Over-confident savers back property before pensions

Thirty-eight per cent of adults who were not retired picked occupational pension schemes as the safest way to save, down from 40 per cent during the period July 2014 to June 2016.

But when asked which saving method would make the most of their money, 49 per cent of respondents to the ONS Wealth and Assets Survey picked property, continuing a growing trend of faith in bricks and mortar.

The UK’s household savings ratio also plunged to an all-time low of just 1.7 per cent, in a later release of ONS figures.

The key to solving these issues is to create a savings commission to address faults in long-term saving, first and foremost by making things simple

Nathan Long, Hargreaves Lansdown

The early indicator results will make troubling reading for new pensions and financial inclusion minister Guy Opperman. Shortly after his appointment, the Department for Work and Pensions highlighted what it called "Britain's reviving savings culture", based on recent auto-enrolment figures.

The DWP did not respond to requests for comment.

Property has benefits

Using property as a tool for retirement provision is not inherently misguided, according to Richard Butcher, managing director at trustee firm PTL.

“We all need somewhere to live,” he said. “Given that savings levels are not high enough… it seems not an unreasonable proposition that individuals should try to release some of the equity value.”

However, he added that in pure terms of return on money invested, the employer contributions and tax breaks associated with a pension would generate more retirement income.

There are further risks associated with downsizing property or using equity release to fund retirement, said Morten Nilsson, chief executive of mastertrust Now Pensions.

“First, there is a shortage of affordable and suitable homes that older people want to live in, and this is something the recent government housing white paper failed to tackle,” he said. “Second, our research also found that over 1.8m UK homeowners don’t expect to pay off their mortgage before they retire.”

Nilsson said the Now Pensions research indicated that 63 per cent of the 7.7m people retiring over the next 10 years will look to use their property to supplement their retirement income.

However, he did not believe that products such as the lifetime Isa would help savers to achieve both goals simultaneously.

“Buying a house happens before retirement, and we know that behaviourally, people place a higher value on nearer-term events. This could easily result in an increase in auto-enrolment opt-outs,” he warned.

Are savers deluded?

The early indicator estimates for the ONS survey did reveal some positive results for the progress of pensions policy. Four-fifths (82 per cent) of employees said they had heard of auto-enrolment.  

The top reason for not participating in a scheme was a lack of disposable income, rather than other factors such as lack of interest in saving.

And 54 per cent of adults were confident their retirement provision would enable them to attain their desired quality of life when they leave work, an increase from 41 per cent between July 2012 and June 2014.

However, industry commentators questioned whether this increased confidence was underpinned by better saving practices.

Defined contribution rates remain low, and a growing body of evidence points to the need to increase auto-enrolment minimum contributions above the levels currently planned. Meanwhile, the ONS household savings ratio hit rock bottom, as available resources and expenditure continued to mirror each other's rise.

“People grow in confidence when they are auto-enrolled into a pension, but are unaware that their contributions are simply not enough,” said Nathan Long, senior pensions analyst at Hargreaves Lansdown.

For Long, a concerted effort to boost financial literacy is needed ahead of the auto-enrolment hikes in 2018 and 2019.

Saver confusion is at least partly due to complex and inconsistent legislation he said, with laws aimed at higher earners often complicating the wider pensions landscape.

“The key to solving these issues is to create a savings commission to address faults in long-term saving, first and foremost by making things simple,” he said.

For Lee Hollingworth, head of DC consulting at Hymans Robertson, successful policy would involve a shift in focus from input to output.

“By simply setting the saver a target income in retirement, telling them how likely they are to achieve that target, and if not what they can do to get back on track, the saver can more easily assess the benefit of paying more into their pension,” he said.