James Coney, one of our best financial journalist has written a very fine article in FT Adviser on why he wants to “leave property our of pensions dashboard”.
It turns out that the Equity Release Council has been lobbying to get the un mortgaged value of your house onto your financial balance sheet, so when you see you’ve got no savings, you don’t burst into tears but nip down to your local friendly equity release specialist and liquidate your bricks and mortar.
James is against this
If there is one financial question every British person knows the answer to, it is how much their house is worth.
We are utterly obsessed with property prices. What is more, our attitude towards property has led to many people to make some very bad financial choices.
And these are just two reasons why housing wealth should not be included in the new pensions dashboard (another more obvious reason being: a property is not a pension).
It is of course impossible to stop people considering their finances in the round. The idea that a pensions dashboard can frame our thinking on retirement planning is fanciful but that is to jump ahead of my argument.
The “bad decisions” he’s referring to are to do with over reliance on property equity and under-provision of the replacement income we need when we stop working.
The article turns on itself as it explores the relative merits of downsizing and taking a lifetime mortgage. It hints at what is a very real moral hazard, that if you are so skint in retirement that you have to mortgage your house to live properly, you are certainly not going to be able to pay the costs of long term care (other than by selling your house).
The moral hazard is that people assume the right to state care and recognise that that care is means tested. If you are planning on a state assisted later life, then you should burn your equity and your potential income. Since most equity release plans don’t ask any questions about how you spend the cash released, the opportunity for people to game the NHS and the social services funded by the DWP is obvious.
We pay far too little time thinking about how ordinary people consider housing, later life income and the threat of needing long-term care.
The over reliance of a very large number of people on their house as their pension also misses an important historical factor. Those people who pushed their finances to the limit to buy a house and keep up the mortgage payments, often did so by not paying into a pension.
Their idea of property investment was to be independent of pensions – which many people see as a black hole into which you pour your money, never to get it back.
The tangibility of a property is pretty obvious, it is a place to live and – if rented out, is a self-sufficient asset. Property has become a free lunch – with low interest rates, high rents and a seemingly inexorable rise in property prices.
The housing shortage , which the Government continues to talk about – without building houses, keeps property prices high. The tight control of interest rates keeps away the perils of negative equity, the young are priced out of the market – but they don’t vote.
All this has the smell of a rigged and rickety market with the potential for a real fall in property prices which could have very nasty social consequences – especially for those for whom property underpins their lifestyle, retirement plans, their legacy and their long-term care insurance.
Far from offering self-sufficiency, a property can and does give a false picture. Which is how James leaves his argument.
People who rely on housing equity or investment income from rental property to fund their pensions are playing a scary game, the risks of which are underestimated.
Or a contingent asset?
The terminology of Defined Benefit pension funding is useful here. Most people do not achieve financial self-sufficiency when they enter retirement. They have to carry on working – or they rely on their savings whether inside a pension wrapper or not.
The house is the back-stop. It acts as a “contingent asset”, something that is pledged to be used but only as a Plan B or C.
If people are having to rely on work and savings to produce income, then they are taking on a lot of risk, risks associated with health, interest rates, markets and people’s capacity to make financial plans and keep to them. There are many calls on older people’s money and most of them cannot be anticipated.
So the financial backstop of a lifetime mortgage is a tremendous advantage to someone who has not achieved self-sufficiency. It makes for a much more relaxed prospect for someone reaching the end of their working life.
Which is why I am very much for equity release, especially the responsible varieties such as Legal & General’s Lifetime mortgage. So long as property is viewed as a contingent asset and not as the answer to all life’s future property, I see it as key to the financial security of most older people.
Property equity is a contingent asset which should form an important part of financial planning for later life
Messaging and dashboards
I am concerned that the expectations of politicians and the proletariat for the dashboard are being set too high. In particular – I fear that “trust” is being commandeered by the pensions industry to justify “control”.
The current obsession with controlling the messaging will doubtless be reflected in the DWP’s consultation response due out shortly.
It is the easiest of wins for those who respond to these consultations to demand high levels of centralised governance resulting in a state dashboard and a few highly regulated portals that plug into a single pension finder service.
It is very unlikely that anyone from the pensions establishment will have written to the DWP telling them to let the market control the messaging. Here for instance is Prospect’s report on its recent dashboard meeting with the Minister.
“All feared the potential for confusion, and some the possibility of exploitation if commercial players had too much scope to fashion the presentation or in any way edit the contents of the dashboard”.
Controlling the messaging from pension dashboards will be quite beyond Government or the pensions industry. People want access to data on their pensions and they want to take control of their savings. They will include housing in their thinking – they would be mad not to.
I hear the splashing of water around King Knut’s chair.
Should your house be on your pension dashboard?
The argument of this blog is this
- James Coney’s article is right to raise the question
- The interaction of housing on pension savings is perverse and underestimated
- People who rely on house equity to be self-sufficient in old age are usually deluded
- Housing equity is a good backstop or contingent asset and shouldn’t be ignored
- Messaging from pensions dashboards can’t be controlled (worthless power of kings)
- With responsible positioning housing could and should feature on dashboards.
I think, were James to read this blog – he’d ultimately come to the same conclusion , despite his title suggesting the opposite.