I get asked every other week about clients using their pension fund to to invest in property. Here’s my stock answers!
The first thing you need to ask yourself is: does it make sense? The main reason there is strong demand for property in pensions is due to the attractive yield (return) available. Deposits and fixed income investments are paying little or no return. Then there are the tax benefits of pension property investments – the rental income is tax-free and there is no capital gains tax on the sale of the property. There are drawbacks too though. The minimum investment amount is typically high, you are investing in an illiquid asset, and the initial costs are high.
From an investment perspective, you need to consider diversification, liquidity, concentration risk and the long-term investment time horizon.
There are rules and restrictions imposed by Revenue when buying property through your pension. The main thing is to ensure that the transaction is at arm’s length from you, your family members or your business. In addition, holiday homes are not permitted.
Given that the typical minimum investment size is quite substantial, borrowing funds to finance the transaction is an option to consider also. Again, there are some Revenue rules to be aware of – only assets purchased by borrowing may be used to provide security to the lender, assignment of rental income to the lender is not allowed, and interest-only loans and loans for a period of more than 15 years are not allowed.
Update: New EU legislation is being transposed into Irish law which could curtail the percentage of your pension monies that can invest in property! *
*Please note that the provision of this advise does not require licensing, authorisation, or registration with the Central Bank and, as a result, it is not covered by the Central Bank requirements designed to protect consumers or by a statutory scheme.