BoE Chief Economist Andy Haldane said that pensioners can depend better on properties than their pension accounts, echoing the call of financial advisers for pensioners to diversify their portfolios.
According to the 49-year-old Haldane, pensioners could depend on the soon-rising figures in property dividends rather than their own pensions.
However, analysts are skeptical of the economist because of his huge pension that guarantees £84,000 yearly and his guaranteed salary of more than £100,000 annually.
Former Pensions Minister Ros Altmanna said that Mr Haldane was “irresponsible” in suggesting that people should rely on property instead of their pensions.
As money paid into pensions attracts tax relief at 20pc for basic rate taxpayers, and 40pc for higher rate taxpayers, they are normally seen as the best way to save for a retirement income.
But as the rates available for savers turning cash into lifetime incomes have drastically fallen in recent years, a growing number of pensioners are becoming buy-to-let investors in a bid to use property to turn their savings into a higher income.
Landlords in some areas of the UK can expect to receive around 9pc a year income on their investment. This compares to over 55s buying an annuity, who can now expect to receive less than 2.5pc a year, depending on their age and health.
Analysts estimate the total UK pensions deficit has risen to more than £1trn. Amplified by the trouble of pensions in BHS and Tata Steel, analysts are questioning the efficiency of defined benefit pensions in different companies.
Research indicates that final salary pension schemes from blue chip companies are unable to meet their future pension commitments. Meanwhile, new employees and contributors cannot enjoy the same merits as those who were employed before the year 2000.
Former Pensions Minister Steve Webb believes many blue chip companies are just ‘zombie schemes’ incapable of fulfilling their commitments.
“The UK’s collective pension deficit has transformed from negligible in 2006 to Britain’s biggest liability, eclipsing government and corporate debt,” says Oscar Williams-Grut in Business Insider.
“But the yield on gilts has collapsed in the wake of the financial crisis, due to demand from other risk-averse investors.
“But if gilts are falling, their expected returns are falling, meaning they need to invest more money. That is money they don’t have, meaning deficits rise,” he adds.
“A combination of lax regulation, low interest rates and frugal employers has allowed deficits on defined benefit work schemes to build to frightening proportions,” says Jeff Prestridge in the Mail on Sunday.
Shareholders and benefactors get bigger payouts from business earnings than companies contributing to employee pensions according to a report commissioned by Pension Experts Lane Clark & Peacock (LCP).
About 56 major firms that disclosed a shortfall of pensions funds the previous year paid out about £53bn in dividends to investors. This was a large amount compared to the £9.5bn contributed to employee pensions.
The report said that the firms could have filled in huge deficits of £42.3bn with the cash they have provided in dividends.
MPs condemned the actions of companies implicated in the research by LCP.
Currently, BHS former Owner Sir Philip Green has his knighthood under review as he had come under fire for selling his chain of stores to a retired racer for only £1 and leaving the company with a £571m pension deficit.
Meanwhile he had received about £400m in dividends.
According to Nigel Green of Financial Advice Firm deVere Group, the Brexit vote could have created the biggest trouble for pensions that it has the power to knock down several major firms and pension schemes.
LCP Senior Partner Bob Scott said:
“The collapse of BHS and the potential sale of Tata Steel UK, both with underfunded pension schemes, have highlighted the significance of pension liabilities and the impact that a large defined benefit scheme can have on a UK company.
“Companies with large deficits may see pressure from the Pensions Regulator on their dividend policy in light of the Select Committee’s report into BHS.”
As UK’s gilts could turn for the worse, experts predict that a global collapse in borrowing costs could send the UK’s pensions industry into a deeper black hole.
On Wednesday, the UK government bonds have gone to negative territory without warning. Former Pensions Minister Ros Altmann asked for an investigation regarding the impact of company pensions and the efficacy of BoE’s new £70bn bond-buying plan to stimulate the economy due to a possible Brexit-related slowdown.
“The Bank wants to stimulate the economy by bringing down interest rates, but the Bank is not acknowledging the negative impact these measures are having on pension deficits, and neither is the government,” said Mrs Altmann.
UK pension funds — in an effort to raise their interest rates and yields — have turned to UK government bonds. Often associated as ‘rainy day stocks’, many pension companies predict their future benefits make them a reliable source of income.
However, the increasing collapse of yields had revealed substantial gaps in large pension funds.
The Bank’s stimulus plan would use the £70bn to purchase assets would intensify a global collapse in bond yields. With the 10-year borrowing rates in the United Kingdom coming to a new low of 0.51% on Wednesday, short-term guilts for March 2019 and March 2020 had nothing.
“Problems are far from universal, with most deficits managed appropriately,” said a spokesperson for the Department for Work and Pensions. “Having strong, sustainable employers and a buoyant economy are the best protections for pensions, and the Bank of England’s announcements last week will help support us as we adjust to a new relationship with the EU.”
Baroness Ros Altmann and former pensions minister Steve Webb have contrasting views on the subject of dropping one of the locks of the ‘triple-lock’ on the pensions rate for the United Kingdom’s current pensioners.
Heavily supportive of the lock in 2015 but had digressed to say that protection of state pension is hampering economic development, former Pensions Minister Ros Altmann — who resigned effectively this year — said the 2.5% of the triple lock scheme did not make sense.
She said that each year, state pensions increase by the inflation rate, average earnings or 2.5%. She said if the country went into a period of deflation where earnings and prices were falling and the country would increase pensions by 2.5% it would be something that is out of proportion.
Meanwhile, Mr Webb contends that the pensioner population is too poor to pay their own taxes and the UK still has the lowest pension in Europe. He argues that government policy is always pro-pensioner and the pensioners still need the government’s financial help.
Ms Altmann had argued to alter the pensions’ triple lock, but former Prime Minister David Cameron blocked the changes for political reasons.
Total pension spending has increased by 25% since 2010-11, and the independent Institute for Fiscal Studies (IFS) said that any long-term commitment to the triple-lock would be “unaffordable”.
Carl Emmerson, deputy director of the IFS, said that the highs and lows of the UK economy would mean that the state pension would logically grow faster than earnings in general over the longer term.
He said that, although the state pension was lower in the UK than much of Europe, private pension provision was higher. Consequently, pensioners were not a relatively poor group.