We are receiving a number of queries from new and existing clients about property purchase within pension funds.
There are a number of urban legends that we thought would be good to clarify.
Can I purchase a property with my pension fund?
Yes you can but there are some restrictions!
The property has to be at arm’s length – This means the property cannot be purchased from yourself or anybody connected to you. It also means that neither yourself or a connected party can rent the property either.
Development property is not allowed.
Can I borrow within the fund to help with a purchase?
Yes your pension fund may borrow in order to purchase property assets. At the moment, there are some lenders that will allow loans that equate to 50% of the value of the property.
If I want to buy a property can I purchase partly with personal money and balance with pension fund monies?
Yes. Your pension fund could purchase a 50% share in property with the other 50% purchased by yourself personally. However non connected party rules apply to the full property, so no part of the property may be acquired from, rented to or sold to a connected person.
If I retire do I need to sell the property?
No. When you get to retirement and wish to take your retirement options, you can, if there is enough liquidity, transfer the property asset to an Approved Retirement Fund/Approved Minimum Retirement Fund.
Do I have to rent the property?
Yes. Property as a pension fund asset may only be acquired with the sole purpose of providing retirement income. As such, a property delivering no rental income would fail this revenue test.
How does the rental income work from a tax perspective?
The rental income when paid is lodged to your pension fund. Unlike rental income on property, you own personally there is no income tax, USC or PRSI payable on rental income through a Pension Fund. On drawdown at retirement, any amount other than the tax free lump sum is subject to income tax, USC and PRSI.
Are there extra legal costs?
Yes there are. The pensioneer trustee has to have their own solicitor involved as well as the buyer and seller.
Our view
In an earlier Newsletter entitled “be careful out there”, we highlighted now more than ever, investors need to be careful with their decisions. Our Firms Philosophy is based on evidence gathered over the last 50 years or more. This philosophy is centred around the following:-
- Diversification
- Liquidity
- Holding for the long term
- Keeping costs low
- Re-Balancing
- Reducing the impact of emotional decision making
Purchasing property through a pension is a big decision. Unless you have substantial pension monies, a property purchase will normally take up a considerable amount of your pension pot. This can mean that potentially you are over exposed to one asset class.
Gearing debt within the pension will also put extra pressure on having to continue to make payments to pay down debt etc.
It is a tax efficient way to purchase a property but like any other asset it has to make sense price wise.
Interestingly, we were at a conference and the dreaded words of “this is a no brainer” were used when somebody was working through the benefits of purchasing a property through their pension.
Les Knott
07/08/2018