A person should be allowed to borrow the deposit for buying their home from their pension fund

[torblednam]

It works only for members of Defined Contribution schemes and for AVCs in DB schemes.


It could be varied so that a DB scheme provides mortgages to its members but that would be quite complicated.

Brendan

So young public sector workers, who are required to pay a good chunk of their salary into pension without any opt-out, are disadvantaged over their private sector peers?

 

[Sunny]

So young public sector workers, who are required to pay a good chunk of their salary into pension without any opt-out, are disadvantaged over their private sector peers?

No problem. Those young public sector workers can give up their defined benefit pensions and have the same pension arrangements as those in the private sector. There. Problem solved. Actually that would solve a couple of problems at the same time.

 

[torblednam]

No problem. Those young public sector workers can give up their defined benefit pensions and have the same pension arrangements as those in the private sector. There. Problem solved. Actually that would solve a couple of problems at the same time.

And how do they do that?

 

[Sunny]

And how do they do that?

Very simple. Contact their union. Get them to send a letter saying that young public sector workers are looking to end defined benefit pension arrangements and enter into defined contribution pension schemes like their fortunate private sector peers. Address the letter to Pascal Donoghue and Leo Varadkar. You should get a positive response in about the 45 seconds it takes them to open the envelope. The trade union response might be slightly different.....

 

[Brendan Burgess]

There would be no need for that.

Anyone on a defined benefit scheme who wants to benefit from this would have the option of converting from a DB to a DC scheme. Those who do not need this would stay as they are in the DB scheme.

Brendan

 

[Sarenco]

Allowing tax-deferred retirement savings to be used for house purchases is really no different, in principle, to other State subsidies, such as the "help to buy" scheme.

It puts more money into the hands of potential house purchasers and they will simply use that additional money to bid up house prices. In other words, it represents a transfer from tax payers to home owners and is of no net benefit to the subsidised house purchasers.

I really don't think Brendan's proposal is a good idea.

 

[Brendan Burgess]

Hi Sarenco

But by the same token, mortgages are no good to house buyers. They simply use the additional money to bid up house prices. In other words, it's a transfer from the borrowers to the banks and does not benefit them at all.

Allowing tax-deferred retirement savings to be used for house purchases is really no different, in principle, to other State subsidies, such as the "help to buy" scheme.

It's very different. The tax treatment of pensions is unchanged. The tax treatment of house purchase is unchanged.

I can use my pension fund to buy a house and let it to someone else. But I can't let it to myself?

Brendan

 

[Duke of Marmalade]

Allowing tax-deferred retirement savings to be used for house purchases is really no different, in principle, to other State subsidies, such as the "help to buy" scheme.

It puts more money into the hands of potential house purchasers and they will simply use that additional money to bid up house prices. In other words, it represents a transfer from tax payers to home owners and is of no net benefit to the subsidised house purchasers.
idea.

I agree with this. Brendan's proposal seems (inadvertently) to be introducing another policy objective - to help first time buyers.
But there is merit in the suggestion if we approach it from the other direction.
The policy objective is to encourage pension savings but Brendan is right that a main blockage is that young people have house purchase as their priority and this could be a big cause of opt outs.
So the answer is to neutralise that syndrome by making them no worse off (but also no better off) with regard to their house purchase objective as a result of saving for their pension. They should be allowed to withdraw their own contributions. They would keep their state top up but they can't withdraw it. Technically for complete neutrality they could withdraw the employer contributions netted for implicit past tax relief. I don't see the merit in the withdrawal being in the form of a loan, but I stand to be persuaded.

 

[Brendan Burgess]

Hi Duke

You articulate my thoughts very well.

The primary purpose is to encourage people to contribute to their pension funds.

But it will also help people who could not get on the housing ladder to get on the housing ladder.

The proposed quasi-mandatory pension system will force people to divert surplus income to their pensions which they would otherwise have used to buy a home. This is wrong.

I am not sure why people have a problem with allowing generous tax reliefs for pensions but not allowing them for buying a home.

If you park the tax and social welfare distortions, there is no difference in reaching 65 with €500k of savings and no house, and reaching 65 and having a house worth €500k with no savings.

I don't like the idea of allowing people to withdraw money from their pension fund as is allowed in New Zealand and Germany.

