What You Should Know About Use of Retirement Savings for Residential Mortgage (I)
The National Pension Commission (PenCom) recently issued Guidelines on Accessing Retirement Savings Account (RSA) Balance towards Payment of Equity Contribution for Residential Mortgage by RSA Holders. This laudable development has actualised the provisions of Section 89 (2) of the Pension Reform Act (PRA 2014), which provides that “a Pension Fund Administrator may, subject to guidelines issued by the Commission, apply a percentage of the pension assets in the retirement savings account towards payment of equity contribution for payment of residential mortgage by a holder of Retirement Savings Account”.
In line with its consultative approach, PenCom obtained input from stakeholders in the housing development and mortgage financing sectors and the Pension Industry to ensure more efficient utilisation of retirement savings for residential mortgage. Specifically, the Guidelines set eligibility criteria for RSA holders and established documentation standards and implementation modalities for Licensed Pension Fund Operators (LPFOs). Presented below are key highlights of the Guidelines:
The Guidelines cover salaried employees or self-employed persons in active service who are making monthly/periodic contributions to their RSAs. A Contributor under the Micro Pension Plan (MPP) is also covered.
The Guidelines provide that an interested RSA holder (applicant) must have an Offer Letter for the property duly signed by the property owner and verified by the Mortgage Lender. The RSA of the applicant must have both employer and employee’s mandatory contributions for a cumulative minimum period of 60 months (five years). Married couples, who are RSA holders, are eligible to make a joint application, subject to individually satisfying the eligibility requirements. If registered before 1 July 2019, RSA holders must have their records updated through the RSA data recapture exercise. Application for equity contribution for a residential mortgage must be done in person and not by proxy. It is imperative to note that RSA Holders with less than three years to retirement are not eligible.
Limit for equity contribution
The Guidelines set the maximum amount that can be withdrawn as equity contribution for a residential mortgage at 25% of the total RSA balance as at the date of application, irrespective of the percentage of equity contribution required by the Mortgage Lender. Where the value of 25% of the RSA is lower than the equity contribution required by the Mortgage Lender, the RSA holder is required to deposit the difference with the Mortgage Lender before 25% of the RSA balance can be applied as equity contribution. Meanwhile, where the value of 25% of the RSA balance is more than the required equity contribution, the RSA holder can only access an amount equivalent to the equity contribution required by the Mortgage Lender.
Meanwhile, the Guidelines allow applicants to utilise the contingent portion of their Voluntary Contribution (VC) for equity contribution, in line with the Voluntary Contribution Guidelines under the CPS. Notwithstanding the above provision, NSITF and Pre-Scheme contributions in respect of an active RSA contributor may form part of the RSA balance in determining the 25% equity contribution subject to the applicant fulfilling all other requirements. If an RSA holder wishes to include the contingent portion of VC, NSITF and Pre-Scheme contributions to his equity contribution, the applicant must sign a consent form with the PFA to that effect.
An RSA holder can only access his RSA once for the purpose of equity contribution for a residential mortgage. Where an RSA holder had accessed the RSA balance for residential mortgage and 25% due to loss of job, the RSA holder is allowed to access lump sum at retirement provided that the RSA balance is sufficient to procure a programmed fund withdrawal or annuity for life in accordance with the extant guidelines issued by the Commission. It is noteworthy that when an RSA holder accesses the RSA balance for a residential mortgage, the RSA holder signs a consent form with the PFA before accessing 25% due to job loss. Similarly, where a pension contributor had accessed the RSA balance due to job loss, the RSA holder signs a consent form with the PFA before accessing his RSA balance for a residential mortgage.
At this juncture, it is essential to state that this innovative development provides access to equity finance for RSA holders in the Contributory Pension Scheme (CPS), which will improve their living standards by facilitating their ownership of residential homes during their working life. The Commission is optimistic that this development will enhance enrolment in the CPS as an incentive for employees yet to open RSAs.
In Part II, we will continue our presentation on the key highlights of the Guidelines on Accessing Retirement Savings Account (RSA) Balance towards Payment of Equity Contribution for Residential Mortgage by RSA Holders.