Using pension pots to buy homes makes sense - and will boost enrolment rate
Large numbers of Irish people are not saving for retirement, and the Government is taking the very sensible step of ensuring that, from 2022, workers are automatically enrolled into a pension plan.
Anyone who wishes to opt out will be able to do so, but the hope is that most people will be gently nudged onto a path towards a decent standard of living in retirement.
To minimise the numbers opting out, people must be convinced that pensions are genuinely attractive. This is something which, despite real and valuable incentives, pension providers, employers and governments globally have had very limited success with to date.
Low interest and engagement with pensions is caused partly by our instinct to think mainly in the short term - an evolutionary aspect of our humanity that cannot be altered.
However it is also related to the perfectly rational desire of people in their 20s and early 30s to prioritise getting a house deposit over saving for retirement. The risk is that, whatever incentives are offered, many of these individuals will opt out of auto-enrolment - and may get comfortable being opted out.
But what if we allowed people to make a withdrawal, tax-free, from their defined contribution (DC) pension at any time - if their demonstrated intent was to use the money to buy a first home?
It may be argued that this will mean less money in the pension for the longer run. However, the objective of a pension is not the pension in itself: it is financial adequacy in retirement. Enabling people to own their own homes is fully consistent with that aim.
A rather more serious objection is presented by the current state of the Irish housing market, within which demand is far outpacing supply: a sudden injection of new cash from pension plans could drive prices up.
Now may indeed not be the best time to introduce this facility. However, auto-enrolment is not due until 2022, and it must be hoped that by that time housing supply and demand will be more in balance.
To address concerns of pension cash driving up house prices, we suggest the withdrawal should be capped at 25pc of the individual's accumulated pension pot (which for someone in their 20s and 30s is unlikely to be that large). The withdrawal should be offset against the individual's eventual retirement lump sum, thus ensuring that the Exchequer makes no significant tax loss from the measure (holders of DC pension plans are entitled to a lump sum of at least 25pc at retirement - the withdrawal would simply allow an individual to bring a small amount of that forward).
The amounts involved are unlikely to be huge: an individual with 10pc pension contributions from a €35,000 annual salary for 10 years would only have contributed €35,000. Even if we allow for investment growth, it is likely that the level of a 25pc withdrawal would sit in the €10,000-€17,000 range. Nevertheless, such a withdrawal would probably lend significant help towards supplying a house deposit, without completely covering it.
Link pensions (a subject people find dull) to the challenge of buying a home (a subject people are obsessed by) and you have a way of getting young people interested in, and enthused by, the prospect of being in a pension - with consequent enthusiasm for auto-enrolment.
This kind of enthusiasm is needed to avoid a situation where many of us will become economically dependent on an unsustainable State pension as the population ages.
- Danny Mansergh is the head of member communications at Mercer in Ireland