Since their inception, legal changes that allow Caymanians working in the private sector to invest a portion of their retirement savings toward purchasing a home or land has led to more than $10 million in direct investment for the local real estate market.
The investment scheme became part of the National Pensions Law in late 2011, following the initial proposal made via a private members motion in the Legislative Assembly from former MLAs Ellio Solomon and Dwayne Seymour.
Figures published by the National Pensions Office indicate that since November 2011, 508 people were approved to withdraw up to $35,000 each in their pension funds to put toward various property-related purchases.
A total of 297 applicants were approved to use the funds to purchase a dwelling. According to legal restrictions, up to $35,000 can be withdrawn for a down payment on a primary dwelling.
Those funds have totaled $5.7 million spent since late 2011, pensions office figures revealed, averaging out to about $19,000 per down payment.
Another 107 applications for homeowners seeking to pay off the remainder of their mortgage using pension funds were approved, leading to another $2.85 million investment.
Sixty applicants were approved to withdraw pension funds in order to construct a dwelling, leading to some $1.1 million in investment, and another 40 had applications approved to purchase undeveloped land, leading to $620,389.53 in investment.
Mr. Solomon said Wednesday that the direct investment figure falls short of quantifying the overall impact of the pension fund investments to the economy.
“[It] does not illustrate the total monies issued by the banks, nor does it reflect the total spend in the economy as a result of the monies passing from hand to hand before being consumed by taxes, a process known as the multiplier effect,” Mr. Solomon said. “Because the Cayman Islands is a low tax jurisdiction, the multiplier effect in my opinion is probably around five.
“So, the total amount of monies drawn from the pensions is $10,309,096.63 and the total approximate amount disbursed by the banks is $74,544,685.30 and with the multiplier effect, assuming we agree on five, is $375,627,054.60.”
According to the National Pensions Office, all property investments made under the program adhere to strict requirements and ensure participants can’t use the pension funds for just anything.
For instance, home buyers who 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 back the full amount into the pension fund if they sell the home prior to retirement.
According to the National Pensions Law: “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 percent 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 percent payment to the person’s retirement fund, which would raise the typical 5 percent pension contribution to 6 percent, 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.
Non-Caymanians in private sector retirement plans and Caymanian civil servants who are participants in the Public Service Pensions fund plans cannot participate in the pension-for-property swap. Workers in Cayman’s government service have their own retirement savings plan that operates separately from any of the other private sector pension plans.
Mr. Solomon, the former MLA, always maintained that he hoped future governments would change that, stating toward the end of his elected term that he knew of no reason why a similar vote on the civil service pension system should not be brought before the Legislative Assembly.
“I want it to be a mirror of what you’re getting now in the private sector,” he said. “I think [the program] has been a success.”
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The program should be expanded to allow individuals to use their pension money to pay off their primary mortgage (if they agree not to pursue another mortgage). The idea would be to allow people time to save and invest for retirement without having to worry about a monthly mortgage payment or the possibility of losing their home in a sluggish economy.
Real estate in my opinion has been one of the longstanding financial reserve used by Caymanians. The sale of land I believe is an unaccounted reprieve from the high cost of living for many Caymanians.
False economy that see the need for stimuli via reserves futures such as pension withdrawals only speaks to the truth of it. Compounding the effect are unrealistic planning regiments which force Caymanians to sell rather than to put up a shelter they can afford and access by affordable means on their land.
Speak me a riddle.. If you are able to set the rules of play, would you allow the players invited to your table to beat the house every time.
The pension withdrawal, I hope those good folks can keep up their payments. replenishing the withdrawn amount should be secondary to mortgage maintenance, and supplemental withdrawals allowed based on a recommendation of the bank/case worker. I mean if you lose your job for six months should you lose your house when you have money sitting in pension..
It go to reason that If you open the door expect to accommodate.
Each mortgage should be assigned as a case, with the caseworker objectives Caymanian home ownership at mortgage maturity.
As a strata manager I deal regularly with people that are in serious arrears of strata payments and insurance reserve fund fees. Some have no intention of paying at all. It’s great the economy had 10m pumped in, but if you need your pension to put a down payment on a home , can you really afford to pay all of the other responsibilities that go with it? I’m sure some can but am willing to bet many can’t.