Brendan Burgess
Founder
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In today's paper based on my Pre-Budget submission
www.independent.ie
In July, the Economic and Social Research Institute published research on behalf of the Pensions Council which looked at the implications of declining home ownership levels for the adequacy of pensions in retirement. At present, 90% of retired people own their own homes. The ESRI projects that, on current trends, only 50% of people who are currently aged between 25 and 34, will own their own homes when they retire. That means that 50% of these people will be renting either from the state or from private landlords.
Home ownership in retirement is one of the best guarantors of a comfortable retirement. Not only does it dramatically reduce a person’s housing costs, but it also means that they have a valuable asset against which they can borrow if they need to supplement their income.
The ESRI paper considered the policy options facing the government. They concluded that people will have to either contribute more to their pensions to ensure that they have enough to pay ever rising rents or else, the government will have to subsidise rents.
But the paper did not look at the much more obvious solution which is the subject of my Pre-Budget submission this year. Saving the €30,000 or so for the deposit is the biggest barrier to getting on the housing ladder. I propose that the first-time buyer should be allowed to borrow this from their own pension fund.
It is important to note that they will repay this money to their pension fund, so they will not be reducing its overall size. They will pay it back either from their income or when they sell their home to trade up. And if they haven’t paid it back by the time they retire, the loan will be deducted from their tax-free lump-sum. It is odd that we allow 65-year-olds to access a big lump-sum on retirement when they probably don’t need it, yet we do not allow younger people to access the money when they do need it.
Typically, people in their twenties and thirties have little interest in pensions as they will see no benefit for at least 30 years. Their pressing concern is how to get on the housing ladder. If they see that contributing to a pension will help them get on the housing ladder, they will be much more enthusiastic about contributing.
Pensions and home ownership are two sides of the same coin. They work together to provide long-term financial security. A person will not have a comfortable old age without both.
But it’s not just about retirement. In general, mortgage repayments are lower than rent. The earlier a person gets on the housing ladder, the lower their housing costs will be during their working life. This will leave them with more disposable income to contribute to their pension fund. It’s very likely that someone who buys their home in their 20s will actually end up not only with a mortgage-free home in retirement, but also with a bigger pension fund than someone who has been spending money on rent all their working life.
The government suffers from compartmentalised thinking on this issue. The Department of Social Welfare deals with pensions. The Department of Housing deals with housing. They operate in isolation from each other. The Department of Social Welfare is introducing an auto-enrolment pension scheme which will effectively force employees to contribute 8% of their after-tax income to a pension fund. This might be great for achieving that Department’s strategic objective of improved pension coverage. But it will make it even more difficult for people to accumulate the deposit and will further reduce home ownership levels.
Allowing first-time buyers to borrow the deposit will not solve the housing problem on its own. It is only one part of the solution. The government must simultaneously focus on encouraging more homes to be built and on bringing down the cost of housing to first-time buyers.
This is not a short-term fix for the current problem. It is a long-term reform of the pensions and housing system. The supply of mortgage finance goes through booms and busts. At the moment, Irish banks have plenty of money to lend to house buyers. But this cycle will change, and from time to time, we will face shortages of mortgage finance. When this happens, house building slows down because of the lack of house buyers. Allowing people to borrow from their pension funds would smooth the total supply of finance so we would not see such pronounced booms and bust in housing finance and house building.
Singapore boosted home ownership from 30% to 90% of the population in just 20 years. In the same period, they doubled their housing stock. Integrating pensions and home ownership was a key component of that strategy.
We are going in the opposite direction to Singapore. The prospect of 50% of our retired citizens depending on the benevolence of the state or on the benevolence of private landlords for a comfortable retirement is frightening. We should fix this problem now.
Brendan Burgess is the founder of Askaboutmoney.com, The Irish Consumer Forum.
It is time to integrate home ownership into our pension savings schemes
In July, the Economic and Social Research Institute published research on behalf of the Pensions Council which looked at the implications of declining home ownership levels for the adequacy of pensions in retirement.
www.independent.ie
In July, the Economic and Social Research Institute published research on behalf of the Pensions Council which looked at the implications of declining home ownership levels for the adequacy of pensions in retirement. At present, 90% of retired people own their own homes. The ESRI projects that, on current trends, only 50% of people who are currently aged between 25 and 34, will own their own homes when they retire. That means that 50% of these people will be renting either from the state or from private landlords.
Home ownership in retirement is one of the best guarantors of a comfortable retirement. Not only does it dramatically reduce a person’s housing costs, but it also means that they have a valuable asset against which they can borrow if they need to supplement their income.
The ESRI paper considered the policy options facing the government. They concluded that people will have to either contribute more to their pensions to ensure that they have enough to pay ever rising rents or else, the government will have to subsidise rents.
But the paper did not look at the much more obvious solution which is the subject of my Pre-Budget submission this year. Saving the €30,000 or so for the deposit is the biggest barrier to getting on the housing ladder. I propose that the first-time buyer should be allowed to borrow this from their own pension fund.
It is important to note that they will repay this money to their pension fund, so they will not be reducing its overall size. They will pay it back either from their income or when they sell their home to trade up. And if they haven’t paid it back by the time they retire, the loan will be deducted from their tax-free lump-sum. It is odd that we allow 65-year-olds to access a big lump-sum on retirement when they probably don’t need it, yet we do not allow younger people to access the money when they do need it.
Typically, people in their twenties and thirties have little interest in pensions as they will see no benefit for at least 30 years. Their pressing concern is how to get on the housing ladder. If they see that contributing to a pension will help them get on the housing ladder, they will be much more enthusiastic about contributing.
Pensions and home ownership are two sides of the same coin. They work together to provide long-term financial security. A person will not have a comfortable old age without both.
But it’s not just about retirement. In general, mortgage repayments are lower than rent. The earlier a person gets on the housing ladder, the lower their housing costs will be during their working life. This will leave them with more disposable income to contribute to their pension fund. It’s very likely that someone who buys their home in their 20s will actually end up not only with a mortgage-free home in retirement, but also with a bigger pension fund than someone who has been spending money on rent all their working life.
The government suffers from compartmentalised thinking on this issue. The Department of Social Welfare deals with pensions. The Department of Housing deals with housing. They operate in isolation from each other. The Department of Social Welfare is introducing an auto-enrolment pension scheme which will effectively force employees to contribute 8% of their after-tax income to a pension fund. This might be great for achieving that Department’s strategic objective of improved pension coverage. But it will make it even more difficult for people to accumulate the deposit and will further reduce home ownership levels.
Allowing first-time buyers to borrow the deposit will not solve the housing problem on its own. It is only one part of the solution. The government must simultaneously focus on encouraging more homes to be built and on bringing down the cost of housing to first-time buyers.
This is not a short-term fix for the current problem. It is a long-term reform of the pensions and housing system. The supply of mortgage finance goes through booms and busts. At the moment, Irish banks have plenty of money to lend to house buyers. But this cycle will change, and from time to time, we will face shortages of mortgage finance. When this happens, house building slows down because of the lack of house buyers. Allowing people to borrow from their pension funds would smooth the total supply of finance so we would not see such pronounced booms and bust in housing finance and house building.
Singapore boosted home ownership from 30% to 90% of the population in just 20 years. In the same period, they doubled their housing stock. Integrating pensions and home ownership was a key component of that strategy.
We are going in the opposite direction to Singapore. The prospect of 50% of our retired citizens depending on the benevolence of the state or on the benevolence of private landlords for a comfortable retirement is frightening. We should fix this problem now.
Brendan Burgess is the founder of Askaboutmoney.com, The Irish Consumer Forum.
