Low annuity rates, high rents – no wonder Bank of England and FCA chiefs are out of tune on what’s best for pension saving says Teresa Hunter
One of the biggest headaches for financial advisers is reassuring clients who are worried about keeping their money safe while simultaneously disturbed about the paltry returns paid on cash deposits.
It can seem like they are stuck between a rock and a hard place for those approaching retirement, in flexible retirement, at retirement or in full-time retirement. But it can be a similarly acute problem for young savers trying to build a nest egg, to provide a home or invest for their children’s education.
Conventional wisdom has always recommended diversification as the key to smart investing – a wad in high-risk assets such as equities, a chunk in lower-risk such as bonds and commercial property, and a final tranche ‘safe’ on deposit.
The old idea of a three-thirds carve-up has largely gone out of the window, as time and risk have become more closely associated. Funds that will not be required for a decade or more can be left at greater risk, while money that could be needed at any time should be in cash.
As incomes are lower in retirement, it is usually advised to hold a greater quantity of money in cash, so that one can buy that new car and boiler when the old ones blow up in the same year that one has to pay for two daughters’ weddings – and the same year that the market crashes.
But holding money in cash has never before attracted the unpalatable penalty that it now does. It is true, there have been times when interest has failed to keep pace with inflation. But when we were earning 6 per cent income, that didn’t seem to matter so much. By contrast, it is now virtually impossible to earn much more than 1 per cent, which provides almost nothing by way of an income on which to live.
Many put the blame on the Bank of England, for cutting interest rates. So it was irksome, to put it mildly, when the Bank’s chief economist, Andy Haldane, said pensions were no longer the right way to save for retirement, and property would give a better return. That is easy to say when your own financial security in retirement is assured via a final salary pension. But aside from the obvious fact that one cannot eat bricks and mortar, the distortion this could lead to for our economy and property markets hardly bears thinking about.
From a moral perspective, Haldane was promoting debt over thrift. In other words, it is better to borrow to buy a house than to save for the future. You don’t need to have lived through many economic cycles to know how dangerous such advice can be.
But where we sit right now, it has some semblance of truth – a truth that should be ring-ing alarm bells for the Government.
Haldane’s remarks were quickly countered by Financial Conduct Authority chief executive Andrew Bailey, who said investing too much of someone’s retirement fund in property could be “self-defeating” and savers should focus on their pension.
But pensions are not delivering. Low interest rates have sent annuity rates down to record lows. So what can corporate advisers say to their clients as they reach retirement?
Most retirees won’t have pots large enough to provide any kind of meaningful pension.
Should those who have built up a decent nest egg be advised to go down the annuitisation route? Many advisers tell me they are finding it increasingly difficult to make this recommendation, while, by contrast, some insurance companies apparently continue to channel customers towards the annuity option.
It’s a bleak background indeed for the launch of the Government’s Lifetime Isa, due in April.
This will pay a 25 per cent bonus on contributions of up to £4,000 annually so, if you invest the full £4,000, the Government will add £1,000.
It works in a similar way to pensions tax relief for a basic-rate taxpayer and its launch was tied up with the Government’s overall review of wider pensions tax relief. There was a view that, if Lisa proved successful, everyone could be moved over to the system, thereby ending higher relief for better earners.
But even before its launch, Lisa is attracting criticism. Money cannot be accessed until age 60 without eye-watering penalties, unless you use it towards your first home. And the maximum saved annually is £4,000.
Prime Minister Theresa May is fond of re-examining her predecessor’s proposals. It will be interesting to see whether Lisa survives in its current form.