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Should I buy property with a pension? Ever wonder what the pros and cons are if you did decide to establish a pension property? Is having a pension property a good idea? Hopefully this will help. In the short piece we will share:
Financial benefits of buying a property with your pension
The pit-falls of having a property in your pension
Some other insights that you should know
Our love of property is widely recognised. Our general disdain of pensions is also widely recognised – maybe that’s why many of us have thought to buy property with a pension – if for no other reason than to sex-up the pension with some property! It’s not quite the golden ticket to Willy Wonka’s that many think it is – but there are merits for sure.
Instead of buying a property with your pension, you could consider buying units of a Property Fund (we wrote about this approach here – not ideal). In many ways an investor stands a better chance if they own bricks and mortar as opposed to units in a property fund, some of the reasons for which are outlined in Blog 135. There are certainly merits for owning property within a pension, if you insist, lets take a look.
Can I Buy Property With A Pension?
Before we get into the nitty-gritty, let’s consider how and if one can buy property with a pension. First things’ first; there is an EU Directive known as IORPS II due to come into force here in Ireland. This was actually due to be transposed into Irish Law a year ago, it has yet to be done, and heaven knows when it will happen now.
IORPS stands for Institutions for Occupational Retirement Provision. The intention with it is to standardise and ensure consistent compliance of pension funds across the EU. One of the impacts of this will be on single-person pension schemes, and Self-Administered pensions and whether such schemes can hold. There are reportedly over 100,000 such pension schemes in Ireland, so it is relevant to many individuals here. It could make it difficult to buy property with a pension in some scenarios. This would depend on the relative value of property to the pension, and whether it is before or after the individual has retired yet or not. More on the ins and outs in a coming episode.
The imposition to law has been fought tooth-and-nail, principally by the Association of Pension Trustees who have brought the case to the courts. Read more about it here on Pensions Authority website.
So yes, you can technically, at time of writing (April 2020) buy property with a pension. One thing you can’t do, before you ask, is to get your pension to buy a property you already own. If I had a euro for every time I’ve been asked if that was possible, I’d have at least enough to buy a pint of stout (when they re-open).
Pros – Buy Property With A Pension
While you need an Executive Pension or a Self-Administered Pension, you don’t need to be a director of a company to have one – technically anyone can do this, if they wished
You can buy any property you like, you have total control, provided you have the pot to do it!
You can buy residential or commercial property within a pension
Rental income goes into the pension ‘pot’ tax free – when you draw income from that pot it will be taxable income of course
You can benefit from increases in the capital value of the property within your pension (obviously only if you sell it will you realise that benefit mind you)
When you do sell it, hopefully at a profit, there is no Capital Gains Tax on the profit within the fund
The property will be managed by property manager, all maintenance etc being taken care of
All expenses, insurance, maintenance related to the property will be paid for with cash within the pension pot, not from your pocket directly
You can ‘chip together’ with someone you know/like who also wishes to use some of their pension pot – if you can consider that as a benefit!
Ideally, the rental income will be of a consistent level to generate the 4% or 5% which you draw-down as income each year.
Cons – Buy Property With A Pension
You will need an Executive or Self Administered Pension in order to buy the property
You must keep sufficient assets in your pension pot, aside from the property, to provide for liquidity and to cover expenses
You, nor anyone connected to you, can have the use of the property – it must be at arms-length – it ain’t a house for your child or a holiday home!
It is a very narrow and under-diversified asset to own within a pension – a single property, on a single street, in a single town, in a single country
Rental income can stop and/or reduce over time
It could just as easily be added to the ‘Pros’ – when you buy property with a pension you can borrow within the pension fund to buy a property of greater value
Again, could be in ‘Pros’ – you will be leveraged if you borrow – when things go bad, that multiplies the negative impact
The costs of maintenance and management can be pricey
Long term property values may not deliver the returns you need
Property can become illiquid – often at the very time you need to sell and access the cash!
If the rental income is not of a level or consistent enough to generate the annual draw-down each year, you’ll need to turn the tap on from your cash or other assets within the pot
We’ll be sharing another piece in the near future to share with you the logistics, technical details around how it works, how the legals and the financials operate. Hopefully for now, this will help you determine for yourself if property really is the ‘Great Glass Elevator’ or if it is a bit of a Violet Beauregarde!
Speaking of Willy Wonka – as a bit of fun – first person to mail me with the correct name of the brand of the chocolate in the image in this piece will get their very own bar of said chocolate in the post from Informed Decisions HQ – It is almost Easter after-all!
Blog 135 – Are Irish Commercial Property Funds In Trouble?
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