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The Irish love affair with property is no secret. So, it’s perhaps no surprise that the prospect of buying a property through a pension might be appealing to some. Having property in the mix for your pension can stand to you – particularly if the market and timing are on your side. So how would you go about buying property through your pension and what should you be aware of before you do?

How to buy property through your pension?

Ultimately, anyone can buy property through a pension as long as they do so through a specific product and provider and have sufficient funds in their pension.

You can generally buy property through Approved Retirements Funds (ARFs), Personal Retirement Savings Accounts (PRSAs), Buy out Bonds (BOBs), or a combination of these pension schemes, depending on the provider.

Note that there are two types of PRSAs – a Standard PRSA and a non-Standard PRSA. 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.

It's worth knowing too that if you buy property through your pension scheme, this property could be transferred into an 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.

How much money do I need?

If buying a property through your pension, you can choose the property you wish to buy, whether it is residential or commercial. The amount of money you need in your pension in order to buy a property will depend on the property you have in mind. You usually can’t use all of the money in your pension fund to buy a property – you must usually leave sufficient liquidity in your pension scheme to cover costs related to the properties and pension fund after the purchase. You should also leave enough money in your pension fund to allow you to spread your investment risk across more than one asset class.

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 fund. If borrowing for property through a pension scheme, you will need to ensure you’ll have enough funds to meet the repayments and that the loan can be paid in full before retirement. Note that borrowing is not permitted for ARFs and banks who are providing lending to pensions have limits on the amounts that can be borrowed along with other criteria such as location of property and expected rental yield.

Be mindful though 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.

Advantages over buying property outright

The main advantages of purchasing property through a pension scheme are tax-related. 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 and is registered with the Residential Tenancies Board). Similarly, any profit earned from the sale of properties is exempt from Capital Gains Tax (CGT). Furthermore, if buying property through a pension, you can get pensions tax relief on your pension contributions into the scheme.

The income tax exemption on rental income would not be available if you bought an investment property outside a pension scheme with a view to earning rental income from it in retirement.

Furthermore, unlike property bought through a pension scheme, you cannot claim pensions tax relief on the money used to purchase a property outright personally.

Caveats: restrictions, costs and so on

Know what kind of rental yields you would expect from the property you are considering buying through a pension scheme. 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. Your financial advisor can take you through the current rental yields on offer.

Get impartial advice before buying property through your pension scheme - and be sure you meet all the rules so that you get the tax advantages. For example, the property can’t be used by or rented to you, or anyone connected to you - such as a family member. You cannot buy a property with a view to ‘flipping’ it – that is, for renovation and a quick resale. You must be buying the property as a long-term investment.

Investing in property through a pension scheme can be expensive so understand the costs. As well as the initial cost of purchasing the property, costs include stamp duty, solicitor fees, insurance, local property tax, letting agent fees and service charges. These costs will vary depending on the type of property you purchase. Note that any costs in connection with the property purchase are consumed by the pension fund.

Be careful about borrowing for property through a pension scheme. Be sure your pension fund can afford the mortgage repayments should you decide to do so.

Is it a good idea?

Firstly, having timing and the market on your side is always important with property. Given the huge shortage of and demand for accommodation, the rental market continues to be strong – though the location of a rental property, as well as its access to local amenities and public transport links, will be key when it comes to securing tenants. With the rental yields currently on offer in Ireland, it would be reasonable to expect investment growth from the rent after expenses such as LPT, property management fees, insurance and so on are paid.

As is always the case with investments, due diligence is important if considering buying or investing in property through your pension. So too is not having all of your pension invested in the one asset class. It is crucial to understand the costs and investment risks of buying or investing in property through a pension, as well as the tax rules. If your property investment were to go wrong, it could take a substantial chunk out of your pension. Seek impartial advice from an authorised financial adviser if considering lining up property to finance your retirement – whether through the purchase of property through a pension scheme, direct ownership or otherwise.

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

Fiona Harris, ITC Marketing Manager