Use pension savings to pay off mortgages, Dutch researchers say
Dutch workers should be offered more choice about their pensions, including the option of taking out a lump sum and using the savings to pay off a mortgage, researchers of Tilburg University and the Netherlands Bureau for Economic Policy Analysis (CPB) argue.
In a report to be published today, they claim that the benefits of freedom of choice would outweigh the risks and would generate additional prosperity for Dutch pension savers, according to financial daily Het Financieele Dagblad (FD).
“Increased freedom of choice is desirable, as the fear that people would squander their money is not justified,” the FD quoted CPB’s Ed Westerhout as saying.
“The experience in other countries shows that most people used a lump sum to pay off debt and for buying or renovating a home.”
Ed Lever, also of the CPB, emphasised that most other countries offered more freedom of choice than the Netherlands.
He cited the UK, where people can now take out their entire pensions as a lump sum, as the most extreme example.
However, the researchers made clear that they did not advocate such an option for the Netherlands.
There was strong demand for more freedom, they said, with surveys at the civil service scheme ABP suggesting more than half of participants favoured taking a lump sum.
Greater freedom of choice is also preferred by the Dutch cabinet and is often cited as a reason to overhaul the current pensions system, according to the report.
However, no agreement has yet been reached within the government, which is awaiting proposals from the Social and Economic Council (SER).
The researchers said the current collective pensions system already offers certain options for increased choice, such as the introduction of a lump sum, or the extension of the new drawdown option for workers who want to retire ahead of the official retirement age for the state pension.
Other possibilities, such as deciding how much and where people save for their pension, or taking out pension assets while still working, are not possible under the current system.
According to the FD, the researchers stressed that freedom of choice must be limited and, for example, not include the option of benefits being for a fixed period.
“The chances are that people will make an appeal to society during their final years for, for example, rent and care costs,” the report says.
Earlier research has suggested that freedom of choice would reduce prosperity among Dutch pension savers.
Westerhout said: “This came with the assumption that people wouldn’t have any brake on spending their money, but we think that this only applies to a small group.”
To further limit the risks of freedom of choice, the researchers suggested giving pension funds an advisory role.
However, this is currently not possible under the law, since pension funds would then enter the realm of commercial providers of financial products.
Dutch pension funds are not allowed to compete with commercial players as they benefit from mandatory participation.