Many of my generation – the older variety – do not like to be told what we can or cannot do. Yet from the reactions of some, following the publication of evidence given to the House of Commons work and pensions committee inquiry into pension freedoms, they clearly want to do just that.
The trigger for this was written evidence given by a social worker. They mentioned some cases they’d come across where their clients had taken large amounts from their pension savings and spent the money on ‘gambling and booze’. This has created something akin to hysteria, with some going as far as to say that those who have pension savings of between £30,000 and £250,000 should not have access to pension freedoms. My reaction to that is, having given me the freedom to do what I want with my pension savings, who are they to say it should be taken away?
The justification for such proponents is that by doing this they are preventing people from having to fall back onto the state after squandering their pension savings.
However this is yesterday’s argument, the new flat-rate pension is set just above the level of pension guarantee credit while other means-tested benefits such as housing and council tax relief are paid to those in poorly-paid employment as well as pensioners.
In fact, someone with £30,000 in their pension pot who converts to an annuity could be no better off because the additional annuity income would offset their benefits; a great advertisement for saving into a pension.
Take these examples…
Now let us look at two people who would be badly disadvantaged by the proposals being put forward. First up is Fred – he is 65 and has built up a very viable small construction company. He was recently offered £300,000 for it, but believes that was an opportunist offer. If he plays his cards right he believes he will get in excess of £400,000. He also has a house worth £800,000 and no mortgage. Plus he has pension savings of £35,000. Why must he convert that into a regular income?
Similarly, we have Mary, who is also 65. Again, she has £35,000 in her pension. In addition to her own home – worth £250,000 – she owns two holiday lets, which in a good year provide her with an adequate income when added to her state pension. She wants to draw on her pension in bad years to supplement that income or if she is faced with a large maintenance bill. A regular income is the last thing she wants from her pension.
Don’t get me wrong, I am not anti-pensions in any way. They are the most efficient way of building wealth but given a first-class wealth creation product the pension industry sometimes seem unable to sell its advantages.
Compared with home ownership, pension savings come with a government incentive, have minimal maintenance charges, are transportable, and can be used as you wish once you reach a certain age. A house incurs transaction costs, regular maintenance charges, is not transportable and it is complicated to extract income from.
Yet how many people do you come across telling you the value of their house and by how much it has increased? How often are house price changes headline news on the front page of our newspapers?
The pensions industry should be striving for people to talk about the value of their pension savings and by how much they have grown. It would be great if we woke one morning to a front-page headline which revealed that, ‘the average retiree now has pension savings worth more than the value of their home’.
This last point is important. How many people retiring today have pension savings worth more than their house? If the average house price is around £250,000, how many have pension savings worth more than that? I suspect fewer than 15%? Yet £250,000 is less than what it currently costs to provide an indexed-linked annuity equal to the State pension. Should this be the target savings level of the pensions industry?
I am writing this article after reading of another successful quarter for the equity release market.
Compared with the same quarter last year there has been 44% growth in the value of ‘loans’ and a 34% rise in the number of new customers. Equity release transactions are now running around 50% of the number of annuity transactions. And on top of this, I also suspect that the number of people enhancing their retirement by raising money through downsizing is much greater than those using equity release.
Therefore, housing is a significant source of retirement income for many and this theme is likely to continue for several decades.
Pension freedom enables a holistic financial planner to combine pension savings with housing wealth to create an efficiently designed plan for lifetime retirement income. This could include downsizing early, and living off the proceeds before using the pension, or drawing down the pension then using equity release for the later years.
For the vast majority, it should not be a case of pensions versus home ownership; it should be a case of how you combine the two for the best outcome. Pension freedoms facilitate that.
Bob Champion is chairman of the Later Life Academy