Financial Conduct Authority (FCA) chief executive Andrew Bailey has warned about the dangers of using property to fund retirement.
In a speech at the annual Pensions and Savings Symposium at Gleneagles, Bailey (pictured) said a retirement portfolio which was focused on housing ‘could be self-defeating’.
Although Bailey said diverse retirement portfolios could be exposed to property, he raised concerns about people depending on housing for retirement.
‘In the Financial Policy Committee we have been concerned about increasing levels of household indebtedness,’ he said.
‘If the effect of increasing the demand for housing as an asset to own is to push up the cost of ownership, an increase in holdings of housing as pension assets will tend to increase the real cost, and thus household indebtedness.’
Bailey’s comments come weeks after Bank of England chief economist Andy Haldane said property is now a better bet for retirement than a pension.
When asked whether a pension or property was better for retirement by The Sunday Times, Haldane said: ‘it ought be a pension, but it’s almost certainly property.’
He added: ‘As long as we continue not to build anything like as many houses in this country as we need to…we will see what we’ve had for the better part of a generation, which is house prices relentlessly heading north.’
Haldane’s comments were criticised by IFAs, who described his views as ‘irresponsible’ and ‘oversimplified’.
Equity release caution
In his speech, Bailey also sounded a ‘note of caution’ over equity release contracts used in retirement.
Such deals allow retirees to borrow money against their existing home, meaning that older people do not have to move out of their house.
Since the introduction of pension freedoms last April, a number of providers have stated the believed the equity release market was set to grow.
Bailey said there were ‘potential benefits’ for people who wanted to stay in their own homes, but also highlighted concerns connected to behavioural economics.
He cited the lifetime investment model, which assumes people make the decision to build up assets over their life and then sell them to provide for retirement.
‘My note of caution here would be that while the approach has an appeal in terms of the lifetime investment pattern, the accompanying financial instrument is made much more complicated by the need – again consistent with the lifetime model – to embed in it a no negative equity guarantee,’ Bailey said.
‘This can have both prudential and conduct consequences, and the Prudential Regulation Authority has issued a discussion paper on the former.’