Brendan Burgess
Founder
- Messages
- 53,218
This is the outline of the submission I will be making to the consultation on auto enrollment.
A person in their 20s or 30s faces a double savings burden. Do they contribute to a pension or do they save up for the deposit on a house?
For some people it's a question of timing. The requirement to contribute to a pension delays them from getting on the housing ladder. For many on low to average incomes, they will not be able to afford both and a mandatory pension system will prevent them from getting on the housing ladder.
Of course, the absolute priority should be to get the deposit for the house. And when you have bought the house and have reduced the mortgage to a comfortable level, then you will be able to contribute to a pension fund. So there should be no quasi-mandatory contributions to pension schemes for people who do not yet own a house.
But this double burden has been made artificial by our pension laws and tax laws. And these need to be changed to integrate pensions and home ownership.
And it’s a very simple change I would propose. Allow people to borrow the deposit for their family home from their pension fund.
And this would be in the form of a second mortgage on the home.
For the borrower it is a normal mortgage secured on their home and which must be repaid.
For the pension fund it is a normal investment on which they will be getting a return.
Say I want to buy a house for €100,000 – I would borrow €80,000 from a bank and borrow the €20,000 from my pension fund.
The pension fund would charge interest at something like ECB +2%, so from the pension fund point of view, it is an investment just like any other investment.
If the person wants to sell the house later on, they have to use the proceeds first to repay the mortgage to the bank and then the pension fund mortgage.
This has huge advantages
· First and foremost, it would be a huge motivator to young people to contribute to their pension fund. They would see that there would be a benefit from contributing to their pension fund in the near future. Compare this to the present situation where they have to wait until they are 65 to see a benefit.
· Secondly, it would be much cheaper for the borrower. They would be paying their pension fund ECB +2% rather than the outrageous mortgage rates being charged by Irish lenders at the moment.
· Thirdly, it would actually makes the banks more secure. The maximum Loan to Value could be reduced to 80%. This would enhance the stability of the banking system.
The Kiwi Saver system allows the person to take their entire pension fund early to buy a home!
In New Zealand, contributing to the Kiwi Saver pension scheme is quasi mandatory. But after three years of contributions, the pension fund holder can withdraw the entire amount tax-free to use towards buying a house.
This goes much further than I am suggesting. Because it depletes their pension fund.
A person in their 20s or 30s faces a double savings burden. Do they contribute to a pension or do they save up for the deposit on a house?
For some people it's a question of timing. The requirement to contribute to a pension delays them from getting on the housing ladder. For many on low to average incomes, they will not be able to afford both and a mandatory pension system will prevent them from getting on the housing ladder.
Of course, the absolute priority should be to get the deposit for the house. And when you have bought the house and have reduced the mortgage to a comfortable level, then you will be able to contribute to a pension fund. So there should be no quasi-mandatory contributions to pension schemes for people who do not yet own a house.
But this double burden has been made artificial by our pension laws and tax laws. And these need to be changed to integrate pensions and home ownership.
And it’s a very simple change I would propose. Allow people to borrow the deposit for their family home from their pension fund.
And this would be in the form of a second mortgage on the home.
For the borrower it is a normal mortgage secured on their home and which must be repaid.
For the pension fund it is a normal investment on which they will be getting a return.
Say I want to buy a house for €100,000 – I would borrow €80,000 from a bank and borrow the €20,000 from my pension fund.
The pension fund would charge interest at something like ECB +2%, so from the pension fund point of view, it is an investment just like any other investment.
If the person wants to sell the house later on, they have to use the proceeds first to repay the mortgage to the bank and then the pension fund mortgage.
This has huge advantages
· First and foremost, it would be a huge motivator to young people to contribute to their pension fund. They would see that there would be a benefit from contributing to their pension fund in the near future. Compare this to the present situation where they have to wait until they are 65 to see a benefit.
· Secondly, it would be much cheaper for the borrower. They would be paying their pension fund ECB +2% rather than the outrageous mortgage rates being charged by Irish lenders at the moment.
· Thirdly, it would actually makes the banks more secure. The maximum Loan to Value could be reduced to 80%. This would enhance the stability of the banking system.
The Kiwi Saver system allows the person to take their entire pension fund early to buy a home!
In New Zealand, contributing to the Kiwi Saver pension scheme is quasi mandatory. But after three years of contributions, the pension fund holder can withdraw the entire amount tax-free to use towards buying a house.
This goes much further than I am suggesting. Because it depletes their pension fund.
Last edited: