Make pension fund available to creditors

I suggested this at the LRC conference on Personal Debt. It was something which they had not considered, but seems very obvious to me.

I have always recommended that people need to take a global view of their finances, rather than compartmentalise different aspects.

People should not start a pension until they have bought a home. People should get their mortgage down to a comfortable level before starting a pension.

If pension funds are excluded from debt settlement, then people could stuff their pensions in advance of getting into financial trouble.

Someone at the conference was horrified at the idea of touching someone's pension. But the reality is that someone who is availing of debt settlement, is getting a great deal. They are getting a fresh start. They have to pay for it.

Brendan

I took an early retirement deal a while ago and the impression I got (on a pre-retirement course) was that the government was anxious that the pension funds were left intact for early retirees as they often pass away and leave widows and orphans behind. A healthy personal pension can save the government on having to pay (means tested) social welfare payments to destitute widows and orphans in certain circumstances.

Secondly, I would worry about a possible 'moral hazard' type problem if pensions could be used to settle personal debts. I'm just thinking that if the personal pension could of being used to secure loans in the past, the lending institutions may have even loaned more money in the past and we may have had an even bigger credit bubble and perhaps even greater house prices. Just a thought....

I like the idea that massive pension funds built up largely to avail of tax relief rather than real retirement planning would be available to creditors. I dislike the idea that people with modest funds would find themselves dependant on social welfare in their retirement. This would effectively be a state subsidy to the creditors in the long term.

I worry that this might create a 'vicious circle' escalation effect, like the way that 100% mortgages inflated property prices. If lenders know that they can get at the pension fund at the end of the day, they will lend more money, with less security.

Brendan said:

People should not start a pension until they have bought a home. People should get their mortgage down to a comfortable level before starting a pension

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I understand and partially agree with the rest of your post, but I don't understand the bit. Why do you see a correlation between the two? I started my pension at 23 and bought my apartment at 25 and I'm failing to see the problem.

markpb said:

I understand and partially agree with the rest of your post, but I don't understand the bit. Why do you see a correlation between the two? I started my pension at 23 and bought my apartment at 25 and I'm failing to see the problem.

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Hi Mark

Because you would have a bigger deposit, if you had not started a pension. And you would have a lower mortgage if you had been paying it off instead of contributing to a pension. It's just a different vehicle for savings, but it's still saving.

Complainer said:

I like the idea that massive pension funds built up largely to avail of tax relief rather than real retirement planning would be available to creditors. I dislike the idea that people with modest funds would find themselves dependant on social welfare in their retirement. This would effectively be a state subsidy to the creditors in the long term.

I worry that this might create a 'vicious circle' escalation effect, like the way that 100% mortgages inflated property prices. If lenders know that they can get at the pension fund at the end of the day, they will lend more money, with less security.

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I suspect that people with "massive pension funds" don't have problems with negative equity.

It's not a state subsidy to creditors. It's bringing forward a state subsidy to the taxpayer/debtor.

The side effects would have to be watched and so these should be a very temporary measure.

Another option would be to give a large creditor e.g. a mortgage provider a charge over the tax-free lump-sum.

This ties in with Complainer's reluctance to cash in modest pension schemes.

Brendan said:

I suspect that people with "massive pension funds" don't have problems with negative equity.

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Not so sure about that at all - start out with McNamara/Carroll/Dunne etc and work your way down from there.

Brendan said:

The side effects would have to be watched and so these should be a very temporary measure.

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Not sure how you can do anything 'temporary' with pensions, given their long term structure. What do you mean by temporary?

Hi Complainer

I think that the bulk of the negative equity problem is with people who bought their first home in the last 5 or 6 years using 100% mortgages. These people generally don't have huge pension funds.

There will be some people with huge pension funds who are in negative equity. But I would not restrict the system to them.

In general, I would prefer not to allow people access to their pension funds until they retire. So I would close off this access when the current problem is generally resolved. In other words, I would not allow new people access it.

The rules would have to be changed for those who have accessed their pensions early.

Brendan