Pension investments should be kept well away from domestic property and properly diversified to safeguard retirement income.
Now that auto-enrolment has finally begun and pensions have become flavour of the month, everyone wants to get a piece of the action. Not content with forcing up to 12 million people into a structure that enables them to save for their retirement, the government is now trying to tell people how to spend it.
Well, I say government, but actually I mean deputy prime minister Nick Clegg. He came up with a fantastic wheeze to allow people to raid their pension schemes to help give their first-time-buyer children a leg up onto the property ladder, thereby kick-starting an economy that is already overly reliant on the housing market. When I first heard this, I thought it was a spoof, but I wasn’t laughing once I realised it was another harebrained policy stunt.
Pensions are designed to provide income in retirement, which is why the Treasury offers generous tax relief on contributions. The quid pro quo for tying up assets for many decades to provide said income is that you cannot get your grubby mitts on that cash until you retire.
But you can only spend a pension once. If you withdraw cash from your fund, it isn’t going to suddenly reappear when you come to retire. This is a subject all too frequently ignored by people entering retirement because they have long craved that set of golf clubs, their ‘last’ new car or a round-the-world cruise without a thought for the damage it will do to their income.
Ignoring all other arguments, the concept of breaking open the piggy bank to buy a house is, essentially, a poor investment decision. Most people with a pension scheme already have a house, quite possibly in the same region as their progeny, especially if they are starting a family.
So not only will an individual’s biggest asset be tied up in property, so too will be up to a quarter of their second largest asset: their pension. From an investment perspective, it is a diversifi cation nightmare and a very good example of what not to do.
That was one of the reasons Gordon Brown ditched the concept of residential property within personal pensions in December 2005, because he could see that the concept of “my house is my pension”, though popular among Daily Mail readers, was also a monumentally stupid idea.
At least saving through the workplace should provide employees access to properly diversified investment structures, even if they, as more than 80% do, fail to make any direct investment decisions.
I had hoped Clegg’s idea would be a one-off, but, not to be outdone, Chancellor George Osborne announced at the Tory party conference that employers could offer share ownership to staff in lieu of employment rights. Whatever your position on the rights of workers, poorly structured share saving is an accident waiting to happen. Doesn’t anyone remember what happened to Enron?
Pádraig Floyd is contributing editor of Workplace Savings Quarterly