Have you found yourself looking enviously at other property buyers recently and felt you’re missing out?Spotted a real gem of a property at a bargain price, with genuine hopes for capital appreciation and strong rental income potential? If so, but you’re struggling to raise the finance or don’t want to take on any more debt, then you may have stumbled upon a real solution to your problem! USE YOUR EXISTING PENSION FUND TO BUY THE PROPERTY.
There are some significant advantages to purchasing investment property through your pension. The most obvious being, as funds are already in existence within your pension, there’s no need to raise bank finance via a mortgage or term loan. Now viewed as a cash buyer, negotiating a lower closing price should also be that much easier. You should be aware however, as with any transaction, that property values can fall as well as rise.
The biggest advantages though are quite clearly tax-based. When your pension fund buys a property,
- it pays no tax on any rental income received, HOW GOOD IS THAT? If you were a personal buyer, you would pay Income Tax, PRSI and USC giving an effective rate of up to 52% for a higher rate tax payer. Furthermore,
- when your pension sells this property, there will be no Capital Gains Tax on any profit as opposed to a 33% personal CGT liability.
As a way of comparing the two, let’s assume you’ve found a nice 2-bed city centre apartment in Galway costing €200,000. This generates a conservative €1,000 per month (after expenses) rental income. As there is no tax payable by your pension fund on this rental income, the full €12,000 per annum goes directly into your pension; a yield of 6%. If purchased personally, then after paying tax, PRSI & USC on this rental income, you would have just €5,760 or a much lower yield of 2.88%.
When you reach retirement age, you can take 25% of your pension fund value as a lump sum with the first €200,000 tax-free. If the only value your pension has is the property it holds, it may have to sell the property come retirement to avail of your tax-free lump sum. Let’s assume this is the case and near retirement, the property sells for €320,000 (after any conveyancing/legal fees). When purchased through your pension, the full €320,000 goes directly into your pension fund, no tax. If personally purchased, you would have incurred a CGT liability on the growth of €39,180 (assuming you haven’t already used up your CGT annual exemption of €1,270).
Alternatively, when you reach retirement, you can also decide to keep the property. This means you can transfer the property into a self-administered Approved Retirement Fund (ARF) with any rental income or future growth helping to supplement your retirement drawdowns.
Whilst the above would have most suitors vying to buy property using their pension funds, there are, as always some restrictions. This means it may not be suitable for everyone. You need a sufficiently large pension fund or a number of smaller pensions which when combined, is large enough to buy the property. So, a minimum pension value of roughly €150,000 is required. The property can be either residential or commercial but not located outside of Ireland or the UK. The Revenue also insists that all such transactions are done at “Arms Length”. This means your pension fund cannot buy your family home from you or any other property for your own personal use or the use of connected parties. In other words, we’re talking about Investment Property.
If you would like to look further into this have a property in mind and want it to form part of your overall pension fund, then please contact us directly. We can look after the paperwork while you get on with the business of finding some bargain price property. Having the paperwork in order in advance of any potential purchase will ensure a more seamless and much quicker property transaction. Remember, if buying an investment property, within your pension and as part of an overall portfolio, it is a very tax-efficient means of doing so.
A Certified Financial Planner is an excellent point of contact for anyone seeking advice on Self Administered Pension Funds. This is particularly so when it forms part of your overall Financial Plan.
Look out for my next blog where I will share a few thoughts on the importance of Partnership Insurance. Paul is the Managing Director of Lifestyle Financial Planners Ltd. He has been in the Finance business since 1985 and offers specialist, tax-efficient wealth management, retirement and estate planning solutions to our clients. Paul is a Certified Financial Planner and holds a Masters Degree from UCD in Financial Services and Risk Management.
Tel: 096-75951 Mob: 086-8053755, www.lifestylefinancialplanners.ie
Please share this blogpost if you think it has been informative or contact us if you have any personal Financial Planning queries. Email paul@lifestylefinancialplanners.ie if you would like to discuss the above or would like me to give an insight into a specific topic you have in mind in a future blogpost.
Waiver: The information contained in this article is for general information. It cannot be relied upon as the basis for any form of agreement or advice. Paul recommends engaging professional tax, legal or financial planning advice relevant to your own specific circumstances.
posted 13th June 2017