employers make a pension training course compulsory, given he has so much influence over the savings and investments of millions of ordinary savers and home-owners and so little apparent understanding of how they work.”
At Pensions Insight we’re inclined to agree.