Revised proposal: A member should be allowed borrow their own contributions to buy a house

Discussion in 'The Government's Pension Consultations' started by Brendan Burgess, 6 Oct 2018.

  1. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    36,007
    Last edited: 6 Oct 2018
    I took the criticisms in this thread on board and have revised my proposal to address them all.

    In particular the Duke's suggestion
    Principles
    • A person should be free to choose whether they want to prioritise saving for apension or saving to buy a home.
    • The auto-enrolment system will effectively force people to prioritise a pension over buying a home
    • At best it will delay people from buying their own home. At worst it will prevent some marginal cases from ever buying a home.
    Assumption about the auto-enrolment system.

    This is based on the understanding that an employee contributes 6% of their salary, the employer matches that with a further 6% and Revenue tops it up by 2%. I also assume that the straw man proposal will be changed so that, on retirement, the pension will be taxed in the same way as all other pensions.

    Proposal: A first-time buyer should be allowed to take an advance of the current value of their own contributions but not the employer's contributions or the Revenue top-up
    • Up to a maximum of €50,000
    • For the purchase of their own home
    • Probably interest-free
    • Repayment-free
    • It would be a charge on the home and would be repaid to the pension fund if the home is sold
    If the home is not sold before retirement, it would be deducted from any net distribution on retirement. For example, if the person's fund is €800k on retirement, and they are entitled to €200k tax-free, then the €50k advance would be deducted from the €200k and they would receive €150k.

    Advantages

    • It encourages every employee to save for the long-term
    • It would reduce the amount of people opting out
    • It does not force them to prioritise a pension over buying their own home
    • They never stop contributing to their pension fund
    • It gives no tax advantage to home buyers
    • It does not throw a wall of money at the housing market
     
    Last edited: 6 Oct 2018
  2. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    36,007
    Last edited: 6 Oct 2018
    Comparisons with other countries

    The New Zealand KiwiSaver account allows the member to withdraw the entire amount for the purchase of a first-time house. This has all the disadvantages set out in the other thread but also results in around 40% of people opting out of the scheme after they buy their home.

    The German Wohn Rieter likewise allows the full fund to be used for the purchase of a house. However, the Wohn Rieter applies to only some low paid employees.
    I understand that the tax top-up on the employees' contributions is much smaller than in New Zealand or what is proposed under the Auto Enrolment Straw Man for Ireland.

    In the USA, a member can borrow up to 50% of their 401(K) up to a maximum of $50,000 but must repay it over 15 years.

    In Canada, there is a Home Buyers Plan where a member can borrow up to $25,000 from their RRSP but must be repaid after 2 years grace over the following 15 years.
     
    Last edited: 6 Oct 2018
  3. Duke of Marmalade

    Duke of Marmalade Frequent Poster

    Posts:
    2,221
    I presume by this you mean only the employee's contributions, possibly with accrued growth.
    I try to see where expressing this as an advance (loan?) is different from just a straight withdrawal. The difference shows up when we consider the tax free lump sum at retirement. The loan approach reduces the TFLS whereas the withdrawal approach leaves it intact. From this narrow perspective the employee is being disadvantaged by using her AE to fund a deposit. She would be better off saving outside the AE for her deposit as this would not compromise her ultimate TFLS. On the other hand of course she would benefit from the employer's and State top up so on balance she would be advised to avail of the AE even if her priority is buying a home.

    I don't think it makes sense to force the repayment of the advance on the sale of the home. That keeps her firmly on the first rung of the housing ladder.
     
  4. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    36,007
    Hi Duke
    Yes. I have amended it as follows:
    Proposal: A first-time buyer should be allowed to take an advance of the current value of their own contributions but not the employer's contributions or the Revenue top-up
     
  5. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    36,007
    Hi Duke

    The straw man proposals keep her completely off the housing ladder. She must put the 6% into the pension fund and can't get any benefit from her until she is 65.

    So my revised proposal is an improvement on this. She can get onto the housing ladder and in the meantime hope that price rises and her non-pension savings allow her to get the deposit when she wants to trade up.

    I don't like her being allowed to simply withdraw the money. She got a tax-break on the basis of her contribution. So it's important that this is regarded as a loan from the pension fund.

    In America and Canada they require the loan to be repaid. But I don't know if pensions are mandatory over there.

    To allow her trade up...
    She could be allowed to borrow the money again for a second or subsequent purchase of a family home.

    I limited it to FTBs to make it as narrow as possible to make it acceptable.

    Brendan
     
  6. RETIRED2017

    RETIRED2017 Frequent Poster

    Posts:
    526
    Last edited: 6 Oct 2018
    If you leave the Employers cont in it may work better for public and private sector workers to take an advance on there pension,
    I have not put any thought into it we are putting pressure on public service wages unless we find a way of including them
    Just have a look back at the post on hear on garda wages ,
    Don't forget public servants will see there levy turned into a contribution from Jan 2019,
     
    Last edited: 6 Oct 2018
  7. Duke of Marmalade

    Duke of Marmalade Frequent Poster

    Posts:
    2,221
    Well of course that answers my objection. I see the merit in your suggestion now, and it does have the psychological effect of reminding folk that they have "borrowed" from their pension, a reminder to remedy that situation in due course.
     
  8. Sarenco

    Sarenco Frequent Poster

    Posts:
    5,140
    I hear there’s chatter that the Government are considering launching an SSIA-type scheme to allow people to save for a deposit for a home.