If someone builds up a pension fund of €50,000 at age 30, they should keep it. If the fund lends the member the €50,000 the member still has a pension fund. It's just invested in a property instead of in a New Ireland fund.

They repay their pension fund as they do with a normal mortgage.

It could not be introduced suddenly as it would flood the market with money and push up prices without increasing supply. It would have to be phased in.
Year 1 - Maximum loan from pension fund €20,000 and First Time Buyers of New Houses only
to final position
Year 10(?) Anyone can borrow up to 50% of their pension fund up to a maximum of €100k to buy a house or refinance their mortgage.

Brendan

 

[Sunny]

Brendan, there is merit in the idea. I know of plenty of people with large pension pots but stuck in unsuitable housing with a young family trying to save a deposit to trade up. They are not going to prioritise pensions and are contributing the bare minimum to get the employer contribution or they are not saving at all. People are having to save longer and longer to buy property. So until the government fixes the housing market to rid us of our obsession with buying property or we get to a stage where supply = demand and prices are a reasonable multiple of average earnings, pensions will not be a priority of people in their 20's, 30's and early 40's. Auto enrolment won't fix this.

You will meet resistance from all sides though and I would have a real concern about the impact on the property market. However did I read recently that the Government wasn't against another SSIA type scheme so you never know!

 

[T McGibney]

If you park the tax and social welfare distortions, there is no difference in reaching 65 with €500k of savings and no house, and reaching 65 and having a house worth €500k with no savings.

Hi Brendan
There's a massive difference. Savings are liquid and can be utilised in a whole host of ways to generate utility, a house isn't. A house with maintenance issues and/or upgrade needs may actually constitute a liability to a retiree.

It's just invested in a property instead of in a New Ireland fund.

"Invested" doesn't mean having money tied up in an asset that generates zero economic return.

 

[Sarenco]

But by the same token, mortgages are no good to house buyers. They simply use the additional money to bid up house prices. In other words, it's a transfer from the borrowers to the banks and does not benefit them at all.

True but a mortgage is a private arrangement between a lender and a borrower - it's not a State subsidy.

It's very different. The tax treatment of pensions is unchanged. The tax treatment of house purchase is unchanged.

Perhaps I misunderstood but I thought your proposal was made in the context of the auto-enrolment straw man where drawdowns from a pension fund would be tax exempt.

 

[Duke of Marmalade]

But it will also help people who could not get on the housing ladder to get on the housing ladder.
...
I am not sure why people have a problem with allowing generous tax reliefs for pensions but not allowing them for buying a home.

Brendan you are bringing in an additional policy objective here. Helping first time buyers may have considerable merits but the consultation process is likely to see it as a distraction and a separate matter. But yes AE should not leave young people worse off with regard to their primary objective (house purchase) but neither should it assist that objective as that should be the subject of a separate discussion.

In terms of borrowing from your pension fund, I look at this from the aggregate picture of the person's financial balance sheet. You effectively have the person lending to him/herself which is just bookkeeping and seems an unnecessary complication.

 

[Brendan Burgess]

But yes AE should not leave young people worse off with regard to their primary objective (house purchase) but neither should it assist that objective as that should be the subject of a separate discussion.

Hi Duke

That is the whole point.

We should not be discussing one without the other. People should not be thinking of pensions without thinking of their housing.

At the morning session I was the only one to raise the issue apart from a follow up from one of the few young people at the meeting who said "As a young person my first priority is a house"

I understand that it was not raised at all in the afternoon session.

This really is shocking. This should be "Auto enrolment for long term savings in a pension and/or a house"

 

[Duke of Marmalade]

Ok, Boss, your position is clear though the less ambitious objective of "neutrality" rather than "positivity" (toward house purchase) may be the more realistic goal.

 

[Sarenco]

Some other questions for Brendan on his proposal:-

• Would the amount borrowed from the pension fund constitute a taxable distribution or would it be tax-free?
• Would tax relief be available on principal repayments (i.e. are they treated the same as pension contributions)?
• Do the principal repayments count towards the maximum annual contributions that attract tax relief?
• Could a borrower make principal repayments and new pension contributions at the same time?
• What about interest payments – are they tax deductible and do they count towards maximum annual contributions?
• Who determines the interest rate payable on the loan? What about the loan term?
• What happens if the loan isn't repaid in accordance with its terms? Does the full amount outstanding (including accrued interest) become taxable income in the hands of the borrower?
• What happens if the loan isn't used to purchase a PPR? Does this have to happen within a prescribed time period of drawing down the loan?
• What happens if the borrower dies with an outstanding loan from his pension fund?
• Who pays for the costs of documenting and administering the loan (legal, etc.)?

