Property versus pension: the FAQ

Every week I look at the Money section of The Sunday Times. Being the inquisitive individual that I am, I love to read the interview feature, which poses various financial questions to well-known (and not so well-known) individuals. One question always asked is: What is better, property or pension?

I am staggered that these influential, wealthy and clearly intelligent individuals often choose property with no thought given as to how this can influence the behaviour of others. So I want to debate the issue in a little more depth.

In my opinion, we are facing a pensions crisis in this country, which, over the next three decades, could lead to poverty for many retirees.

These days, more and more people are starting full-time work later, after university and gap years. Rather than starting with a clean slate at that point, many graduates are facing debts of at least £40,000.

The average first-time buyer then needs £30,000 as a deposit. So rather than property helping with pension planning, it hinders because accumulating additional properties for future investment planning is beyond the reach of most. While I hope that the new 'help to buy' scheme announced by the government in the recent Budget will help, it still doesn't change the fact that house prices are still at ridiculous levels relative to earnings.

Attractive scheme

In our company, we offer staff what I consider to be an attractive pension scheme. Basically, if they pay in 5 per cent of their salary, we match the contribution. The 5 per cent they contribute is subject to tax relief at a minimum of 20 per cent, so 5 per cent only costs them 4 per cent.

Put simply, every £4 they invest into their pension turns in to £10 overnight, which is an instant return of 250 per cent, guaranteed. Once they have that in the 'pot', they can then invest it tax-free (well, almost) pretty much anywhere they like.

Despite a 250 per cent immediate return, not everyone joins the scheme at the earliest opportunity, if at all. Our staff are trained, experienced and knowledgeable financial services professionals, so if they are not joining, I am fairly certain that the situation is much worse across the working population.

The main reason given for not joining the pension scheme is that they 'cannot afford it'. This is absolute twaddle and doesn't wash with me. Seriously, the cost of the scheme is less than £2.75 per day on a salary of £25,000. Just a few lifestyle choices, for example not buying a takeaway coffee in the morning, or taking a packed lunch to work, can easily cover the cost.

So, is the issue of affordability just plain daft? The truth is, that years of 'pension bashing' combined with the 'I want it now' mentality of today means generation Y and beyond are heading for a dire future.

We carried out a short survey in the office and asked our team when they expected to retire. The majority thought it would be in their 70s. Really?

While media hype constantly bombards the population with the idea that you will have to work longer to afford retirement, do these individuals honestly think that they will be able to work at the same pace post-60 or 70, as they do now? Will they expect employers to expect less of them and let them work slower? Do they think they will still be enthused and able to work at a high tempo?

Pace change

Don't get me wrong, I know lots of people well beyond state-retirement age who are capable of working - it's just that they would rather work less or choose the pace at which to work.

The only way to get people to save for retirement in the right way is with a combination of facts and emotion. Facts will show the cold hard truth of what inadequate pension provision looks like, then hopefully the emotional side of the brain will stir some action.

I am not a devout pensions fan (at least not any more). I think diversification is much wiser and the various governments' pension strategies have been nothing short of shambolic. However, it's the apathy and lack of intelligent thinking that really bugs me.

Back to the question of what's better: property or pension. Well, the stock market has significantly outperformed property over the last one, three, five and ten years. However, that's not the real issue and wasn't actually the question.

Colin Lawson is founder and managing partner of Equilibrium Asset Management

This blog continues next month