    I don’t think that’s a particularly good idea (it would inevitably be inflationary) but it would meet the objective of Brendan’s proposal, with a lot less complexity.
     
  9. Duke of Marmalade

    Duke of Marmalade Frequent Poster

    Posts:
    2,221
    Probably being pedantic here. But Brendan has altered his objective in this context to try and ensure that the house purchase priority does not obstruct the AE objectives. He may well have a separate objective to help FTBs but he is not addressing that here. A separate SSIA scheme to help FTBs would most certainly compete with the AE initiative.

    I don't think his latest proposal is particularly complex.
     
  10. Sarenco

    Sarenco Frequent Poster

    Posts:
    5,140
    That’s a fair point re Brendan’s changed objective Duke.

    The ability to draw down up to €50k from a pension pot, tax-free, before retirement age would obviously be very attractive but I don’t see how this constitutes a loan in any meaningful sense. There is obviously no obligation on anybody to take a TFLS at retirement or to contribute anything further to a pension having drawn down the advance benefit.

    If somebody wants to prioritize buying a house (or anything else for that matter) over saving for retirement they can simply opt of AE - it won’t be mandatory.
     
  11. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    36,007
    Hi Sarenco

    But that is the point.

    If I prioritise the deposit over my pension, I lose the tax relief and the employer's matching contribution.

    That is wrong. I should not be forced or quasi-forced to prioritise a pension.

    With my proposal, I can choose which to prioritise. And if I never buy a house, I am at least building up a pension.

    Brendan
     
    Duke of Marmalade likes this.
  12. Sarenco

    Sarenco Frequent Poster

    Posts:
    5,140
    Fair enough Brendan, I think we’ll just have to agree to disagree on this one.

    I think it is entirely appropriate for the State to defer taxing an element of income to encourage a taxpayer to provide for his old age. However, I don’t think it is sensible for the State to give tax breaks to people to buy houses for the reasons already articulated.
     
  13. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    36,007
    But what better way is there to provide for your old age than to provide for your housing needs?
     
  14. Sarenco

    Sarenco Frequent Poster

    Posts:
    5,140
    Well, you obviously don’t need to own a house to provide for your housing needs.

    In any event, I don’t believe that providing tax breaks to house purchasers actually helps them because of the inflationary effect. The experience in New Zealand is instructive in this regard.
     
  15. Duke of Marmalade

    Duke of Marmalade Frequent Poster

    Posts:
    2,221
    Last edited: 7 Oct 2018
    It's not a loan, it is an advance. It is deducted from net benefits. The concept of "defaulting" only arises if the net distribution from the combination of this advance plus the employer's contribution plus the state top-up exceeded the advance. A very unlikely possibility. To simplify the example let us assume tax is flat at 25% and there is no TLFS and there is no investment growth.

    So assume a €30K advance. The fund net of the advance consists of €10k state top up plus €30k employer contribution. At retirement the advance is assumed paid back giving a total fund of €70k. A withdrawal of €40K is then deemed to be made so that net of the 25% tax the €30K advance is funded and the retirement fund now amounts to €30K, which is merely the employer's contribution. Or in other words the state top up has been returned. So in principle there has been no tax advantage in using the pension fund to save for a house purchase. Of course the TFLS confuses the picture but that can be neutralised by not allowing 25% of the advance to contribute towards the TFLS.
     
    Last edited: 7 Oct 2018
  16. Brendan Burgess

    Brendan Burgess Founder

    Posts:
    36,007
    Exactly!
     
  17. Sarenco

    Sarenco Frequent Poster

    Posts:
    5,140
    I hadn’t appreciated that there would be a deemed repayment of the advance, followed immediately by a deemed (taxable) distribution of the same amount at some point in the future.

    Would this be deemed to have taken place on the earlier of reaching 55 (the earliest age that an occupational pension can be drawn down) or the demise of the individual concerned?

    Presumably, as things stand, that deemed distribution would be liable to USC and PRSI, which would not have been relieved on contributions.
     
  18. Duke of Marmalade

    Duke of Marmalade Frequent Poster

    Posts:
    2,221
    Last edited: 7 Oct 2018
    I admit that it is not without complications. Would it be possible, for example, to pay back the advance before retirement, in which case would it enjoy the 25% TFLS?

    Personally I would prefer that the employee can simply withdraw the value of her contributions for FTB and that the associated State top up (i.e. 1/3rd of the amount withdrawn) would be returned to Revenue. Whilst financially neutral this would actually be psychologically a disincentive to withdraw for the purpose of house purchase as you would see that you are giving up the State top-ups. Though I suppose you could sweeten the pill by allowing that on any future return of the amount withdrawn the State top-up would also be added back to the pension fund.

    I am not seeing any huge advantage in casting it as an advance/loan, as whilst not overly complex per se, it does seem complicated if not impossible to remove all the wrinkles and anomalies in the overall tax treatment.
     
    Last edited: 7 Oct 2018
  19. Sarenco

    Sarenco Frequent Poster

    Posts:
    5,140
    Ok but how would you treat investment gains/losses?
     
  20. Duke of Marmalade

    Duke of Marmalade Frequent Poster

    Posts:
    2,221
    They would withdraw the value of their units at the time of withdrawal, or put another way they would withdraw 3/7ths of the total value of units in the fund and 1/7th would be returned to Revenue.
     
    Sarenco likes this.