Workers should be able to borrow from their pension to fund their first home purchase as part of the Government’s new auto-enrolment scheme, a pensions expert has said, adding that the net cost of the scheme to employees may be greater than expected.
Speaking at the Society of Actuaries in Ireland president’s conference on Thursday, Roma Burke, partner at Lane Clark and Peacock, said the Government should allow savers to access a part of their pension funds to deal with major lifetime milestones, such as home purchase.
Auto-enrolment is due to be introduced in Ireland from 2022 , but the Government has shown a reluctance to allow early drawdown in the scheme. In the UK, policymakers are set to trial an early access approach to the Nest auto-enrolment scheme, which would see pension contributions shared between a pension pot and a liquid savings vehicle.
However, Ms Burke is suggesting something different for Ireland; instead of drawing down money from your pension fund, you just borrow from it.
No tax implications
“This approach could be considered an inter-life approach – a younger me is borrowing from an older me to help me with my key life milestones and my aspirations,” she said, adding that this approach would have no tax implications and people would be encouraged to top-up their pension again because they themselves are the lender.
Ms Burke also queried how affordable auto enrolment will actually be for people. It has been proposed that people will contribute 6 per cent of their gross earnings once the scheme is fully ramped up, but as Ms Burke pointed out, because of the way the system is proposed to work, this 6 per cent has to come out of net pay, not gross pay.
Single person
So, a single person earning the average full-time wage of just over €46,000 will have to make a contribution of 6 per cent a year on their gross income, of €53 a week. However, as this is taken out of their net take home pay of € 668 a week, their contribution is actually closer to 8 per cent of their net take-home pay. And as Ms Burke points out, this increases to over 9 per cent for people earning the maximum under the scheme of €75,000.
“There is no middle ground, after the initial run-in period it will be the full contribution or nothing. There does not seem to be any supports for those who might like to save, but save less,” she said.
She also queried the proposed tax relief of 25 per cent which would be given to people opting into auto-enrolment.
“This means again for the average full-time worker, he or she will pay tax at 40 per cent but only effectively claim relief at 25 per cent, significantly less than under the current system,” she said.
Lending for housing
Pension funds should also consider lending directly to putative homebuyers, Ms Burke said, adding that such a move could be the “logical next step in a diversification of how pension funds invest their money”.
Noting that approved retirement fund (ARF) holders who have a built up a lump of money are looking for long term predictable income over a period of 25 or 30 years, Ms Burke suggests a service that would match up those who want to loan money for home ownership with those who want to borrow to buy their home.
“A type of double-pooled scheme where money is pooled and loans are also pooled,” she said.
