Houses As Pensions

[Ferret]

"Houses as Lottery Tickets" is probably more suitable now.

Yes, for those who bought within the last 6 years and overstretched themselves.

Those who bought at the last trough are smiling, and the Wrinklies together with the older Boomers are set up nicely.

Never had any Pension Plan or General Investments but am now set up very nicely without my home being my pension.

[Bardon]

Houses and pension funds for me, Invest in growth assets while working go for cash flow in semi retirement.

Get tax offsets on -ve property cashflow while income is high

Put 9% into pension fund at the moment but increase this in the future bonuses etc straight into a 15% tax environment

Quit day job in 10-15 years time, strategy changes, set up for income as priority over growth but keep growth assets

Do a little bit of consultancy here and there.

Sell current place of residence into a trust get all the gains tax free,

Trust rents out property seriously -ve cash flow on a 104% loan.

Surplus invested on income producing assets may or may not be done through low tax pension fund.

Buy smaller dream home in another location on 80% finance, run around the hills drinking whisky, naked with guns of my choice.

Do a little bit of consultancy here and there.

Review position and take out -ve mortgages on all investment properties which will be cashflow +ve bar one.

Kids get the benefit of any equity in properties and pension fund that is left when me and she cark it. If I live to 120 tough luck for the kids.

The population is increasing where I live.

[Oliver Sutton]

Anybody tried to get any info out of their pension provider? Effin joke.

My private pension has just been xferred for the third time. Total shambles.

You're encouraged to buy a product that won't be ready for 25 years and you have no idea what it will look like.

[Oliver Sutton]

Did anyone read the Saturday Guradina a few weeks back with a story from a city trader.

One of their scams was if there was a rumor going round buy a load of the stocks wihtout declaring the purchaser.

A few hours later if the stock did well sell it and say it was bought by a "friend".

If it did badly say it was bought by a pension fund.

He said it was endemic. Your future depends on a bunch of coke-snorting ex public schoolboy tw@ts.

[Guest muttley]

I agree in principle but what really frustrates me is that I picked a winner with the Far East and Norwich Union managed to make a pig's ear out of a silk purse.

I'm guessing that your "Far East" fund was top heavy in Japan.

[Bardon]

He said it was endemic. Your future depends on a bunch of coke-snorting ex public schoolboy tw@ts.

That is a pretty scary thought.

[Tiger Woods?]

Take heart, Bart!

Last week a letter dropped through the door explaining that my first pension which was wound up in 2003 has just finished its run through the courts. To summarise....

Existing pension claimants are prioritised.

Final salary members will be paid out of remains (as per equitable life). Final salary scheme was dropped in the early 80's to everyone under 50.

Money purchase members (effectively all remaining non claiming pensioners) will effectively get nothing, b****r all, schmaltz, zilch, of the company pension they paid for as it will all be eaten up by the existing obligations.

The scheme was opted out of the state second pension. For money purchase members, there will be no Guaranteed Minimum Pension for non claiming pensioners as again, it will be eaten up by the existing obligations.

So, members have lost their pension, and the state second pension for the period they strove to look themselves in old age.

Ok, that all sounds bad. The kick in the teeth is.... wait for it....

The wind up date is before the FAS scheme was set up and so the pensioners are subject to the old Maxwell rules. Under these rules only final salary pension members are allowed to claim any assistance.

Effectively all the money purchase pensioners paid in good faith to lose their pension, their state second pension and face no assistance. It is extremely unlikely there are many final salary members yet to claim.

Which is precisely why I only pay enough into my pension to get the full company contribution...the risk reward ratio is worthwhile. However, if anyone thinks this government guarantee is going to still be in place in 30 years, they need their head examined. Yes, I might be able to get higher earner tax relief on my contributions, but what is the point if it is going to be invested unwisely/just plain lost. The demographic, political and economic risks are just too high to lock up money for 30 years (unless in a SIPP, but even that comes with political risks...who knows what restrictions will be placed on access to funds in them in future?)

Those who bought a couple of properties as a pension in 1995 did a very, very clever thing. Those who bought in 2005..well, we all know they were naturally selecting themselves.. One thing I believe that can be assured is that average rents will be a certain portion of the average salary (even if that is counted in bags of rice and chickens), and that owning a couple of spare homes will be a better guarantee of being able to eat well in your dotage than pension funds, gold etc.

