Employer-sponsored pension funds typically allow investments in assets that are determined by the trustees of the pension fund. But invariably the assets are limited to those chosen by the fund manager, which is usually an insurance company. Fund managers tend to stick to tried and trusted assets like equities, bonds and cash – but in more recent times, fund managers have included other assets like commodities, index funds and other derivatives.
However, self-administered pensions have no such asset constraints and are free to invest in most assets, including private property. Irish investors have a particular ‘grá’ for property. This backfired spectacularly in the 2000s when too many people paid too much for property and took on far too much debt. In addition, the current state of the property market in Ireland with caps on rent, onerous tax commitments and ever-increasing paperwork, make it increasingly difficult for private landlords; and evidence suggests that landlords holding just one property are exiting the market. Although, these numbers undoubtedly include people who inherited a house on the death of parents and have no desire to hold on to it.
With meagre returns from deposits and other low-risk products, many investors are keen to consider alternatives – and private property is a very real target for self-administered pensions. Within a pension structure all income from, say, rent and all gains on the sale of a property are tax exempt. This can prove very attractive. For example, over the course of 10-20 years, pension investors might be contented with an investment that held its own in value terms and delivered consistent returns by way of gross rental income. If capital appreciation also ensued, well that would be a nice bonus.
Naturally some rules apply to the purchase of property through your pension fund. The most notable one is that the purchase must be an arms-length transaction. For instance, you cannot invest in your own principal private residence nor your holiday home nor any property that might be connected to a close relative or a business associate.
The current market where prices are depressed and rents are high is in total contrast to conditions 15-20 years ago, when prices were soaring. This could be an ideal time for owning rental property through your pension. There are risks, of course, and these need to be explained and understood but there are also clear advantages. The tax breaks that pensions attract are a key issue. Their continuance in their current format is always a topic of conversation at budget time. However, the Irish government is committed to expanding the broader pension take-up rate and may even implement a scheme of compulsory pensions. Tax breaks will be at the heart of such initiatives.
The information, herein, is believed to be reliable. MMPI is not soliciting any investment actions based solely upon this information and accepts no responsibility for any errors or omissions. Specific professional advice, offered by MMPI in private consultation, should be sought in relation to individual circumstances.