With many people in Cayman now contemplating whether it is worthwhile withdrawing money from their pension under new Government rules permitting people to do so, I thought it would be worthwhile exploring whether this would be a good idea or not, from the perspective of the real estate industry.
Withdrawing pension funds, which are supposed to be part of a person’s means of retirement in later life, is a personal decision that should not be taken lightly. In my opinion, there are advantages to withdrawing pension funds, but I do believe that the money should be spent wisely.
Reasons to withdraw pension funds
If one was to pull out money from a pension, it may well give an individual who was hoping to get into the property market more equity in which to invest. If requiring more funds in this way makes the difference as to whether someone can purchase a property or not, then I believe this is a good reason for withdrawing funds.
In my opinion, another good reason for withdrawing funds is if the interest rate at which an individual is paying off their mortgage is greater than the returns they are seeing on their pension investment. Ideally, they would pay down the principal on their existing debt with their pension funds because paying these funds to the bank to be applied to existing debt means an acceleration towards the end of paying off the loan/mortgage. Overall, this means a shorter period of indebtedness and therefore less interest that has to be paid to the bank, especially as that interest compounds, so the quicker the debt is paid the better. At the end of the day, the individual is free and clear of their loan earlier, so there are real benefits if the funds are applied in this way.
Pension Value
Given that the stock market has taken a substantial hit over the last few months, some could argue that withdrawing and reinvesting those funds in a more stable return, such as real estate, would be beneficial. Of course, there are others that have more of a “wait and see” philosophy as undoubtedly the stock market will bounce back. The only real questions are when and how long will it take to get back to pre-COVID-19 levels.
The question to ask yourself is whether it makes more sense withdrawing your pension at today’s value and investing it in the property. Overall pension values have dropped so you will definitely receive less now by pulling funds from your pension. Also, with respect to the real estate market, we don’t know exactly what the future holds in Cayman as of yet, but I do anticipate that more inventory will become available on the market. Overall, consumers should have more buying power than they did pre-COVID-19 with the availability of pension funds, more inventory as well as extremely low-interest rates. Read my last article to learn more about when is the best time to buy and sell.
The good news is you don’t have to decide today. Funds can be withdrawn from pensions until October 31, 2020, unless extended by Cabinet.
No quick fix
Above all, I don’t believe people should be rash and make quick decisions. People should carefully consider what suits their particular situation as everyone is in a different situation and ensure that, at the end of the day, they choose what is best for themselves and their family.
Please bear in mind that Cayman has a strong history of resilience when it comes to adversity and economic downturn and opportunities are lost as quickly as they appear. If you have any questions about whether or not to invest in the real estate market, start the conversation now.