Property has been and continues to be a very popular investment asset in Ireland. With both house prices and rentals continuing to increase, people are looking at tax efficient ways of investing in property.
Using your small self-administered pension scheme to purchase a property has the benefit of incurring no tax on your rental income and no capital gains tax when you sell. This has made purchasing property through your pension particularly popular in Ireland relative to the rest of Europe with thousands of single member schemes owning property through their pension.
The EU recently introduced new rules to protect pension investors from a lack of diversity in their portfolios. It’s directive on institutions for occupational retirement provision, known as IORP II, which was transposed in Ireland in April 2021 is designed to give this protection.
The directive is all about ensuring that occupational pension schemes are sound and afford better protection to members and beneficiaries. The rules themselves are not new; they were first introduced in 2006, but single-member schemes such as Small Self-Administered Scheme’s (SSAS) were exempt. They are however now included. This has made purchasing property through your pension more difficult but not impossible.
There are ways of purchasing a property as both Buy-out Bonds (BOB’s)and Personal Retirement Savings Accounts (PRSA’s) are excluded from the legislation. This means you can buy property through these vehicles. It is not a simple solution in that BOB’s and PRSA’s operate under slightly different funding rules from the SSAS’s.
Once you transfer your pension assets from a SSAS into a Buy Out Bond you cannot make any further contributions to this fund. You have to transfer the full value of the fund and close the existing SSAS. You can however set up a new SSAS for further contributions but you are adding additional expense.
Under a PRSA, you are still allowed to make pension contributions but they are bound by rules around age and percentage of salary that can benefit from tax relief.
For a lot of people the additional work is worth it as the advantages are clear. You benefit not only from the potential for capital growth but also from rental income, which is allowed to grow tax free. And if you sell the property, any gains are distributed free of capital-gains tax back into the fund. Social-housing investment in particular has become particularly popular among such pension funds in recent years.
Investors can buy a property through their pension fund, which must be done at arm’s length, and negotiate an agreement with a local authority to lease the property at guaranteed rents for up to 25 years. This is effectively a state backed rental income. Rental yields in the country can be very attractive also.
As BOBs and PRSAs are outside the scope of IORP’s II, you can still borrow through these vehicles. ICS Mortgages, for example, can lend to them via exempt unit trusts at up to 50 per cent of the value of the property, at a variable rate of 4.25 per cent. Loans range from €40,000 to €500,000, for a maximum 15-year term. This is subject to meeting a number of criteria and formal approval.
While investing in property through your pension is very popular you should be mindful of having all your eggs in one basket. Property like all other assets can fluctuate in value and as we have seen in recent years that fluctuation can be substantial. If you need to sell some or all of your property to draw down your pension it might not be an opportune time when you need it. Property assets can be illiquid when the markets are down so it is very important to weigh up your options before making your decision.
Further clarification is due from the Pensions Authority later this year around the finer points of the legislation. This should help with greater clarity on the rules. The Irish love of property will remain and using your pension still continues to be the most tax efficient way to own a property. With all the recent rule changes and the complexity around pensions it is important to speak with your financial advisor before making your decision.
Conor Harte is a Financial Planner with Wealthwise Financial Planning who are based in Block C, Hartley Business Park , Carrick on Shannon, www.wealthwise.ie All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland.#CI66141
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