Brendan Burgess
Founder
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This is a separate consultation from the auto-enrolment consultation. Consultation on Supplementary Pensions Reform
I would encourage others to make a submission which must be in by this Friday 19th October.
Comments on my draft submission are welcome.
Submission on Supplementary Pension Reform from Brendan Burgess, Consumer Advocate and founder of Askaboutmoney.com.
I will confine my submission to the following two questions:
B2. To the extent that the State’s tax expenditure on pensions has not resulted in high coverage rates, what in your view explains this?
B4. What form of financial incentives for supplementary pensions, alternative to existing ones offered by the State, would better encourage lower and middle income earners to save for their retirement?
Summary suggestion
Those people in their 20s who think about the future, do not think about pensions. They think about how they might get on the housing ladder.
Living rent-free in retirement should be the individual’s priority and it should also be the state’s priority for the individual.
Home buyers should be allowed to take an advance of up to 50% of their fund towards the purchase of their home
· This would dramatically increase the relevance of pensions to everyone and increase pension coverage very quickly
· It would make the proposed auto-enrolment system more acceptable
· It would meet the Exchequer’s objective of increasing everyone’s financial independence in retirement
Imagine a world without tax incentives for pensions …
What would be the right strategy for someone in their 20s saving up to provide for a comfortable retirement?
· First they should save the deposit for a home.
· Then, having bought a home, they should clear the mortgage as quickly as possible.
· Then, and only then, having paid off the mortgage, should they invest their savings to provide a fund on which to live in retirement.
They should not be taking out a mortgage at 4.5% interest while tying up money in a long term investment. This is a violation of the first rule of investing: Do not borrow to invest! They should pay off their mortgage before investing. It is also a violation of the second rule of investment – stay flexible and don’t tie up your money where you can’t access it.
The current system which encourages people to save through a pension fund while borrowing money from a mortgage lender leads to most of the tax benefit being dissipated through the profits of mortgage lenders and pension fund managers.
The first objective for any individual should be rent-free living in retirement
Leaving aside the distortions caused by tax incentives, what is the difference between someone who reaches retirement with a €200k house and €300k of savings and someone who has €500k of savings and no house?
There is no difference as the person with the house can sell it and be in the same position as the other person. Likewise the person with €500k can buy a house for €200k and reduce their savings to €300k
Other countries do allow house buyers to access their pension schemes to buy their home
The KiwiSaver scheme in New Zealand and the Wohn Rieter in Germany can be withdrawn in full and the proceeds used to buy a home. The person’s own contributions, the employer’s contributions and the State’s tax relief/top-up can all be withdrawn in full.
In the United States and in Canada, home owners can take a loan from their pension savings account to buy a house but they must repay this loan, usually over about 15 years.
The Exchequer’s objective is the same as the individual’s: that the person lives rent-free in retirement and is not dependent on the state for their housing needs.
It doesn’t make any difference to an individual whether they have €200k savings and no house or a €200k house and no savings. But it makes quite a difference to the Exchequer. It is much easier and cheaper to administer and pay a pension than to provide someone with housing.
So the Exchequer should also be prioritising rent-free living for people in retirement.
The extreme solution would be to allow a person’s pension fund to buy their family home up to a maximum of €300k.
Leave all the tax and social welfare rules as they are, but allow the pension fund to take out a loan from their pension fund to buy the family home up to a limit of, say, €300k.
A person reaches retirement with a fund of €500k which is comprised of a home worth €300k and investment of €200k. That is the same as having €500k in cash.
This would make pension funds meaningful for young people. They could see an immediate benefit from maxing their contributions. They would get on the housing ladder much earlier than they would otherwise.
The financial system would be much stronger as there would be no need for 90% Loan to Value mortgages. The maximum LTV could reduced to 80% for a First Time Buyer and 70% for Second and Subsequent Buyers.
The dissipation of tax relief via the profits of mortgage lenders and pension fund managers would be greatly reduced.
The system would need to provide for members who want to buy a home worth more than €300k. This could be achieved by the pension fund owning 60% of the house or else providing a loan to the member to buy a house.
Criticism 1 of this proposal: The wall of money released would just push up house prices
This criticism is appropriate in the dysfunctional housing market we are in at present. Throwing cash at it without building more houses would push up prices.
However, this is a long term proposal and not targeted at solving the present problem. In normal markets, where supply increase to meet demand, this proposal should not have distorting effects. Certainly the distortions would be less than the distortions caused by allowing First Time Buyers 90% mortgages.
Any distorting effects could be reduced or eliminated by reducing the maximum LTVs allowed by normal mortgage lenders.
Access to pension money could be very useful during a period where lenders are unable or unwilling to provide housing finance.
Criticism 2 of this proposal: The state should not be subsidising home ownership.
