Retiring using other people’s money


Thanks to Jo Cumbo for putting me on to this excellent debate on “property v pension”.

You can listen to it here;

The crux of the argument is about borrowing. People do not borrow other people’s money to invest in pensions. People investing in buy to let typically  borrow three pounds for every pound they invest from their own pocket.

People could borrow money to kickstart their pension fund in precisely the same way as we take out a mortgage. The bank could lend against the security of your portfolio of stocks and shares as they lend against your bricks and mortar.

Why don’t they?

There are  a number of answers; the most important of which is that most people do not have the deposit to invest into a pension at an early stage of their life,

A second answer is the complicated set of tax reliefs that mean for most people, a maximum of £40,000 can be invested in a pension in any one year. Even  if people borrowed £30,000 and invested £10,000, these sums don’t equate to our unrestricted capacity to invest in property.

A third answer is the hassle factor. One caller in the debate pointed out that property management is a full time occupation.

But by far the most persuasive argument for not borrowing other people’s money to fund our retirement is risk. The assumption that property valuations will rise and that rental income will be constant turns out to be regionally inaccurate. Those in the North East and Northern Ireland who phoned in talked of the value of their property falling over the past ten years.

Taking back control

Leverage is a fine thing if you are an entrepreneur. It is a very dangerous thing if you are not prepared to take risk.

The recent tinkering of the tax reliefs surrounding buy-to-let by George Osborne show how vulnerable the predicted returns from property can be – especially when those returns are dependent on leverage.

But owning a property, unlike an investment in the stock-market is something you can touch, visit and to some extent enjoy.

Here I am quite certain, decisions are being taken on an emotional rather than a rational basis. For my pension is invested in real things and – were I wanting to- I could probably find out what they are and visit them,

So why don’t I?

I think this is the nub of things. We don’t feel we own the money in our pension. It is infact typically owned by Trustees on our behalf, we do not have “property rights”. Because we don’t own the money, we don’t borrow to own more of it. The deeds of a property- even if they sit in someone else’s bank vaults are owned by us and – once we get past the agents and the lawyers at the point of sale, there is no ongoing intermediation.

If we had the direct ownership of our pension assets that we did of our property assets, I am quite sure we would be more “in touch” with out pension. Should we?

The movement from the late eighties onwards towards self-invested personal pensions was designed to put us back in control of our pensions. It has – to my mind – done no such thing. SIPPs are now even more intermediated than other forms of workplace pension.

The problem with pensions is the relentless advance of the intermediary driving a wedge between us and the ownership of our money.

But the most successful pensions are those that confer on us rights – not to the investable assets – but to the income they produce. Defined Benefit Pensions – whether funded or unfunded- state generated or generated from the private employer – are providing us with an entirely different experience from property.

A right to property or a right to an income?

The right to an income is not a right to property – it is a pension. Somewhere along the line we got these two things mixed up and from that confusion we get debates like the one on Moneybox.

There will be many people who successfully manage their finances – including their retirement finances around buy to let – but this is a property venture that happens to provide a long term income stream.

The business of building up rights to an income in later life is managed, by the majority of us, by focussing our energy on something different from property management.

Ironically, if we all became property managers, we would have no tenants and there would be no property market (other than for owner occupiers).

Property is a specific business which uses leverage to maximise its profitability. In this it is no different than other businesses that borrow for growth. I have always thought that confusing your business with your pension is as dangerous as believing a brick can buy you a sausage.

Property – a niche business for experts – not a turnkey for retirement income

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions and tagged , , , , , . Bookmark the permalink.

3 Responses to Retiring using other people’s money

  1. Duncan says:

    I think the killer blow for SIPPs came much later than the eighties Henry. You may remember a move to allow pensions to invest in residential property I the naughties? An eleventh hour U turn stopped it in it’s tracks probably for good reason. However the door was left partly open for buy to let through SSAS pension loans where an SPV is used to make the purchases. A technical solution but one which is nevertheless much underused in my opinion given the income needs of the advancing retirement market.

    • Anthony Ellis says:

      Borrowing to fund your (DC) pension is actually incredibly tax efficient. If you are a higher rate tax payer with a mortgage you could no doubt extend your mortgage and borrow an extra 24k at perhaps 2%. You could then immediately get a 40k investment into your pension once your tax relief is applied. This is a risk/return trade off that is attractive. Not all leverage is bad.

  2. henry tapper says:

    Two great posts. I wonder why more is not made of these opportunities?

Leave a Reply