Pension Property is Alive and Well
Retirement can be a daunting prospect, both economically and personally, but investing in a pension property can provide a sense of security that extends beyond the individual’s own lifetime. In this blog, we will explore what pension property is, how it works in Ireland, and some of the benefits and drawbacks of this investment option.
There are multiple ways to invest in property through your pension – investing in a managed fund; indirectly by investing in a loan note instrument; or purchasing a property directly into your pension scheme through a self-administered pension plan. Focusing on the latter option, the possibility of generating a steady income stream through rental payments has attracted many investors into the market.
There are a number of key differences between owning a property personally and owning one through your pension. The most important ones are the restrictions set out by Revenue. A pension investor cannot have anything to do with the property, that means they or any “connected party” can never stay in the property or carry out work on it. Additionally, Revenue stipulate that the “sole purpose” of the property purchase must be to benefit the pension scheme. The property must be rented to provide an income for the pension fund., although there is no minimum rental term defined, Revenue expect to see income flowing into the pension scheme for a significant number of years.
One of the main benefits of investing in pension property is the tax shield provided by the pension structure. Properties purchased outside of a pension scheme are taxed heavily with stamp duty, local property tax, income tax and capital gains tax (CGT), all applying to the same asset. All rental income, less some tax-deductible expenses, is added to the property owner’s other income and taxed at their top tax rate, which includes USC and PRSI (of 4%). CGT of 33% is levied on any capital appreciation. This punitive taxation system is one of the main reasons why so many landlords are leaving the market.
The taxation of property in a pension is a lot less complex, firstly tax relief is granted when funds are contributed to the pension scheme. Properties purchased in a pension are liable to local property tax and stamp duty as normal, however there is no income tax on rental yield and no CGT on any increase in value when the property is sold.
It is important to note that the property does not have to be sold at retirement. Many pensioners move the property into a post-retirement product and continue to live off the rental income until they pass away. This allows them to receive a similar type of income to the traditional pension annuity, while crucially preserving a capital value to pass to their estate. Income tax will apply on funds drawn from the pension post-retirement. That being said retirees are entitled to a significant tax-free lump sum, typically 25% of the fund, this lump sum can go as high as €200,000 before any tax is payable on it.
As with any investment there are also some potential drawbacks to pension property. First and foremost, property investments are subject to market fluctuations and may not always produce the expected returns. Owning a single property as opposed to a share in a property fund means it may take longer to offload the property, particularly during times of economic stress. Finally, there are various fees and costs associated with the process of purchasing and managing a property including legal fees, property manager fees and ongoing maintenance costs.
Despite these potential drawbacks, pension property remains an attractive investment option for many Irish investors. The ability to generate a steady income stream from rental payments, combined with the potential tax benefits offered for property investments, make this a viable addition to traditional investment portfolios.
In conclusion, pension property is an investment option that should be carefully considered in the context of an individual’s financial goals and circumstances. Like any investment, it is important to conduct thorough research and seek expert independent financial advice before committing to a pension property investment
For further information, please speak to your financial advisor or email justask@independent-trustee.com.
Eoin Hassett, ITC Group