Dear Nick

Dear NickDear Nick

I have gone on record saying that I don’t really understand pensions despite having a very senior job in economics at HM Treasury.

More recently I have publicly said that I believe property is a better way of investing for retirement than say a pension plan. I have taken a lot of “flack” for this.

What do you think and why do you think people hate me so much?

Yours sincerely,
AH

Dear AH

Thank you for your letter.

I recall you saying that you didn’t understand pensions but I also recall that you also said “countless advisers” you have spoken to didn’t understand pensions either.

It may have been just a little sloppy on your part to use the word “countless” after all people would normally expect economists to be able to count.

The fact that you benefit from a “gold plated” final salary scheme worth a very lot of money probably doesn’t endear you much with the general public and media either and indeed many professional advisers may have taken offence at what you said.

Pensions are pretty simple really, they are about saving for the future.

There are two basic ways of doing this either by building up a pension pot or by being a member of an employers scheme that promises you a pension amount at retirement.

Just so you know, these alternatives are generally known as defined contributions (or “money purchase”) or defined benefits (“final salary) although these days fewer people in the private sector have access to the latter type like you enjoy.

You might understand it better if I told you that saving in a pension is about deferring some of your income now in order to pay you an income later in life. Simple really.

The government (those people you work for) imposes a lot of rules and regulations on pensions in terms of how much you can pay in, when you can take the benefits out, and the amount of tax relief and indeed income tax that you will pay on your pension pot or pension income.

It may be the very complex government rules and regulations that are confusing you.

If that is the case you might want to have a chat with some of your colleagues who are responsible for this and maybe even get them to change them (again).

Pensions, in the main are a very tax efficient way of saving for retirement for most people including the “man in the street” who unlike you may not be earning £185,000 per year and have access to a gold plated pension scheme.

Those same people may well struggle to buy a property either in which to live or to rent out as an investment.

If they are able to do so they may well have to raise a mortgage to do so. This brings with it costs and risk.

It will also bring with it tax as well; tax on any rental income that the property generates (without any compensating tax relief) and tax (Capital Gains Tax) when the property is sold.

Of course if the property in question is your home you get the enjoyment of living there and raising a family in it for example, but ultimately you may have to sell it to get the money you need for retirement.

This process is known as downsizing – you buy a smaller house and release some of the cash value to pay yourself retirement income.

It can work but usually it is pretty well off people who can afford to do this. They may by the way not necessarily consider themselves “well off”.

Like with any financial decision any of us make there are advantages and disadvantages to each course of action. Usually though the are no guarantees in respect of either approach.

Property can be very illiquid and it may not be possible to sell the property at the time you need to do so.

Equally, of course, the value of investments in a pension pot can go down as well as up and it may well be difficult to time retirement at the optimum time.

There will be costs associated with each approach as well.

You may need a Solicitor to help you buy the property and there will be other costs as well.

With pensions there will be investment management costs to pay. It is good to know exactly how much you will have to pay and an adviser will tell you that precisely.

You should probably seek professional financial advice because clearly you have been struggling to find one who understands pensions. Or maybe they did but you had closed your mind to their explanations.

If you are in the fortunate position to be able to afford to be a member of a pension scheme and have investment property as well that might be a good mix of assets to have for retirement. Both can work well in certain circumstances.

I’m not sure people “hate you”, AH. I just think that they feel you don’t give much thought to what you say before you say it.

Perhaps you are looking for a job in politics or something?

Anyway, next time before you tell journalists that you don’t understand something, perhaps you should talk to someone who actually does know. There are countless advisers who do.

Best wishes,
Nick

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