One of the Bank of England’s top officials thinks property beats a pension as a way of saving for retirement.
Andy Haldane’s idea is hardly controversial — thousands of Britons are of the same mind — but it’s staggering that the BOE’s chief economist seems to share the simplistic view that U.K. property is a one-way bet.
Haldane’s comments were made in a personal finance interview with The Sunday Times, and, as a member of the Monetary Policy Committee, he isn’t responsible for regulating insurers or fund managers. He wasn’t trying to set the agenda.
But the BOE’s duties include making sure insurers stay solvent. So any utterances from Threadneedle Street that undermine the industry’s core product won’t help sales and therefore pose an economic threat.
Fortunately for Haldane, insurance is a long-term game and existing policies are pretty sticky. Bank bosses will be hoping no one seeks his comparative analysis of putting cash in deposit accounts or under the mattress.
The trouble is that Haldane’s logic seems strangely one-dimensional. He is reported as saying the supply shortage in U.K. housing, if sustained, means prices will march “relentlessly” north. There are many reasons that may be wrong: government policy may alleviate the supply shortage, as he implied. Even if that doesn’t happen, prices can still get ahead of themselves prompting a buyers’ strike and sudden correction. In a recession, people have less money and less to spend on rent. And what happens to asset prices when the BOE’s own monetary policy normalizes?
Haldane may be right for the wrong reason. The U.K.’s system of retirement saving is complex and difficult way of saving for most people. The government has tried to overhaul it in recent years, but hasn’t gone far enough — a shortcoming Haldane’s comments underscore.
Individuals now have the right to cash in their pension pot rather than be forced to buy an annuity, a product that turns their capital into a tiny income stream until they die. Then they have nothing to pass on.
Still, pension fees are too high, and transparency around the various charges levied by pension providers and fund managers is inadequate. Savers are also left befuddled by an ever-changing system of tax relief on pension contributions. That perk is meant to compensate investors for locking away their money until retirement.
By contrast, property is easily understood, transparent, and (in most cases) liquid, even if it lacks the favorable tax treatment of saving in pension.
Policy makers should be striving for a system which puts investors’ pension savings to productive use in the economy instead of stoking an already groaning property bubble. Asset managers could allocate those funds to attractive companies or U.K. infrastructure projects.
Haldane has inadvertently drawn attention to the problem in a very powerful way. Until the Treasury and industry make pensions a more attractive way of saving, who can blame investors for following him and choosing property?
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