[Mikhail Liebenstein]

Which is precisely why I only pay enough into my pension to get the full company contribution...the risk reward ratio is worthwhile. However, if anyone thinks this government guarantee is going to still be in place in 30 years, they need their head examined. Yes, I might be able to get higher earner tax relief on my contributions, but what is the point if it is going to be invested unwisely/just plain lost. The demographic, political and economic risks are just too high to lock up money for 30 years (unless in a SIPP, but even that comes with political risks...who knows what restrictions will be placed on access to funds in them in future?)

Those who bought a couple of properties as a pension in 1995 did a very, very clever thing. Those who bought in 2005..well, we all know they were naturally selecting themselves.. One thing I believe that can be assured is that average rents will be a certain portion of the average salary (even if that is counted in bags of rice and chickens), and that owning a couple of spare homes will be a better guarantee of being able to eat well in your dotage than pension funds, gold etc.

I don't think this is so. The pig in the python theory says we should now expect a long term real decline in house prices. As the babyboomers moved through the system, their shear numbers drove all price up in their wake. Now they are retiring and disposing of assets. Expect property to be a bad investment for the next 25 years.

[Bootsox]

Recently, I have been considering the longevity of the impact of previous bursts of high inflation on today's house prices. In other words, how on earth has property become so expensive?

On casual observation, there seems to be a group of people in society (probably more in the south east/London) in their 60s and 70s who are living in far more expensive properties than their career earnings might suggest. Now some of these people may just have inherited but I also feel that it has got a lot to do with the inflationary bursts of the 70s and early 80s. During this time, people who are now in their 60s and 70s would and been 30/40ish and, if ambitious, would have been pushing themselves on the property ladder (unlike today, this may well have been an unfashionable thing to do). Despite possibly stretching themselves to the hilt on borrowing, 70s style inflation would have soon whittled down their monthly payments with the large annual wage rises that prevailed at that time.

I remember as a "young fella me lad" starting work in the early 80s, older colleagues rubbing their hands with glee as they reminisced about the previous inflationary decade and how their high annual wage settlements soon demolished their monthly mortgage payments. A good example of being in the right place at the right time.

Unfortunately, in terms of high house prices, the legacy of this period of high inflation still echoes with today's younger generation. I also suspect that the effects of this period may also still live on in the "national psych" as an absolute fear of not being on the housing ladder, irrespective of prevailing property prices or economic conditions.

Regards

Sox

[chas]

Recently, I have been considering the longevity of the impact of previous bursts of high inflation on today's house prices. In other words, how on earth has property become so expensive?

On casual observation, there seems to be a group of people in society (probably more in the south east/London) in their 60s and 70s who are living in far more expensive properties than their career earnings might suggest. Now some of these people may just have inherited but I also feel that it has got a lot to do with the inflationary bursts of the 70s and early 80s. During this time, people who are now in their 60s and 70s would and been 30/40ish and, if ambitious, would have been pushing themselves on the property ladder (unlike today, this may well have been an unfashionable thing to do). Despite possibly stretching themselves to the hilt on borrowing, 70s style inflation would have soon whittled down their monthly payments with the large annual wage rises that prevailed at that time.

I remember as a "young fella me lad" starting work in the early 80s, older colleagues rubbing their hands with glee as they reminisced about the previous inflationary decade and how their high annual wage settlements soon demolished their monthly mortgage payments. A good example of being in the right place at the right time.

Unfortunately, in terms of high house prices, the legacy of this period of high inflation still echoes with today's younger generation. I also suspect that the effects of this period may also still live on in the "national psych" as an absolute fear of not being on the housing ladder, irrespective of prevailing property prices or economic conditions.

Regards

Sox

Bootsox, I quite agree with your comments on inflation, with today's (relativly) low inflation environment, debt is real debt and will have to be paid off out of earnings, so who is going to pay all these high property prices? once you have paid off your student loan and got over your dissappointment that a degree is only going to get you a slightly superior Mac job, quite apoart from all the debt that is has been built up over the last 10 years on the expectation that booming house prices will pay for it all.

Charles

[Si1]

I don't think this is so. The pig in the python theory says we should now expect a long term real decline in house prices. As the babyboomers moved through the system, their shear numbers drove all price up in their wake. Now they are retiring and disposing of assets. Expect property to be a bad investment for the next 25 years.

this is the best concise demographic explanation I have heard - I also ascribe to this view, but it is tempered by one thing:

following the current crash, it is possible that houses could be very UNDERvalued compared to the longer term trend, so may make a good buy on an individual timing/geography/needs basis. Of course this depends on how catastrophic the crash becomes.

