Can you purchase a property with your pension?
With the combination of historically low deposit rates, high taxation along with rising property prices and rents, many investors have considered using a portion of their pension funds to purchase a property. Because of the generous tax exemptions within a pension fund, investors can often get a much better return than purchasing the property personally.
However, how can you purchase a property through your pension?
Whilst most people are familiar with workplace / occupational pension schemes or personal pension plans with insurance companies, there is another pension scheme that offers further flexibility – the Self-Administered Pension Scheme.
What is a Self-Administered Pension Scheme?
A Self-Administered Pension Scheme is an approved pension structure where the member decides on how the funds are invested. Unlike many insurance company based pension schemes, the members can control and choose their investments.
Who can invest in a Self-Administered Pension Scheme?
The vast majority of Self-Administered Schemes are established in respect of company directors and key employees. By establishing such a scheme, the member retains control of the funds and investment decisions in his/her own scheme.
Investment choice, control and flexibility
As with most self-administered structures, the member’s funds can be spread between a wide range of allowable investments, such as:
- Direct share dealing
- Direct property
- Syndicated property investments
What are the advantages of a Self-Administered Scheme?
- Members’ personal contributions qualify for Income Tax relief
- Investments grow free from Capital Gains Tax and Income Tax – therefore, no income tax on rental income and no CGT on property sale within the pension scheme
- Deposits grow free from DIRT Tax
- A tax free cash lump sum can be taken at retirement
- Any balance can be transferred into an Approved Retirement Fund
- For Company Schemes, contributions made by the company qualify for Corporation Tax relief
Are there any investment restrictions?
The Member Trustee controls the funds in their Self-Administered Scheme, however the Pensioneer Trustee must be party to all financial transactions. The Pensioneer Trustee also determines whether an investment is allowable under Revenue rules.
There are some restrictions on how you can invest your pension funds.
A sample of some of those restrictions are below:
- If you are investing in a property investment, the person selling or letting the property cannot be connected to the pension scheme;
- You cannot use the pension fund to purchase a holiday home and there are strict rules regarding the purchase of overseas property;
- You cannot purchase shares in a company that you own or are a director of;
- Property development is generally not permitted as the Revenue regard this as trading and not investment.
- The property is purchased from gross funds (having availed of tax relief) giving you increased purchasing power.
- The pension is a tax-exempt structure with all rents accumulating tax free in the pension.
- Any capital gain is tax free within the pension fund.
- All expenses relating to the property are paid from the pension fund.
- Rent can be used as part of your retirement income.
Self-Administered Pension schemes are not for everyone; however, they should be considered if you are looking for a more flexible pension structure. Keeping all these key points in mind, it’s sensible to seek independent financial advice before making important financial decisions.
Gerard O’Brien LL.B LL.M CFP® QFA is a Certified Financial Planner and the Owner of Heritage Wealth Management, a Financial Planning practice based in 27 Cook Street, Cork. For more information, contact Gerard at firstname.lastname@example.org www.heritagewealth.ie
Disclaimer: All data and information provided within this article is for informational purposes only. Heritage Wealth Management Limited makes no representations as to accuracy, completeness, suitability, or validity of any information and will not be liable for any errors, omissions or delays in this information or any losses, injuries, or damages arising from its use.