Caymanians will soon be allowed to withdraw up to $35,000 from their private sector retirement plans to purchase a home, a piece of property, or pay off an existing home loan.
However, there’s a small catch.
Home buyers that do not currently own a property who make withdrawals from their pension accounts to help meet a down payment for their new property would have to pay the full amount back into the pension fund if they sell the home prior to retirement.
According to the amendments: “Where before attaining the normal retirement age, a person sells the dwelling unit purchased or constructed or the residential land purchase through the use of a deposit … the person shall, upon completion of the sale return the original amount of deposit or 10 per cent of the fair market value of the dwelling unit or residential land, whichever is greater, back to his pension plan account.”
Not paying back the pension contribution in such a case could lead to a $20,000 fine or two years imprisonment upon conviction.
If the property or land purchased is kept until after retirement age, the money withdrawn would not have to be given back when and if the property is sold.
The bill also requires slightly higher contributions to the pension plan if a person makes a withdrawal under the amended law. According to the amendments: “In addition to the amount the person is required to contribute to a pension plan … [the person shall] contribute an additional amount of 1 per cent of his earnings to the pension plan from the month immediately following the date of the issuance of the cheque [for the down payment, property purchase or mortgage payoff].”
The added 1 per cent payment to the person’s retirement fund, which would raise the typical 5 per cent pension contribution to 6 per cent, would continue for either 10 years from the date, until the total amount of contributions equal the amount withdrawn, or until the person attains retirement age – whichever comes first.
It would also be an offence under the amended pensions law for an employee making a withdrawal not to pay the additional 1 per cent contribution.
The person’s employer is not required to make any additional pension contributions above and beyond the legally mandated 5 per cent of salary if their employee decides to make a withdrawal from their retirement account.
The lawmaker who initially proposed the pension for property exchange, Ellio Solomon of George Town, admittedly didn’t get everything he proposed as part of the pension-for-property swap last year. However, Mr. Solomon said he thought the compromise reached in the end was “reasonable” and would increase home ownership among Caymanians.
“I believe that the Cabinet wanted to try to strike a balance … in terms of being able to offer benefits to the people and at the same time mitigating a bit of the risk [to the pension plan],” Mr. Solomon said. “There’s no such thing as a free lunch.”
Government pension advisers have questioned what would occur if a significant amount of money was withdrawn from an individual’s pension scheme under Mr. Solomon’s proposal and not paid back.
Mr. Solomon said it was unlikely a 1 per cent additional pension contribution for 10 years would make up the withdrawn funds anyway, unless the person making the withdrawal was earning quite a bit of money and wanted to take only a small amount from their pension.
“No one making that 1 per cent contribution is going to fully pay back the money [taken from the pension plan],” Mr. Solomon said. “I think it was an even compromise.”
Civil servants left out
Changes to the pensions law by legislators only applied to the National Pensions Law, which governs private sector retirement plans.
The civil servants pension schemes, governed under the Public Service Pensions Law, were not included in the legal changes. Therefore, Caymanian civil servants will not be able to make withdrawals from their accounts for the purchase of a first time home or land.
Mr. Solomon is hopeful lawmakers can change that in future legislation
“I have always wanted this for all employees and that would include civil servants,” he said. “I intend to do so.”