It’s not clear to me why people object to the state providing tax incentives for pensions but not for home ownership?
The state interferes with the housing market in many ways. They provide social housing at less than market rent. They provide Housing Assistance Payment to people who can’t afford their rent.
So is allowing people a tax break to buy their own home that much of a problem?
It seems to me that it would be better and cheaper for everyone if a person were encouraged to buy their own home than to rely on the state to provide them with housing.
In many European countries, mortgages rates and house purchases are subsidised through different means. For example, the German Bausparen system, provides tax incentives to savers so that the lenders have a source of finance cheaper than it would otherwise have been.
An alternative solution would be to allow the member a limited advance on their pension
A member would be allowed an advance of 100% of their pension fund up to a limit of €20k and a further 50% of any balance over €20k up to a further €30k.
The advance would be secured on the home and repayable in full if the house is sold. It could be borrowed again for the purchase of a second home.
If the house is not sold before retirement, the advance, adjusted for inflation, would be deducted from any tax-free lump sum payable on retirement.
This deals with the tax-incentive criticism because the home owner is getting back just their own money.
It also deals with the wall of money criticism in that the amounts could easily be adjusted downwards in an overheated market and adjusted upwards in a market which was short of funding.
These limits could also be adjusted to meet public policy objectives – for example, the limits could be higher for the purchasers of new homes to encourage house building.
Integrating housing and pensions would make the quasi-mandatory contributions envisaged under Auto-enrolment more acceptable
The proposed auto-enrolment system will hit people who want to buy a house very hard.
· They will be effectively obliged to contribute 6% of their gross salary to a pension fund which would have been very useful towards the deposit
· Employers will be obliged to contribute 6% of the gross salary. In practice, this means that they will not be able to afford salary increases they would otherwise have paid to employees.
If auto-enrolment allows people to get on the housing market quicker, it would be popular.
While this is a long-term plan, now is a very good time to introduce it
· Very low returns on pensions
· High cost of rents
· Very high mortgage rates
Most of the time, it is much more expensive to rent a house than to rent the money to buy that house. But at the moment, with supply/demand imbalance, the cost of renting is far higher.
At the same time, investment returns are low and uncertain so pensions and long-term saving are not particularly attractive.
This is exacerbated in Ireland because while we have a low interest rate environment generally which pushes down investment returns, our banks charge the highest mortgage rates in Europe to non-tracker borrowers. So consumer are being hit with a double whammy – low investment returns and high mortgage rates.
I would encourage others to make a submission which must be in by this Friday 19th October.
Comments on my draft submission are welcome.
Submission on Supplementary Pension Reform from Brendan Burgess, Consumer Advocate and founder of Askaboutmoney.com.
I will confine my submission to the following two questions:
B2. To the extent that the State’s tax expenditure on pensions has not resulted in high coverage rates, what in your view explains this?
B4. What form of financial incentives for supplementary pensions, alternative to existing ones offered by the State, would better encourage lower and middle income earners to save for their retirement?
Summary suggestion
Those people in their 20s who think about the future, do not think about pensions. They think about how they might get on the housing ladder.
Living rent-free in retirement should be the individual’s priority and it should also be the state’s priority for the individual.
Home buyers should be allowed to take an advance of up to 50% of their fund towards the purchase of their home
· This would dramatically increase the relevance of pensions to everyone and increase pension coverage very quickly
· It would make the proposed auto-enrolment system more acceptable
· It would meet the Exchequer’s objective of increasing everyone’s financial independence in retirement
Imagine a world without tax incentives for pensions …
What would be the right strategy for someone in their 20s saving up to provide for a comfortable retirement?
· First they should save the deposit for a home.
· Then, having bought a home, they should clear the mortgage as quickly as possible.
· Then, and only then, having paid off the mortgage, should they invest their savings to provide a fund on which to live in retirement.
They should not be taking out a mortgage at 4.5% interest while tying up money in a long term investment. This is a violation of the first rule of investing: Do not borrow to invest! They should pay off their mortgage before investing. It is also a violation of the second rule of investment – stay flexible and don’t tie up your money where you can’t access it.
The current system which encourages people to save through a pension fund while borrowing money from a mortgage lender leads to most of the tax benefit being dissipated through the profits of mortgage lenders and pension fund managers.
The first objective for any individual should be rent-free living in retirement
Leaving aside the distortions caused by tax incentives, what is the difference between someone who reaches retirement with a €200k house and €300k of savings and someone who has €500k of savings and no house?
There is no difference as the person with the house can sell it and be in the same position as the other person. Likewise the person with €500k can buy a house for €200k and reduce their savings to €300k
Other countries do allow house buyers to access their pension schemes to buy their home
The KiwiSaver scheme in New Zealand and the Wohn Rieter in Germany can be withdrawn in full and the proceeds used to buy a home. The person’s own contributions, the employer’s contributions and the State’s tax relief/top-up can all be withdrawn in full.
