Finance

Published on September 13th, 2017 | by Martin Clancy

Can I use my Pension Fund to buy an Investment Property?

In recent years the popularity of purchasing property through pension funds (pre and post retirement) has increased steadily so I thought it might be useful to run through it in more detail: the key points, the attractions and benefits of it, how it works, what are the limitations and who might it be suitable for.

Guest Blog by Joe O’Regan, Managing Director Blackthorn Capital www.blackthorncapital.ie

In recent years the popularity of purchasing property through pension funds (pre and post retirement) has increased steadily so I thought it might be useful to run through it in more detail: the key points, the attractions and benefits of it, how it works, what are the limitations and who might it be suitable for.

Key Points:

  • It is your Pension that purchases the property and not you personally so you’ll need to have sufficient control over your pension to be able to self-direct it.
  • Revenue rules require that all pension investments are at arms-length so you cannot purchase a property (or from somebody) that is connected to you, nor can anyone connected to you use the property. Your kids can’t stay there when they go to college nor can you purchase an Office to rent to your Company nor can it be a Holiday Home.
  • 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 do want / need to utilise a mortgage, the maximum loan to value is 50%, it must be on a capital and interest basis and maximum term is 15 years (fully paid off by retirement). if you are contemplating property purchase post-retirement with your Retirement Fund (ARF) you will be doing so without a mortgage.
  • You can purchase Residential or Commercial Property in Ireland or the UK.

Now, let’s look at the attractions and advantages of buying property within your pension fund:

  • You get to choose the Property
  • There is no tax on rental income whereas you pay income tax and levies if you own it personally
  • There is no Capital Gains Tax on Sale
  • You have far more control than with traditional pensions as you can dictate when to sell etc.
  • You get tax relief on pension contributions
  • Rental income goes to pension (particularly useful as a post-retirement income) and you will likely benefit from capital appreciation over time.

How it works:

Usually when we meet with clients who are interested in doing this, the starting point is to establish what funds they have available in their pensions. It may be that two or more clients come together and effectively ‘pool’ their pension assets to ensure they have sufficient funds available. In these situations we would require that there is a legally binding Co-Ownership Agreement detailing what happens in various scenarios – death, retirement, dispute, sale etc. We will then need to transfer the relevant pension assets to matching self-directed pensions with a Revenue approved Pensioneer Trustee to facilitate the forthcoming property acquisition. This can accommodate Executive pensions (Small Self-Administered Pensions), Personal Pensions (Non-Standard PRSA’s), Personal Retirement Bonds, Approved Retirement Funds (ARF’s/AMRF’s) and even QROPS (some UK Pensions).

A bank account will be opened by the Pensioner Trustee for the Pension. The role of the Pensioneer is to administer the Pension and ensure it is Revenue compliant. They will charge a fee each year for this service, typically a fixed % or a flat fee. Generally speaking, these fees are significantly lower than traditional pension fees.

The client(s) will choose their property (UK or Ireland) and the Pension Fund will pay a deposit on it and appoint a solicitor from their panel who are experienced in dealing with pension acquisitions. The process will then move forward similar to non-pension property purchases. Legals, valuation, mortgage drawdown where relevant and closing. The property will be owned by the Pension Fund. All expenses will be paid by the Pension and all Rental Income will go into the bank account of the Pension Fund. The clients may of course make future pension contributions to the fund if they so wish to build up cash for other investments.

Possible limitations:

As I mentioned earlier, you need to have control of your pension in the first instance to enable you to direct what it is going to invest in. This will be fine for a Company Director, or someone who is Self-Employed, has Personal Pensions, Pensions relating to previous Employment or an Approved Retirement Fund (ARF). However, if the pension you’d like to use relates to your current employment and it’s not your Company or you’re not 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.

Another consideration for those who might want to extract tax free lump sums at Retirement / Early-Retirement is that if you invest your entire fund in property, where will the funds come from to pay the lump sum without requiring the sale of the Property? Ideally you will have or accumulate additional pension monies for this purpose so that you have the option at retirement of keeping the property and just doing an in-specie (paper) transfer to an Approved Retirement Fund.

If you are interested in looking at property investment as an option for your pension, don’t hesitate to contact us to discuss your situation in more detail. www.blackthorncapital.ie


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