Individuals considering whether to invest in the property market might consider using their pension funds to purchase property.
One of the main benefits of using a pension fund to purchase a property is that money which not been subject to tax can be used to purchase the asset.
In addition, due to the generous tax exemptions that exist within a pension fund, investors achieve a much better return than they would if they owned the property personally. These tax exemptions are not to be under estimated, after all there is no income tax, PRSI or USC on rental income or no capital gains tax (CGT ) on the disposal of the property within the pension fund structure.
Under a self-invested pension structure, investors also get to choose the property that the pension will purchase on their behalf and has far more control than with traditional pensions.
Who can invest?
Only those individuals who have control of their pensions can invest - typically company directors of an SME, the self-employed, those who have a pension relating to a previous employment and those who have already retired and hold an Approved Retirement Fund (ARF ).
However, if the pension you would like to use relates to your current employment and it is not your company nor are you senior management (where the trustees might facilitate you ), you will probably find that the trustees are not going to permit you to go on a solo run and buy property.
Are there restrictions on the property the pension fund can buy?
Revenue rules require that all pension investments are at arms-length. Therefore, pension funds cannot acquire a property that is connected to you, nor can anyone connected to you use the property. For example, your children can’t reside there when they go to college nor can the pension fund purchase an office to rent to your company. In addition, the property cannot be a holiday home or a property for your own personal use.
Can the pension fund have borrowings?
Yes, some financial institutions are lending to pension funds for the purpose of property acquisition, subject to terms and conditions. However, a pension fund can only have a mortgage pre-retirement so it must be fully cleared by your chosen retirement date (typically between 60 and 70 ). If you want or need to utilise a mortgage, the maximum loan to value is 50 per cent, it must be on a capital and interest basis and maximum term is 15 years (fully paid off by retirement ).
If you are contemplating your pension fund acquiring a property post-retirement you will be doing so without a mortgage.
Other points to note:
• Both residential and commercial property can be purchased by a self-administered pension.
• There is no tax on the rental income received by the pension fund.
• There is no capital gains tax if the pension fund sells the property in the future. It is also worth noting that the pension fund does not have to sell the property once retirement is reached. The pension fund can hold onto the property in a self –administered ARF post retirement and use it to generate a post retirement income.
• Any further contributions made into a pension fund still receive tax relief at the marginal tax rate (Subject to Revenue Max Funding Rules )
• Any expenses incurred re the purchase of the property, eg, solicitor’s costs, auctioneer’s fees, stamp duty along with expenses in carrying out a refurbishment or fitting out of the property can be paid directly out of the pension fund. Also, any other ongoing expenditure such as management fees and property tax can also be paid directly by your pension fund.
Operating a self-administered pension scheme does involve some additional work and may not be suitable for everyone. However, if you are considering buying an investment property, it may be one of the most tax efficient ways to do so. Purchasing a property through a pension structure should be considered as part of a diversified pension portfolio and always seek professional financial and taxation advice before making any long-term investment decisions.