Latest News from Pension Property

It is possible to invest in property through a Personal Retirement Savings Account (PRSA) depending on, the type of – and provider of - the PRSA, how exactly you wish to invest in property, and if you have sufficient funds in your PRSA to allow you to do so.

There are two types of PRSA – Standard and Non-Standard. A financial advisor is required to explain the differences between the two if they are recommending a Non-Standard PRSA to you.

With a Standard PRSA, you are only allowed to invest in pooled funds such as unit trusts and life company unit funds. So, if you wished to invest in property through a Standard PRSA, you would usually need to do so through a pooled fund. Bear in mind though that pooled funds typically invest in a range of different assets in order to spread risk and so your exposure to property could be quite limited. You should ask your PRSA provider if there is a particular investment fund which offers exposure to property, though be sure you understand – and are comfortable with – the risks and costs of such a fund before investing in it.

You have more flexibility around investments with Non-Standard PRSAs – and a larger selection of assets to invest in. Furthermore, with Non-Standard PRSAs, your investments are not restricted to pooled funds. However, charges on Non-Standard PRSAs may be higher and the investment risks are greater.

Should you wish to purchase property directly through your PRSA, you would need to do so through a Non-Standard PRSA. You would also need to have your PRSA with a provider which facilitates such direct property investment. There are a number of providers who offer Non-Standard PRSAs which allow you to buy property directly.

There are a number of tax advantages to purchasing property through a pension scheme. 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). Similarly, any profit earned from the sale of properties is exempt from Capital Gains Tax (CGT). Furthermore, you can get pensions tax relief on your pension contributions into the scheme.

Should you purchase a property through your PRSA, your financial advisor can take you through the current rental yields on offer. 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.

Bear in mind though that the property can’t be used by or rented to you, or anyone connected to you - such as a family member. It can only be held in the pension for the purpose of generating rent to build your pension pot.

In the event that you have a Non-Standard PRSA, but you don’t wish to buy a property directly, you could invest in property through an investment fund, depending on the choice of investment funds available through the PRSA provider.

It’s also worth noting that a property could continue to be held in a Vested PRSA or an Approved Retirement Fund (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.

Investing in property through a pension scheme can be expensive so understand the costs.

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 scheme. Be careful about borrowing for property through a pension scheme though. Be sure you can afford the mortgage repayments should you decide to do so. Be mindful that property is an asset which can go up or down in value and that 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.

Its important to get financial advice before buying property through your pension scheme - and be sure you meet all the rules so that you get the tax advantages.

For further information, please speak to your financial advisor or email justask@independent-trustee.com.

Fiona Harris, ITC Marketing Manager