A depressing statistic was published last week, depressing for what it revealed about the attitude and behaviour of Britons – specifically, that too few are reading the excellent personal finance pages published by newspapers such as this one and its sister title.
According to the Office for National Statistics, when asked between April and June this year which method of saving for retirement would make the most of their money, 47 per cent of respondents suggested investing in property, while only 24 per cent suggested paying into an employer pension scheme. This was despite the fact that 40 per cent of those questioned in the same period regarded saving via an employer pension scheme to be the safest way to save for retirement and only 30 per cent plumped for property. While skim-reading the personal finance sections, Britons evidently are taking longer over supplements such as Bricks & Mortar in The Times and Home in The Sunday Times.
In a way, the ONS findings make sense. The financial services industry’s reputation was wrecked during the crisis, even though Britain’s big insurers and pension providers never looked like going bust, unlike its banks. But occupational pensions have had an awful press over the years, whether it was the late Robert Maxwell’s plundering of his company schemes, Gordon Brown’s tax raids on pensions, the well-documented outbreaks of annuities mis-selling or the Equitable Life scandal.
Also eroding confidence was the sight, in the early 2000s, of private sector workers in “final-salary” schemes at companies such as Dexion, the shelving manufacturer, ASW, the steelmaker, and Triplex Components, the car parts maker, losing some or all of their retirement savings when their employers went bust and the pension schemes they sponsored were wound up. The Pension Protection Fund was created in 2004 to prevent a recurrence of such horrors, but the reputational damage was done.
Nor can some people actually save in an occupational pension: the ONS reported that, from July last year to June this year, half of people not saving into one were in that situation because of their low income or because they were unemployed or still in education, up from 38 per cent when the ONS last crunched the numbers between July 2010 and July 2012.
Meanwhile, having been bombarded for years by newspaper articles about houses earning more than their owners – usually inspired by press releases from not entirely disinterested parties, such as the Halifax – people cannot be blamed for believing that property will achieve better returns than a pension. And especially not when television schedules are cluttered with the likes of The Home Show, DIY SOS, Homes Under the Hammer, Escape to the Country, Double Your House for Half the Money, Property Ladder and Location, Location, Location. They feed a “get rich quick” mentality that helps no one.
But where are the pension equivalents? If there were, it might nail the myth that workplace pensions achieve worse investment returns than property. As Tom McPhail, head of retirement policy at Hargreaves Lansdown, the stockbroker and investment provider – admittedly, not a disinterested party, either – notes, the average balanced managed pension fund returned 60 per cent from the third quarter of 2005 to the third quarter of this year, against a rise of only 24.2 per cent in UK house prices, as measured by the Nationwide house price index, during the same period. The comparison is the same over any ten-year period, even those including the unprecedented consecutive reverses in the stock market from 2000-02 – returns from workplace pensions always outperform property.
Moreover, saving into a workplace pension offers spectacular advantages over saving via property. Employer contributions mean that any contribution from the saver is at least doubled, while – until George Osborne takes his cleaver to them, as seems inevitable – pension contributions also come from pre-tax income. Mortgage repayments, by contrast, must come from taxed income. Stamp duty is also payable on property purchases, capital gains tax is payable when the property is sold and, while some rental income can be offset against mortgage repayments, the tax benefits of doing so are being reduced. The reverse is true, as retirees can use their pensions to pay the rent at an assisted living facility. In these facilities, retired or old people can benefit from trained nursing staff, nutritious meals, housekeeping services, speech therapy, and transportation services.
Then there is the security factor. Regulation has been tightened, making saving into a pension relatively secure, as the ONS’s respondents appear to acknowledge. Advice is readily available, so those planning for retirement know clearly, through their life, how much they need to be saving and when.
By contrast, such are the vagaries of the property market, anyone saving for retirement via a buy-to-let property, for example, can have no idea whether the investment will deliver the return they seek. And unlike a pension, whose risk is spread among many asset classes, those saving via property are putting all their eggs in one basket. Remember that when interest rates start to rise. Homeowners who are too young to remember the housing crash of the early 1990s have grown up thinking that property is a one-way bet.
So let’s have The Pension Show or Pension SOS on TV to nail the myths. And let’s hope that the government’s latest reforms do not further erode confidence in workplace pensions by unleashing more mis-selling.
Meanwhile, spare a thought for the 1 per cent who told the ONS that buying Premium Bonds would produce the best return for their retirement savings. They should be reported to the authorities to protect themselves from themselves.
Ian King is business presenter for Sky News. Ian King Live is broadcast at 6.30pm Monday to Thursday