[Wlad]

Aye, apparently things like French unfunded liabilities are damn hard to elucidate, but the estimate for the EU as a whole is about $100 trillion! That's the same as the yanks but with far less GDP to play with.

US GDP is 13.8 trillion dollars, EU 11.9 trillion Euros, or about 18.5 trillion dollars. So the EU GDP is higher. Adjusted for PPP they are pretty much the same, but in nominal terms it is higher and the unfunded liability figures are in nominal amounts.

I've read the UK public pension unfunded liability might be a mere £1 trillion! You have to add the private shortfall which could be anywhere between £0.5 to £1 trillion (which won't get paid presumably). And then we have to add all the other unfunded liabilities like future health spending. This is the big one for the US. $86 trillion compared to a mere $13 trillion for social security/pension stuff. No idea what it is for us.

Unfunded liabilities may be a problem, but they are a bit like an unfunded future food bill to be paid out over a number of years. I.e. what is more important is the projected ANNUAL cost against projected ANNUAL income. If I calculated my entire future food bill even without inflation it would dwarf my annual income, but be less than my projected total income over the same period. If the economy falls short, though, it will be an issue in paying those liabilties.

In terms of UK state sector workers, a lot have funded plans, e.g. postal workers. Even some local governments here have investments to hopefully partialy cover future pension liabilities. Obviously to create such a fund requires income in excess of expenditure now, and it is hard for councils to acheve this as people then complain about council tax being too high. So in many ways it is hard for local or central government to create such funds in a general atmosphere that wishes for tax cuts, and so the more sensible step of investments has been sidelined. It was anticipated, though, that general GDP growth would allow the funding of such liabilities from future tax revenue, hence no need to increase tax rates to provide an investment funding (as it was argued this would put a brake on GDP growth and so make things worse in the end*). Also not all investments do well, as some cities in the USA have found out with holes in their workers' pension funds.

It's a difficult one to solve, as a bit like the old joke about asking directions in Ireland it is a case of not wanting to start from here.

* The idea also being that the government holding large reserves is also a brake on GDP as the money is not best allocated by being in government reserves, at least for the industrial and post-industrial economies. For economies that are based on the export of natural resources then different rules apply, but the logic was developed immediately after WW2 for Western economies where it was hoped that governments could act as a brake during too fast expansion by using various measures, including tax, as a brake, to then allow reflationary deficit spending in the slumps. From the 1980s it was felt that runing a government surplus meant that tax was too high, and so the consensus from 1945-80 changed.

In Europe Germany is one that has a current account surplus, but there are lots of complaints that this is not what should be happening. Norway also has a surplus, but falls into the class of natural resource exporters.

[yawnIHateSundays]

Not only that but a 6K house was quite something in 1964.

Not sure about that. My father bought a 4 bed detached house in a pleasant town in Sussex in 1960 for 5K. He was a teacher, so not exactly on a mega income.

[okonu]

The numbers are fairly simple. You’ll live to about 80, most people start work 22 or so.

I intend to retire at 57, so have to fund 23 years retirement, with 35 years work. So need a savings rate of around 40%, being very conservative.

Just had a “check up” with an IFA, who have to say, was pretty good. Required assets for retirement fund was 3.92m (including main residence, reason for huge sum is, of course, taking account of inflation) Estimated assets at retirement age – 4.05m.

She said that I was only the second person she has ever seen with an estimated actuarial surplus… She was a bit disappointed about not being able to sell me any saving advice, but she did have some interesting comments about IHT tax, which may go and look at in more detail.

But, purpose of the anecdote is – you have to save a serious wodge of money. I am lucky, in that I have a decent income, but my wife and I have simple tastes. Oh yes, and that based on what the IFA said – almost no-one saves enough. Most will have to reduce lifestyle significantly, or work longer, or both.

[Tiger Woods?]

I don't think this is so. The pig in the python theory says we should now expect a long term real decline in house prices. As the babyboomers moved through the system, their shear numbers drove all price up in their wake. Now they are retiring and disposing of assets. Expect property to be a bad investment for the next 25 years.

As I said, I wouldn't be buying a house now due to the price. My point was that someone who bought in 1995 would be in a good position in the following sense:

(1) I'm sceptical about the performance of pensions over the next 30 years and what unilateral decisions will be made by government because of the pig in the python demographics...that will not be in a pension holder's favour.

(2) Rent would be more than covering the mortgage, and would probably do so for the foreseeable future. In fact, they would be 13 years into the process by now.

