The A-Z of Buying a Property Through Your Pension

One of the key features of a self-administered pension is the ability to invest in property. This unique opportunity allows you to acquire the property of your choice to enhance the value of your fund and avail of powerful tax reliefs.

So how do you go about buying property through your pension and what do you need to know before embarking on this route?

Amount of Money You’ll Need?

The amount of money you need in your pension in order to buy a property will depend on the property you have in mind. It can be either a residential or commercial property and you ultimately decide on the property you wish to buy. You usually can’t use all of the money in your pension fund to buy a property – you must leave sufficient liquidity in your pension scheme to cover costs related to the properties and pension fund after the purchase. You should also consider leaving enough money in your pension fund to allow you to spread your investment risk across more than one asset class. Check out our Pension Property Calculator for more information.

Borrowing

In certain circumstances, borrowing can be used to help with the purchase of property that may be valued higher than the available funds in your pension fund. If borrowing for property through a pension scheme, be sure your pension fund can afford the mortgage repayments and that the loan can be paid in full before retirement, our Pension Mortgage Calculator can assist you with this.

Be careful about borrowing for property through a pension scheme. Note that borrowing is not permitted for Approved Retirement Funds and banks who are providing lending to pensions have limits on the amounts that can be borrowed along with other criteria such as location of property and expected rental yield. There are also a number of Revenue rules which you need to be mindful of, including that only the property purchased  may be used as security, that all loans must be repaid in full before retirement, and that loans can be no longer than 15 years.

Costs

Investing in property through a pension scheme can be expensive so understand the costs. As well as the initial cost of purchasing the property, costs include stamp duty, solicitor fees, insurance, local property tax, letting agent fees and service charges. These costs will vary depending on the type of property you purchase. Note that any costs in connection with the property purchase are consumed by the pension fund.

Do Your Research

As with any investment, due diligence is important if considering buying or investing in property through your pension.

Expect Peaks and Troughs

Property is an asset which can go up or down in value and such fluctuations could have a positive or negative impact on the value of your pension fund, as well as your ability to pay back any money borrowed to buy the property. While there has been strong growth in residential property prices of late, past performance is no guarantee of future returns. Similarly, those interested in investing in commercial property through their pension should be aware of the recent trends in – and forecasts for - that market.

Find Out the Rental Yields

Know what kind of rental yields you would expect from the property you are considering buying through a pension scheme. Rental yields can indicate what kind of investment growth you can expect after expenses such as Local Property Tax (LPT), property management fees, insurance and so on are paid. Your financial advisor can take you through the current rental yields on offer. Given the huge shortage of and demand for accommodation, the rental market continues to be strong – though the location of a rental property, as well as its access to local amenities and public transport links, will be key when it comes to securing tenants.

Get Advice

Get impartial advice before buying property through your pension scheme - and be sure you meet all the rules so that you get the tax advantages. For example, the property can’t be used by or rented to you, or anyone connected to you - such as a family member. You cannot buy a property with a view to ‘flipping’ it – that is, for renovation and a quick resale. A financial advisor will also be able to discuss what pension structure and property would best suit your requirements.

How and Why?

How: You can generally buy property through Approved Retirements Funds (ARFs – a personal retirement fund where you can keep the money in your pension pot invested after retirement), Personal Retirement Savings Accounts (PRSAs – a type of personal pension), Buy Out Bonds (BOBs - an individual pension bond or policy created in your name where you can transfer your pension fund if you leave a company pension scheme or if the pension scheme is being shut down), or a combination of these pension schemes.

Be aware that there are two types of PRSAs – a Standard PRSA and a Non-Standard PRSA. Should you wish to purchase property directly through your PRSA, you would need to do so through a Non-Standard PRSA.

Know that if you buy property through your pension scheme, this property could be transferred into an ARF after the retirement of the pension scheme (assuming you have enough liquidity to pay out the tax-free lump sum and don’t need to sell the property) to assist with generating a return whilst in retirement.

Why: The main advantages of purchasing property through a pension scheme are tax related. Any rental income earned from property is exempt from income tax (as long as the scheme has been approved by Revenue as a tax exempt one and the property is registered with the Residential Tenancies Board). Similarly, any profit earned from the sale of properties is exempt from Capital Gains Tax (CGT). Furthermore, if buying property through a pension, you can get pensions tax relief on your pension contributions into the scheme.

 For further information, please speak to your financial advisor or visit www.pensionproperty.ie.

Fiona Harris, ITC Marketing Manager