Don't bet the house on your pension

Seven years ago, the FTSE 100 index stood at 4,455. Last week, it was at roughly the same level and anyone who has invested in equity funds over that period will have been doing well to have made any money at all.

Pensions have been just as badly hit. Sir Richard Sykes, the former GlaxoSmithKline boss who chaired an investigation into the financial services industry which reported last week, noted that an investor who saved £100 a month in a balanced pension fund for the 10 years to February 2003 would have ended up with a pot worth £11,515: even with tax relief, they would have been better off putting the £12,000 into a building society.

The report, Restoring Trust: Investment in the 21st Century, points out that commission on a modest pension of £2,000 a year would amount to a whopping £12,000 over the life of the fund, equal to six years' contributions. And, despite recent rises in interest rates, returns on annuities are still extremely unattractive compared with those expected as little as five years ago. Add in mis-selling scandals, the crippling losses many suffered with supposedly blue-chip Equitable Life and the case against pensions seems to be irrefutable.

The housing market, by contrast, looks the picture of health. Over the past seven years, prices in most areas have doubled and in many places increases will be substantially higher. Meanwhile falling interest rates have made mortgage repayments more affordable, so much so that many of us are buying more properties, either as second homes or buy-to-let investments.

House price indices give no indication that the pace of rises is faltering. Small wonder then that more and more of us are relying on property rather than the stock market to provide our pensions. That is not as sensible as it seems - and not just because Mervyn King, the Bank of England's governor, has joined the doom-mongers warning about a fall in house prices.

A fall in house prices is undoubtedly a big risk in the short term, but the recovery since the last major housing crash, at the beginning of the 1990s, indicates that what goes down does go up again - eventually. But there are two better reasons for eschewing property in favour of pensions or other stock market investment: diversification and contrariness.

For most of us, our house is our major asset. Regardless of how well (or badly) it is doing, the best strategy is to balance that exposure to the property market with other types of investment, whether shares, bonds, commodities - commercial property tends to behave differently to the residential market.

It also pays not to follow the herd; ask anyone who joined the rush into technology funds in 1999, bond funds last year or any of the other bandwagons which have rolled in the past 30 years. If everyone is so convinced property is a sure bet that they are borrowing heavily to buy more of it, you should be looking at any of the investments outlined above.

While many commentators believe equities may mark time, at best, for much of this year, anyone aiming to fund their retirement will be looking to a more distant horizon. Richard Hughes, who manages M&G's equity income fund, says current valuations do not look particularly stretched and points out that many equity income funds currently offer yields of 4 per cent, which compares well with building societies and offers the prospect of eventual capital growth.

The Pensions Policy Institute says that, even after the stock market crash and the house price boom, the average pension fund has grown by 11.6 per cent over the past 33 years - a reasonable time span for retirement funds - compared with 11.1 per cent for houses.

It also points out that many of us will simply not have the housing assets to fund our retirement. We may have borrowed too much against it, be unable or unwilling to trade down to less expensive accommodation or prefer to hand it on to our children. It estimates that we already have more invested in housing than in pensions. It is time to redress the balance.