In the United States and in Canada, home owners can take a loan from their pension savings account to buy a house but they must repay this loan, usually over about 15 years.
The Exchequer’s objective is the same as the individual’s: that the person lives rent-free in retirement and is not dependent on the state for their housing needs.
It doesn’t make any difference to an individual whether they have €200k savings and no house or a €200k house and no savings. But it makes quite a difference to the Exchequer. It is much easier and cheaper to administer and pay a pension than to provide someone with housing.
So the Exchequer should also be prioritising rent-free living for people in retirement.
The extreme solution would be to allow a person’s pension fund to buy their family home up to a maximum of €300k.
Leave all the tax and social welfare rules as they are, but allow the pension fund to take out a loan from their pension fund to buy the family home up to a limit of, say, €300k.
A person reaches retirement with a fund of €500k which is comprised of a home worth €300k and investment of €200k. That is the same as having €500k in cash.
This would make pension funds meaningful for young people. They could see an immediate benefit from maxing their contributions. They would get on the housing ladder much earlier than they would otherwise.
The financial system would be much stronger as there would be no need for 90% Loan to Value mortgages. The maximum LTV could reduced to 80% for a First Time Buyer and 70% for Second and Subsequent Buyers.
The dissipation of tax relief via the profits of mortgage lenders and pension fund managers would be greatly reduced.
The system would need to provide for members who want to buy a home worth more than €300k. This could be achieved by the pension fund owning 60% of the house or else providing a loan to the member to buy a house.
Criticism 1 of this proposal: The wall of money released would just push up house prices
This criticism is appropriate in the dysfunctional housing market we are in at present. Throwing cash at it without building more houses would push up prices.
However, this is a long term proposal and not targeted at solving the present problem. In normal markets, where supply increase to meet demand, this proposal should not have distorting effects. Certainly the distortions would be less than the distortions caused by allowing First Time Buyers 90% mortgages.
Any distorting effects could be reduced or eliminated by reducing the maximum LTVs allowed by normal mortgage lenders.
Access to pension money could be very useful during a period where lenders are unable or unwilling to provide housing finance.
Criticism 2 of this proposal: The state should not be subsidising home ownership.
It’s not clear to me why people object to the state providing tax incentives for pensions but not for home ownership?
The state interferes with the housing market in many ways. They provide social housing at less than market rent. They provide Housing Assistance Payment to people who can’t afford their rent.
So is allowing people a tax break to buy their own home that much of a problem?
It seems to me that it would be better and cheaper for everyone if a person were encouraged to buy their own home than to rely on the state to provide them with housing.
In many European countries, mortgages rates and house purchases are subsidised through different means. For example, the German Bausparen system, provides tax incentives to savers so that the lenders have a source of finance cheaper than it would otherwise have been.
An alternative solution would be to allow the member a limited advance on their pension
A member would be allowed an advance of 100% of their pension fund up to a limit of €20k and a further 50% of any balance over €20k up to a further €30k.
The advance would be secured on the home and repayable in full if the house is sold. It could be borrowed again for the purchase of a second home.
If the house is not sold before retirement, the advance, adjusted for inflation, would be deducted from any tax-free lump sum payable on retirement.
This deals with the tax-incentive criticism because the home owner is getting back just their own money.
It also deals with the wall of money criticism in that the amounts could easily be adjusted downwards in an overheated market and adjusted upwards in a market which was short of funding.
These limits could also be adjusted to meet public policy objectives – for example, the limits could be higher for the purchasers of new homes to encourage house building.
Integrating housing and pensions would make the quasi-mandatory contributions envisaged under Auto-enrolment more acceptable
The proposed auto-enrolment system will hit people who want to buy a house very hard.
· They will be effectively obliged to contribute 6% of their gross salary to a pension fund which would have been very useful towards the deposit
· Employers will be obliged to contribute 6% of the gross salary. In practice, this means that they will not be able to afford salary increases they would otherwise have paid to employees.
If auto-enrolment allows people to get on the housing market quicker, it would be popular.
While this is a long-term plan, now is a very good time to introduce it
· Very low returns on pensions
· High cost of rents
· Very high mortgage rates
Most of the time, it is much more expensive to rent a house than to rent the money to buy that house. But at the moment, with supply/demand imbalance, the cost of renting is far higher.
At the same time, investment returns are low and uncertain so pensions and long-term saving are not particularly attractive.
This is exacerbated in Ireland because while we have a low interest rate environment generally which pushes down investment returns, our banks charge the highest mortgage rates in Europe to non-tracker borrowers. So consumer are being hit with a double whammy – low investment returns and high mortgage rates.