Buying a property with your Pension Fund

As property prices continue to rise and rental income is on the increase, one of the most frequent queries we get is “Can I buy a property with my pension fund?”, if so, how do I do it?

The answer is yes you can  but it’s important to fully understand any rules and restrictions. Because of the generous tax exemptions that exist within a pension fund, investors can often get 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 due on rental income or no capital gains tax (CGT) liability on disposal, if the property is held with a pension fund.

So, where do you start? Firstly, you would need to have sufficient value built up in your Pension Fund. The next step is to set up a Self-Administered pension structure which gives you much more freedom in the type of assets you’re allowed to invest in. Generally, the minimum amount to make it viable to set up such a structure is about €100,000. This may be a transfer from another Pension, an old Pension from a previous employer or a combination of a number of pension funds accumulated over the years. There may be a once off set-up fee for the establishment of the fund. In addition, self-administered pension funds require the services of a trustee, one of the roles of the trustee is to provide an annual return to revenue, this will would incur a further annual trustee fee which may be reflected as a % of the overall fund but then fee is generally lower than a traditional Pension Annual management fee.

Some points to remember:

• Once you’ve decided on the property that you wish to purchase you will be considered a cash buyer as you are not borrowing to purchase a property. This should enable you to complete the purchase of the property far quicker, also hopefully at a lower price than someone who is looking to get mortgage approval.
• Both residential and commercial property can be purchased by a Self-Administered Pension
• There is no tax payable in respect of the rental income received from the property and this is paid tax free directly into your pension fund.
• There is no capital gains tax if you sell the property in the future. It’s also worth noting that you do not have to sell the property once you reach retirement. You can if you wish hold onto the property in A Self –Administered ARF after you retire and use it to generate a post Retirement Income.
• Any further contributions you make into your pension fund still receive tax relief at the higher tax rate (Subject to Revenue Max Funding Rules)
• Any expenses incurred re the purchase of the property e.g. solicitor’s costs, auctioneers 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 expenses such as Management Fees and property tax can also be paid directly by your pension fund.
• Two people can pool their pension assets together to purchase a property e.g.: 2 Directors, 2 friends or even spouses.

At retirement 25% of the total value of your pension assets can be taken as a tax free lump sum subject to the max of €200,000

As mentioned above, some restrictions do apply in terms of how you buy and sell property within a pension fund. As per Revenue rules, the property must be held at “arms-length”, in other words, your Pension fund cannot buy your home from you, nor can the fund buy a property for your own personal or business use or to be used by any “connected” parties.

Post Retirement, It may also be possible to transfer the property from a self-administered pension to a self-administered ARF and thus continue to generate a post retirement income.

Let’s take the example of a house which is on the market for €250,000 and generating rent of €1,200 per month. When stamp duty, and other purchasing costs are included, the total cost is €255,000. Now after property tax and letting agent’s fees, the rental income is €13,915 a year. A pension fund would get to keep all of this rental Income which would give it a yield of 4.36 % pa. If the property was held personally by a high rate tax payer they would be left with only €6,680 rental income after TAX &PRSI are paid, this equates to a yield of only 2.09%. A difference of €7,235 pa

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. Always seek Independent financial advice before making any long term Investment decisions.

For more information and guidance you can contact Wealthwise Financial planning on 071 9650699 or info@wealthwise.ie

Barry Kerr BBS QFA CFP® is MD of Wealthwise Financial Planning in Block C, Hartley Business Park, Carrick on Shannon, www.wealthwise.ie. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland. 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.