(3) By retirement the person would own, say, 2 extra properties, and my belief is that average rent should reflect a certain proportion of an average wage.

(4) The average wage should allow people to feed themselves.

(5) Hence, as retired people tend to have fewer expenses, by having an income stream related to wages, say 2/3rds, they would have some security.

Regardless of whatever currency crises, bank failures etc., they would own an asset that produces income tied to wages and hence to the cost of living, at least indirectly. I'm not sure one can say the same for pensions. I'm not interested in the capital value of the asset, just its returns in relation to the cost of living and the ability to ensure that one can eventually own the asset by retirement. We cannot ignore the possibility of serious inflation over the next 30 years, ala 1970s, in which case all that money stuffed in a pension will become more or less worthless (as it did to many in the 1970s).

Having said that, as a bear I obviously expect you are correct that in real and nominal terms the value of house prices will drop significantly over the next few years...which is why I wouldn't be doing this now...but someone who bought a couple of decent houses in the mid 90s, might be laughing 30 years hence.

[Pezerinno]

D'oh do you then plan to buy a house as a pension when the prices drop? By your logic shown above I assume you will? I'm not arguing just curious.

[Tiger Woods?]

D'oh do you then plan to buy a house as a pension when the prices drop? By your logic shown above I assume you will? I'm not arguing just curious.

This is a question I am struggling with now. My situation is as follows: only child with older parents who have done well out of the boom in land prices in Australia (selling a sugar cane farm as housing land). Family owns 2 houses in Australia. I currently rent in the UK. My capital has been invested in commodities since 2004/5 (when I started lurking on this site. Thank you all!) That which is not tied up in commodities, has been used to short the current market over the past year, and will be similarly tied up for some time I suspect In many ways, I am in a good position. Regardless of what happens, it is unlikely that I will reach retirement age without a house to live in, unless Australia is invaded by Indonesia or some other unforeseen disaster occurs. This lets me sleep at night. A lot of people are not so lucky.

My concerns are that over the next 30 years we are heading towards a world in which commodities are going to be much more expensive relative to wages. Whatever one believes about the current oil price situation, the effects of peak oil will become real and not just speculation in that time period, and oil is fundamental to the production of food (through machinery and, most importantly, fertilizers) and the general running of our society. I suspect the standard of living in the western world is going to drop significantly over that period. I suspect that at some stage, relative to the basics of living (food, energy etc.) we will see a 70s style inflation, without the concomitant raise in wages i.e. cash and equity in many companies is not going to keep up with the costs of living. This is why I am negative about anything other than self managed pension funds...and I also suspect that there will be unilaterally imposed changes to self managed pensions from government. Houses will deflate in real terms, probably for an extended period of time as more of wages will be going on the basics of life rather than speculating on the value of land.

Given these beliefs, I think owning some agricultural land will be a good safety net for a family, not necessarily in terms of capital appreciation, but in the ability to ameliorate food costs etc. The other thing is that people have to live somewhere, and that the owners of the average property have generally been able to charge tenants a set percentage of the average wage, whether that is measured in dollars or handfuls of rice. The average wage has to be able to feed a family, so the proceeds of owning and renting a couple of houses should be enough to feed a family. This isn't the retirement or world I envisioned when I left school in the 80s, but one has to be pragmatic.

I'm not looking at this as a way to make a killing, just to provide basic security for a family. From this perspective, those who bought houses sensibly in 1995 are likely to be a good position from the perspective I have outlined above. This is purely looking at the situation in hindsight. What will happen this time, one can only guess, but we are heading for a less prosperous world (for the average Joe) in my opinion and the real issue will be how to preserve as much of your wealth and standard of living as possible. The next 5 years will be very interesting and what I do will very much depend on how that unfolds and how I see it continuing to unfold.

Apologies for not supplying a simple "yes/no" answer, but I don't know myself.

[cartimandua51]

My only reservation about property as pension is the vulnerability of housing to swings in political thought. You only have to have an anti-landlord government to get the situation where tenants have very strong security, even if they don't pay the rent (as in France, where I believe they CANNOT be evicted during the winter, no matter what the circumstances - anyone confirm or deny?) AND rents are fixed at an amount which doesn't even cover maintenance costs. This certainly happened in the 1950s in the UK.

[Bloo Loo]

D'oh do you then plan to buy a house as a pension when the prices drop? By your logic shown above I assume you will? I'm not arguing just curious.

