Should you Self-Administer your own 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 is slightly more interesting and flexible – 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. They have been particular popular in Ireland in the past few years as people look to capitalize on perceived lower property prices by purchasing property within their pension schemes.

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.  The Revenue Commissioners require that a Pensioneer Trustee be appointed to operate such schemes.

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
  • Structured products such as equity linked notes and kick-out bonds
  • Institutional funds including many leading global investment managers

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
  • 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
  • A tax free sum can be payable on death before retirement
  • 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 the money. 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
  • Personal items cannot be bought, for example, art, jewelry, vintage cars etc.
  • Investments in private companies (those not listed on the stock exchange) can only be a maximum of 5% of the pension’s assets and a maximum of 10% of the private company’s share capital
  • Property development is generally not permitted as the Revenue regard this as trading and not investment.

Summary:

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 Main Street, Midleton, Cork. For more information, contact Gerard at gerard@heritagewealth.ie 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.