It all just seems very complicated.

Surely if auto-enrolment results in people having less to spend on housing then presumably house prices/rents will adjust accordingly.

 

[Brendan Burgess]

Hi Sarenco

These are really helpful in forcing me to anticipate the questions I will be asked. Keep them coming.

• Would the amount borrowed from the pension fund constitute a taxable distribution or would it be tax-free?

No it would be like any other borrowings. The borrowings would have no tax consequences.

• Would tax relief be available on principal repayments (i.e. are they treated the same as pension contributions)?

No principal repayments would be like the principal repayments on any other loan. They would not attract tax relief.

• Do the principal repayments count towards the maximum annual contributions that attract tax relief?

No.

• Could a borrower make principal repayments and new pension contributions at the same time?

Yes.

• What about interest payments – are they tax deductible and do they count towards maximum annual contributions?

No, they are like interest payments on any other mortgage.
No, they don't count towards your maximum annual contributions as they are not contributions.

• Who determines the interest rate payable on the loan? What about the loan term?

All up for negotiation.
I would think that the interest rate should be something like inflation +2%.

Loan term is interesting. In America, it's 15 years for borrowings from the 401(k).

• What happens if the loan isn't repaid in accordance with its terms? Does the full amount outstanding (including accrued interest) become taxable income in the hands of the borrower?

No. The fund has an asset which is growing. It is secured on the property.

• What happens if the loan isn't used to purchase a PPR? Does this have to happen within a prescribed time period of drawing down the loan?

Absolutely. A bit like the drawdown cheque from the mortgage lender, it would go to the solicitor to pay for a house purchase and nothing else.

• What happens if the borrower dies with an outstanding loan from his pension fund?

What happens a person's DC fund at present?
I presume that the fund goes to the estate?
It would be treated the same way.

Say I have a house worth €200k , an AIB mortgage of €100k. To make it difficult, assume no other investment in the DC fund except a loan to me of €20k,

The house is sold.
AIB gets €100k, leaving €100k
The pension fund loan is paid off.
The estate now has €80k cash and a pension fund with €20k in it.

• Who pays for the costs of documenting and administering the loan (legal, etc.)?

The borrower or his pension fund.

 

[Duke of Marmalade]

Who pays for the costs of documenting and administering the loan (legal, etc.)?

I really don't see what added value this loan to oneself achieves, and it definitely brings complexity and cost. Is it the psychological impact of reminding you that you owe your pension fund some money. If that's all it is, then it is carrying nannyism too far.

 

[Brendan Burgess]

I really don't see what added value this loan to oneself achieves, and it definitely brings complexity and cost.

This brings huge value to the person.

Instead of borrowing money from the bank at 4.5%, they are borrowing it from their own pension fund at maybe around 2%. A 2% which they are benefiting from.

It is encouraging young people to contribute to their pensions when they would otherwise not be inclined to do so.

And it will enable some people to buy a house, who could not otherwise buy a house.

This is already happening but in an indirect way

A person has a pension fund worth say €200k.
The same person has a mortgage of €200k.
So they are borrowing at 4.5% to invest in a pension fund which is paying very little.
In many cases, the pension fund is just buying mortgage backed securities from the same bank.

It's like going into Bank of Ireland and taking out a loan at 4.5% only to cross the road to AIB and put in in your current account.

Brendan

 

[Sarenco]

Hi Brendan

If I understand you correctly defaulting on a loan from my pension does not crystallise a tax liability under your proposal, right?

So why would I ever repay the loan? I'm hardly going to enforce a loan against myself so I've effectively achieved a tax-free distribution from my pension fund, all contributions to which were originally relieved of tax.

Apparently I can even continue to make contributions while the loan from my pension to myself remains outstanding so I'll be in a position to trade up to a bigger place in a few years time. All generously subsidised by the tax payer. Nice.