Ive got a pension as a pension and thats worth £300 less than this time last year, in spite of £1290 in payments plus the tax releif.

[Tiger Woods?]

My only reservation about property as pension is the vulnerability of housing to swings in political thought. You only have to have an anti-landlord government to get the situation where tenants have very strong security, even if they don't pay the rent (as in France, where I believe they CANNOT be evicted during the winter, no matter what the circumstances - anyone confirm or deny?) AND rents are fixed at an amount which doesn't even cover maintenance costs. This certainly happened in the 1950s in the UK.

Yes. I suppose the point is that one should be diversified. The problem is that no matter what you do some government/banking/pension/insurance vulture is going to do its best to prise your hard earned money from your hands and redistribute/waste/squander it after taking their share...through inflation, legislation, taxation, or just plain brute force abuse of "the law". Life was so much happier and simpler in my youth when I didn't realise just how badly the odds are stacked against a private citizen.

[right_freds_dead]

im wondering where the term 'houses as pensions' was first coined.?

whoever did it hadnt realised it doesnt add up. another persons home costs cannot be your personal pension.

otherwise someone else has no house and no pension.

should be re named, stealing.

[chichi]

im wondering where the term 'houses as pensions' was first coined.?

whoever did it hadnt realised it doesnt add up. another persons home costs cannot be your personal pension.

otherwise someone else has no house and no pension.

should be re named, stealing.

Isn't it also strange that people will think of their "house as a pension" but not "house as care home fees"

[wickywackywoo]

Pensions are one of the biggest scams of modern day history - along with endowments which thankfully are now dying.

If you buy a pension YOU are paying for nice big shiny steel/glass buildings, expensive company cars, big bonuses and the inflated salarys of people who work for these companies. They LOVE you. You promise to pay them money for most of your life and they get to skim a bit off each month.

Pensions have few advantages:

1. Tax relief at point of entry.

2. Can't be seized by creditors.

3. You can't be forced to spend it by the Goverment if you're out of work, it's protected.

Disadvantages.

1. You don't know what the level of tax is that you will be paying when you draw it. Could be horrendous. Labour could be back in again by then Contrast to an ISA where you get no upfront tax relief but you draw it tax free.

2. When you've done paying into it, you are forced to buy another crappy product with the proceeds, an annuity.

3. Once you've paid money into the pension, it's no longer yours. It's effectively the Goverments. If you don't believe me ask for it back. This enables the Goverment to steal from your pension fund via inflation or removal of tax credits and many other ways. If you don't understand how Goverments redistribute wealth via inflation then find out, one of the most important things you can learn. By putting your money in a big pot and giving up control over it you make it very easy for life's crooks to help themselves.

4. Related to 3, loss of control - the goverment can decide at any time you can't retire yet and change the rules.

5. It's visible to the Goverment - you get no means tested benefits while paying taxes to provide for those who didn't pay.

Pensions are sh1t. The benefit the Goverment and large financial corporations.

A better pension plan is to do it yourself. Property, high yielding shares, precious metals, land... The list is endless and it all remains under your control. Most of it can also be protected from Goverment theft which may become very problematic over the coming decades.

[davidg]

My only reservation about property as pension is the vulnerability of housing to swings in political thought. You only have to have an anti-landlord government to get the situation where tenants have very strong security, even if they don't pay the rent (as in France, where I believe they CANNOT be evicted during the winter, no matter what the circumstances - anyone confirm or deny?) AND rents are fixed at an amount which doesn't even cover maintenance costs. This certainly happened in the 1950s in the UK.

That is the case and it is very hard to evict outside of that period. It can take 2 - 3 years to evict a tenant.

I know a lot of people o HPC would like this but it has the perverse effect that many properties are kept empty, especially in property hotspots like Paris because it is too risky to rent them out. It is also very difficult to rent in Paris - you have 20 to 30 people viewing a property on the same day and the landlord will require tenants to have a spotless dossier and also to provide onerous guarantees. Last time I rented in Paris I had to pay a year's rent up front.

A guy I know who rents properties in Paris will only rent to foreigners, particularly illegals. Sounds counter intuitive but these are the easiest to evict as you just send a couple of heavies round if you have problems to 'ave a word'.

Due to the poor rental yields many properties are poorly maintained. Even in the center of Paris there are many tenements. What would be considered slums in the UK... it is not untypical to have combined "turk" type toilets and showers on the landing shared by all apartments. Bienvenue a la vie en rose.

[Si1]

Pensions are one of the biggest scams of modern day history

division of labour. simple init.