Purchasing a Property through your Pension
Guest Blog by Joe O’Regan, Managing Director of O’Regan Financial.
If you are in control of your own Pension Fund and by this I mean that you have a Personal Pension or you are a Company Director with a Defined Contribution Company Pension (or Self-Administered Pension) or indeed you have already retired and have an Approved Retirement Fund (‘ARF’) you can potentially invest in Residential or Commercial Property through your Pension rather than traditional pension funds.
Why might you consider doing this? One answer is that people consider ‘bricks and mortar’ to be real and tangible and a recent survey in the UK found that one in three people plan to use property to help their retirement income.
In this article, I will take you through the key points to consider and be aware of if you think you might have an interest in acquiring property through your pension.
I will start by looking at the advantages of owning property in your Pension Fund. First and foremost you get to choose the property (subject to some conditions outlined) rather than rely on a Fund Manager to make decisions on your behalf. So you have far more control.
You have had the benefit of marginal rate tax relief on your contributions building up your pension fund so for example if you have a fund of €300k and you are a 40% taxpayer, it should have cost you no more than €180k (60% of €300k) and possibly significantly less depending on fund growth to accumulate that €300k Fund which you can now direct towards a property purchase.
When your Pension Fund owns a Property it will pay no tax on any rent received whereas if you personally owned the property you are potentially liable to income tax, PRSI and USC on the rental income. Furthermore, if the Pension Fund sells the property it will not be liable to Capital Gains Tax (currently 33%) whereas again you personally would be. When you ‘retire’ your pension you don’t have to sell the property as you can transfer it ‘in-specie’ into your Approved Retirement Fund so it will continue to earn an income and can be transferred through your estate on death.
At retirement you can extract 25% of the value of your Pension Fund as a lump sum (the first €200k of which is tax free) but you’ll need to have sufficient cash or liquid assets in the fund to do so but equally you could sell the Property if necessary.
So far, so good and clearly there are significant advantages to owning a property in your pension fund. However there are of course strict rules set by Revenue as to what is and is not allowed.
All property transactions must be on a genuine arms-length basis so you cannot acquire property from yourself or anyone connected to you and nor can you or anyone connected to you buy, rent or use the property.
You cannot acquire a property for development
You cannot acquire property from your employer and your employer cannot use or rent the Property.
The property must be in Ireland or the UK.
When a bank lends to a Pension Fund, under legislation the mortgage must be on a non-recourse basis meaning that the bank has no recourse to the borrower so it only has the property as security. In recent years banks have been reluctant to lend to Pension Funds and therefore anyone acquiring property through their Pension has done so on a cash basis i.e. they had sufficient money in their Fund to acquire the property without using a mortgage.
As the economy, property market and indeed banking sector return to normality I would expect banks to slowly return to this market but in the short term if you are interested in acquiring property through your pension you will need to have a sufficiently large Pension Fund to do so without utilising borrowings.
If you would like to discuss the above and how it might be relevant to you in more detail don’t hesitate to contact us.