Financial Planning Insights November 2017
Solid Reasons to Consider Investing Your Pension in Property
Senior Financial Planning Manager
Through good times and bad, Ireland’s appetite for bricks and mortar has never wavered. Buying or investing in direct property offers a range of benefits including a reassuring solidity – whatever your stage in life. For many people, investing in property through a pension is a viable and increasingly attractive option. There are a number of reasons for this.
One of the main motivations for people to invest in property is the possibility of generating a steady income over a long period of time. Now that property values are once again accelerating upwards, particularly in Dublin, investors can reasonably expect an attractive yield and a potential uplift in value.
The benefits of bricks and mortar
As with property values, rent levels continue to rise, again with sky-high demand in the capital pushing Dublin rent up by more than 12% year on year (Daft.ie 2017). This trend does not look like reversing. Here, a key benefit of investing your pension pot in a rental property is that you will pay no income tax on any rent received.
If you subsequently decide to sell the investment property, you will not have to pay capital gains tax (CGT) on the transaction. As CGT currently stands at 33%, this is potentially a significant saving.
A sometimes overlooked benefit of investing in property through a pension is that you are using funds that have not been subject to income tax – this gives you greater bang for your buck when deciding what type of property you wish to invest in.
Potential pitfalls: why you must consider carefully
As with any investment, there are potential drawbacks too. The minimum entry level for investing in direct property is high and this could impact on your liquidity, for example if you need to use all or nearly all your pension fund to invest. There are also high ongoing costs associated with property, both expected (insurance, maintenance, etc.) and unexpected (nasty surprises!).
Before committing, you will also need to consider your overall investment strategy. After investing in the property, will your portfolio be adequately diversified? Is there a risk you will be over-concentrated on property? Will your investment leave you with sufficient liquidity to maintain your lifestyle? These are vitally important considerations to be talked through with a qualified adviser.
How to invest in property through your pension
if you decide that the pros of property investment outweigh the cons, the first step is to ensure you have a self-administered pension arrangement that gives you control over your options (as opposed to having a fund manager making decisions for you). This can be either a small self-administered scheme (SSAS) or executive pension (EP).
Alternative structures that can be used to invest in property include a PRSA (personal retirement savings account), a PRB (personal retirement bond) or, if you have already retired, an ARF (approved retirement fund).
As you would expect, there are strict Revenue rules around investing in property through a pension. In the first instance, you cannot invest in a property that you yourself own or one that is owned by anyone ‘connected’ to you (e.g. an employer or relative). Similarly, you cannot then sell the property to a connected person (including yourself).
You cannot invest in a property for development purposes, while the property must be in Ireland or the UK – and must be of a certain type (your financial adviser will run through these options with you).
Can you borrow?
As long as you don’t have an ARF then yes, you can borrow – subject to certain restrictions. Only assets purchased by the loan can be used to provide security to the lender, for example you cannot assign rental income to the bank as a means of repayment.
The loan should be repaid in full prior to the normal retirement age. And, while banks have loosened up considerably in this area in recent years, you cannot take out an interest-only loan or borrow for a period of more than 15 years.
On balance, there are solid reasons to consider investing in property through a pension fund.
Although not back at the levels of the pre-crisis peak, Ireland’s property market is surging ahead once again, both in terms of value and rental yields. For pension fund investors, these key indicators provide reasonable expectations of a steady stream of income over a long period of time.
There are also potential downsides but, on balance, the benefits of owning property as part of your pension fund make it a worthwhile consideration. As with all major financial decisions, it is vital to seek professional advice that is tailored towards your own goals and circumstances. Scheduling a meeting with a financial adviser can help to get you on the right path.
There are risks associated with pensions. The value of investments may go down as well as up. J&E Davy, trading as Davy, is regulated by the Central Bank of Ireland.
Warning: This information is based on Davy’s understanding of current tax legislation in Ireland and is subject to change without notice. It is intended as a guide only and not as a substitute for professional advice. You should consult your tax adviser for the rules that apply in your individual circumstances.
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