Economic turmoil puts property vs pension in focus: HAMISH MCRAE

It’s exhausting, isn’t it? And it only gets worse. Of course the situation is far harder for anyone directly involved in the conflict in the Middle East. Yet it is troubling for all of us. What are we supposed to do when every day there’s another twist to the saga, and the traditional havens don’t seem so safe any more?

Gold is well off its peak. The property market has stalled. Government bonds, especially gilts – UK Government bonds – are volatile. And as for the dollar, who knows?

The best approach, surely, is to step back and focus on the big decisions. The biggest one of all, as far as building wealth is concerned, is the balance of saving between property and pension.

The most recent estimate from the Office for National Statistics for the median wealth of a household where the head of the household is aged between 65 and 74 – the wealthiest age range – is just £502,500. So that is the middle family, with half richer and half poorer. The largest two chunks of that wealth are pensions and property, pretty evenly split between them.

So as far as most people are concerned, the answer to the popular question ‘which is the better way to save for old age, pension or property?’ is very simple: ‘Both.’

But the past few weeks have taught us a lot. You can have huge economic disruption and yet the world economy seems able to ride through it in decent shape.

All the anguished stuff about this being the worst energy crisis ever, and the markets have shrugged it off. The FTSE 100 index is up 7 per cent this year, while the most important US index, the S&P 500, is pretty much where it was on January 2. 

Apply this to the property or pensions question, and while on a very long view the answer is indeed both, on a five-year horizon there’s a clear argument for putting money into a pension that is invested in equities rather than residential property.

On the past five years the Footsie is up over 50 per cent, whereas UK property is up 10 per cent on where it was in 2021.

That latter figure is, of course, an average. If you were unfortunate enough to buy a flat in central London you would probably have lost money.

New-build flats have been especially hard hit, with about 40 per cent of those bought in the past 20 years being sold at a loss.

Aside from the golden rule that savers should never put all their eggs in one basket, what else have we learnt from this experience?

My own big takeaway is that inflation will be higher than most of us expect. To be brutal, that is because governments like it. It whittles away the real value of their debt; it pushes up their tax yield by stealth – dragging taxpayers into higher income brackets; it enables them to say ‘we are spending millions’ on whatever they think will pip them up a few points in the opinion polls.

And they can blame high inflation, which they know is unpopular with voters, on the war in the Middle East. Not their fault at all.

We even had Rachel Reeves crowing in her Spring Statement about how there had been six interest rates cuts from the Bank of England since Labour took office in July 2024.

I wonder how the Chancellor will respond if, as seems likely, the next move in rates is up, not down. So there’ll be more inflation, and we must not allow ourselves to be fooled by the money illusion, for a pound today is not a pound of ten or 20 years ago.

At some stage – we cannot know when – there will be a bear market in share prices – but we know that on a long view equities do give protection against inflation. It’s frustrating that people keep emphasising the risk of equity investment when the greater risk is seeing the real value of savings whittled away by inflation.

Let’s look forward. Come the autumn, there will be some sort of clarity about the outcome of the conflict in the Middle East. The disruption will have added to the cost of everything.

But the world economy will carry on, and – while there will inevitably be a bear market some time in the future – remember that historically equities tend to recover faster than other asset classes. So sit tight and enjoy the fact summer is around the corner.