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Can I Buy a Property Through a Pension and is it a Suitable Option for Me?

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Nov 08

Many people like the idea of owning an investment property.

After all, it’s a tangible asset that tends to avoid the volatility associated with global investment markets.

Buying and managing property through a pension has become popular over the years, particularly with retirees.

And while it may seem like an ideal solution there are limitations and risks involved so this article will give you a quick run down of how it all works, the tax benefits available and the things to be aware of.

How Exactly Do I Buy a Property Through a Pension?

You can’t purchase a property through a regular pension so if you find a suitable property you will need to facilitate its purchase through a Small Self-Administered Pension Scheme (SSAP).

There is a fair bit involved in this process but the broad strokes of it are as follows;

  1. Source the qualifying property you’d like to buy.
  2. Have most or all of the purchase price sitting within an existing pension fund.
  3. Set up your receiving SSAP, self-administered PRSA or self-administered PRB.
  4. Open up a bank account within your chosen structure.
  5. Transfer monies from your existing pension into your SSAP’s bank account.
  6. Arrange any borrowings, cover off the legal requirements and complete purchase.

What are the Tax Benefits of Buying it This Way?

There are valuable cost and tax advantages available once a property is owned by a pension that would not apply if you owned it privately.

  • NO income tax is liable on rental income when it’s in a pension whereas income tax, USC & PRSI can all apply if owned personally.
  • NO capital gains tax is liable if you make a profit on disposal as opposed to 33% capital gains if owned personally.
  • The ongoing costs of maintenance and insurance can be borne by the pension fund itself where you would have to cover these costs if it was owned personally.

How Does it Differ From a Regular Pension Fund?

A traditional pension fund has a qualifying asset manager who makes all the necessary investment decisions on your behalf so you don’t have to.

Under a self-administered arrangement, you become the asset manager which means that you assume the full responsibility of ensuring that it’s adequately managed and continues to generate rental income into the future.

Once the ‘asset’ is performing you can continue to manage it as you would a privately owned investment property right the way up to your desired retirement age.

Do I Have to Sell the Property When I Retire?

Not necessarily.

Once you have it within an SSAP you can mature it as a pre-retirement investment and transfer it into a self-administered ARF. This would enable you to manage the very same property in retirement.

However, you would need to maintain sufficient liquidity to facilitate this since you will want to avail of your tax-free cash entitlements and you will need to satisfy the compulsory income requirements.

*The compulsory income requirement is known as the ‘deemed distribution’ which is the proportion of your ARF that must be taken as income each year. You have to take 4% each year from age 61 through 70, and 5% from age 71 onwards.

The ideal outcome here is that the rental income would be at a sufficient level to satisfy the income requirement leaving you with a self-sustaining asset.

What If I’m Already Retired?

If you have the purchase price of a property sitting within an existing ARF you can transfer it over to a new Self-Administered ARF.

There are a number of providers who cater for this type of proposition in Ireland and they have become a popular option.

This is particularly against the backdrop of market volatility which can be a significant source of concern to ARF holders and retirees.

What Should I know About This That I Probably Don’t?

  • SSAP costs can be high between set-up costs, ongoing costs and professional fees.
  • It can be extremely risky investing all of your assets into a single property or asset if that’s what you’re looking at.
  • You’ll need to ensure that there’s enough surplus cash to satisfy the ARF income requirement as this can be a significant risk factor especially if the rental income discontinues.
  • Recent legislation (IORP II) will introduce more restrictive investment requirements for single member company schemes.
  • You can’t buy a property that you already own or that’s owned by anyone connected to you.
  • You can’t buy a property that you’d directly benefit from, like a holiday home.
  • If you’re a director, your limited company can’t rent or use the property in any way.
  • You can’t buy a property for development purposes.
  • And you can’t sell the property to yourself or anyone else you’re connected to when you’re finished with it.

Like any investment proposition, you need to be sure before committing because if it goes wrong it can be very difficult to unwind. Managed funds, on the other hand, can be changed immediately.

That said, they can be a very lucrative investment when they work well.

Caveat Emptor.

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