Pension fund: Key to home ownership?

Jürg Zulliger

Many of us dream of owning our own home, but more and more of us are finding that dream out of reach because we just don’t have the money. In fact, property prices are reaching new highs in many parts of Switzerland. Even though we may not see ourselves living on Lake Zurich’s prohibitively expensive ‘Gold Coast’ or eyeing up property in St. Moritz or Zermatt, housing is costly wherever you look.

In the current market, there are many places in which anyone planning to buy a home must have a good income and plenty of savings. Today’s cheap mortgage rates don’t change that. As a rule, banks will approve mortgages only if buyers can prove they have a 20% deposit. Income must also be regular and reliable, in accordance with the financial industry’s general affordability criteria. Depending on the location, experts conclude that for about 70% to 80% of tenants, owning their home will remain a castle in the air.

Your dream home – but how?

If your dream is to become a reality, you have to get smart; for example, some parents give their children financial help. The world looks very different with a lifetime gift from your parents or a rich uncle. If only everyone were so lucky.

What about pension savings, then? If you don’t have enough money, you can take some from your Pillar 3a personal pension, or from the assets you hold in your occupational pension fund. Remember that this requires you to have at least a 10% deposit (as things stand) that is not taken from your overall pension pot; i.e. in cash. ‘With the rise in property prices, buyers today need to put down a bigger deposit,’ explains Damian Gliott of VermögensPartner in Zurich. As a result, it’s quite common to fall back on pension savings. That’s something the banks have also noticed, as a ZKB spokesperson confirms: ‘We are seeing more people taking savings from their occupational pension schemes.’

Using your pension pot: what you need to know

If you decide to use your pension savings, there are still various points to consider:

• Taxes: a lump-sum withdrawal is taxable. Another thing to note is that if you take CHF 100,000 from your pension, for example, your taxable assets will rise by the same amount.
• Endorsement: an endorsement to the effect that assets have been taken from a pension fund will be made in the land register. If the home is later sold, the money must be repaid.
• Pension benefits: depending on the pension fund, you must be aware that your pension benefits will ultimately be lower. A pension gap means a lower retirement pension, not just due to the amount withdrawn, but also to the interest that would have been earned – assets held in schemes under the Occupational Pensions Act earn interest at 1%. Depending on the pension fund, risk benefits (for disability, or for survivors in the event of death) may also be lower. Find out exactly how you would be affected before making your decision.
• Amount: you can take money from your pension fund if you need a minimum of CHF 20,000.
• Additional voluntary contributions: you will not be able to make any additional voluntary contributions or deposits into your pension fund until you have repaid the amount you took out.
• Limited amount: up to the age of 50, you can withdraw your entire pension fund savings in advance to buy a property. Restrictions apply for people aged 50 and over.

Financing and pensions specialist Damian Gliott pulls no punches here: ‘Anyone who withdraws money from their pension pot in advance should draw up a clear savings plan and repay it within 10 years.’ He shares the conclusion of many experts in the field: owning property but having to live on a reduced pension is not a good financial scenario. And if you can’t manage the repayments, you need to go over the books again. Your dream property might simply be out of reach.

Pledging as an attractive alternative

You should therefore think carefully before taking money from your pension, and plan it well. There is an interesting alternative, though: instead of actually taking money out of your pension pot, you can pledge your retirement capital to the bank. The money stays in the fund, but the pledge gives the bank additional collateral. The potential mortgage amount increases by the amount pledged; for example, you might be able to borrow 90% instead of the usual 80%.

This protects the bank against a potential loss, in the rare event that the customer is unable to service their loan. It’s worth knowing that banks treat applications such as these differently. The best thing is to compare several mortgage offers.

The great advantage here is that the money remains untouched in the pension fund. This means that you will continue to receive all pension fund benefits in full. No taxes are due and you have the freedom to make additional voluntary contributions at any time, providing your finances and the pension fund regulations allow.

The banks regard pension fund assets as additional, well-accepted collateral, which is why many will approve the higher loan mentioned above. So you see, although your home-buying budget might look stretched at first, it may still work out.

Pros and cons

The downside is that your costs will at first appear to be a little higher. After all, pledging your assets means that you can take out a larger loan – for which banks of course demand additional collateral. You therefore have to pay interest on and repay a higher amount. But if you think about how incredibly low interest rates are right now and that payments are tax-deductible, the reckoning looks different again. And remember that with the pledge option, your pension fund benefits remain fully intact.

The only rare exception to this is if the pension fund pays out benefits in the event of death; the pension fund money then no longer qualifies as collateral. Other than that, when you consider the pension provision and financial security aspects, you’re clearly better off pledging your assets. It’s best to compare specific mortgage offers from several banks. In some cases, you may be asked to demonstrate a higher income to service the larger loan.

Gliott’s verdict is clear: ‘Including interest, taxes and pension considerations, in many cases pledging will be the better option financially.’