Q: I have a small, self-administered pension and I am considering investing in property through it. What are the main pros and cons of doing so? What are the potential risks I could face after investing in property through my pension — and how can I protect myself from those risks? Also, I’ve heard that new EU rules mean it is now harder to buy property through a pension — is that right and are there any ways around those rules? John, Dublin South
A: Irish property prices increased by 6.9pc in the year to June, according to the Central Statistics Office. Property prices have balanced out since the dizzying heights of the Celtic Tiger — but from an investor’s perspective, the return on investment will also depend on the rental yield. The average rent nationwide was 5.6pc higher in the second quarter of 2021 than it was at the same stage last year, according to daft.ie. So, things appear to be adding up in favour of the argument to invest in property.
A key benefit of individual self-administered pension vehicles is the ability to acquire property through them.
With deposit interest rates being so low, the returns that some pension funds are generating are minimal. Contrast this with the strong rental rates in Ireland and it’s not hard to see the attraction of property investment.
The flexibility of a self-administered pension arrangement means that the pension investor can choose the property he or she wishes to purchase — provided pension rules are satisfied. Both residential and commercial property can be acquired.
Where a property is acquired through a pension vehicle, the rental income is not subject to income tax — nor will Capital Gains Tax be payable on the sale of the property.
Borrowing can also be utilised if available and the property fund can even be registered for Value Added Tax (VAT) if required.
On retirement, the property can be transferred in specie to an Approved Retirement Fund (ARF) and can continue to generate a post-retirement income. The rental income can be used to cover drawdowns from the scheme while maintaining the capital value of the fund — and so mitigate against ‘bomb out’ risk (where the investor outlives their retirement fund).
Indeed, the value of the property ultimately forms part of the ARF holder’s estate on death, which means the value of the property (as opposed to the property itself) can be passed on to the ARF holder’s family.
Property purchases are typically facilitated through a unit trust structure and a specific sub-fund is established to hold each property. As a result, when borrowing to purchase a property, the other assets of the pension scheme are protected as the bank’s only recourse is to the assets of the sub-fund — and not the pension itself. Furthermore, where VAT arises on a purchase, the sub-fund itself can be registered for VAT without having to register the entire pension fund for VAT.
Revenue does have criteria that specifically apply to property investments.
One of the primary requirements is that the vendor must be at arm’s length from the pension scheme member and the employer — including its directors and associated companies.
The pension scheme itself must of course have enough liquid investments to meet its liabilities.
As with any investment, careful and prudent consideration must be given to all aspects before any final decision is made. You should consider the fact that under Revenue’s ‘arm’s length’ rule, you cannot use property personally or buy or sell from connected parties. The value of property could fall as well as increase and/or the property could fall vacant — resulting in no rental income being received for a period.
We would always recommend people seek financial advice so they can make an informed decision on property selection (that is, choosing property in a strong location with good letting potential and yield). An adviser will also explain how you can diversify your pension fund to mitigate against risk and ensure sufficient liquidity is held in the scheme to cover any unexpected costs or repairs.
The IORP II Directive includes new EU rules introduced on April 22, 2021, which have brought some changes around borrowing for property investments. These rules have also limited the amount of a pension scheme which can be invested in unregulated assets (such as property) to a maximum of 50pc. These restrictions only affect the likes of occupational schemes such as a Small Self-Administered Scheme (SSAS) that are linked to a sponsoring employer. The restrictions do not affect Buy Out Bonds (BOBs) or Personal Retirement Savings Accounts (PRSAs). It may be possible to transfer an existing SSAS to a BOB or PRSA and make the property investment from there.
Q: I have a number of small pensions from various roles I have had throughout my working life. I’m currently in my mid-50s. These pensions include two defined benefit (DB) pensions, two defined contribution (DC) pensions — and my current pension, which is a public service pension. Would it be a good idea for me to simplify all, or some of these pensions, by merging some — or all — of them together? Or is it better to just leave them where they are?
Irene, Co Kildare
A: There are pros and cons to consolidating previous employer funds. Public sector pensions generally cannot be transferred and combined with private sector policies. However, DB and DC policies could be consolidated into a Buy Out Bond (BOB).
Financial advice is imperative prior to making such transfers or consolidating benefits.
DB schemes can offer valuable and guaranteed pensions but, if the DB scheme is underfunded, may offer a very lucrative transfer value in lieu.
The advantages of consolidation include a potential reduction in fees (such as if current funds are subject to individual fixed fees) and a larger pool of funds to use for investment purposes (such as to purchase a property asset).
Consolidating schemes also gives the individual control over their pension investment strategy, simplifies the administration involved and allows the saver to extend their retirement date if preferred — or conversely early retirement might become an option, subject to the scheme rules.
On death, the full value of the fund passes to a spouse or estate (whereas a DB scheme may only pay 50pc of pension to a spouse on death, or none at all).
However, you should note that if you do consolidate, you may lose benefits linked to employer schemes (such as permanent health insurance and guaranteed annuity rates).
The annual management fee on existing group schemes may also be lower than on a standalone policy such as a BOB. There may well be costs associated with the transfer or merging of policies — such as exit penalties on investments, conveyancing of property assets and so on. Also, the ability to retire individual schemes at different stages, as and when required, is lost on consolidation as all funds must be retired together.
Glenn Gaughren is head of business development with the Independent Trustee Company (www.independent-trustee.com).