While some pension investors will run a mile at the mere suggestion of putting money into bricks and mortar — among them surely former landlords sick of the hassle — for others it offers a rare degree of control and visibility. And despite the inherent risk of putting a chunk of money into one asset class, with values and rents proving resilient, it has the potential to put money to work.
“With increasing costs in the buy-to-let market, it looks like using a pension will become one of the main ways regular people will be able to buy investment property profitably,” says Ralph Benson, co-founder of the investments platform Moneycube.
Pension buy-to-lets
Properties bought within a pension are exempt from income tax on rent. And while usually anyone who sells an investment property will pay a huge chunk of capital gains tax (CGT) — 33% — on any uptick in value, there is no capital gains tax if you do it in a pension.
Apart from the tax benefits, some are drawn to buy-to-let for less tangible reasons. “Some people feel they have no visibility over their pension,” says Emer Kirk, head of business development and marketing at Harvest Financial Services. “They want a sense of ownership and control. With a buy-to-let they have that line of sight, and they can make the decisions on rent, when to sell.”
Although buying a buy-to-let through a pension is tax efficient, it still incurs all the usual costs of buying and letting. There will be one extra expense, in that while you might not normally hire a property manager, you are obliged by Revenue to do so if buying from a pension. This should minimise the hassle that can often make buy-to-let less appealing, although it will not eliminate it.
Hurdles
There is an arm’s-length stipulation; in other words you cannot buy a property that has any connection to you or those close to you.
“People want to buy a business premises, a holiday home or an apartment their children can use when they go to college,” says Kirk.
Another issue is the fact that some people keen on a pension buy-to-let simply lack the funds. And while you can technically borrow via a pension, it can be a pricy — and risky — strategy, says Kirk.
“If someone comes in with €100,000 in their pension wanting to borrow to buy, we’d see that as off the scale in terms of risk. They would be overexposed if rental income or values fell.”
If you do borrow, you pay substantially higher interest rates. It is “limited recourse” lending — in other words, the bank has no recourse to your other pension assets — and because of this there is a premium on the interest. You could be looking at rates upwards of 5%, which is far more than what you might pay on a regular mortgage.
“You’d have to select a property where the rent would be able to cover both this interest rate and capital repayments; it takes it into a whole different risk category,” says Kirk.
You could investigate the Rental Accommodation Scheme, whereby you buy a property and enter into an agreement with a local authority, which will take a long lease and pay rent directly to you. You get slightly less than market rent, but it is guaranteed, and the local authority looks after maintenance.
Income or capital value?
While there is always hope that a property’s capital value will increase, pension investors now are generally more interested in income. Rent varies hugely depending on what and where you buy.
“One person might pay €500,000 for a two-bed in Ranelagh and get €2,000 rent a month, while someone else might use it to buy two three-beds out by the M50, and get €1,500 a month on each,” says Kirk.
A financial adviser will do cash projections that may help you weigh up the buy-to-let option against others, such as investing indirectly through property funds or real estate investment trusts (Reits). Kirk recently did two projections for a client with a pension fund of €1m. In the first, all the money would be left in multi-asset funds at an assumed 4% rate of return; in the second, €600,000 would go into a buy-to-let with an assumed net rental yield of 6%. The client was interested in the income, as opposed to capital value, and in this example they would run out of money at the age of 92 in the first scenario, while there would still be funds in their ARF on their 100th birthday in the second.
Source * An extract from – How investing your nest egg in property can build your pension by – Eithne Dunne Sunday September 20 2020, 12.01am BST, The Sunday Times Personal finance
