As rents continue to rise right across the country, one question I get asked increasingly more often is “Can I use my pension fund to buy a property?”, if so how do I do it?
Because of the generous tax exemptions that exist within a pension fund, investors who own a property can often get a much better return than they would if they owned the property personally. These Tax exemptions should not to be under estimated, after all there is no Income tax, PRSI or USC on rental income or no capital gains tax (CGT) liability on disposal, if the property is held with a pension fund.
So, how do you do it? 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 or a combination of a number of pension funds accumulated over the years. There is often a once off set-up fee for the establishment of the fund. In addition, self-administered pension funds are required to provide annual valuations, this will would incur a further annual trustee fee which may be reflected as a % of the overall fund but the fee is generally lower than a traditional Pension Funds Annual management fee.
Some important 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 fees, 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, the fund cannot buy your home from you, nor can the fund buy a property for your own personal 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. A pension fund would get to keep all of this rental Income which would give it a yield of 5.64 % 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 €7,700 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.
Barry Kerr BBS QFA CFP® is the owner of Wealthwise Financial Planning, 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.