Using Your Pension to Buy a Property
It is possible to use your pension to buy a property through your pension. Property, as with all unregulated investments in pension arrangements, has set guidelines and restrictions issued by the Revenue governing what is permitted. This document briefly outlines those guidelines and restrictions together with the approach banks are currently taking with respect to gearing.
Buying a Property through your Pension – General property investment rules
- All purchases, sales and lettings must be on a totally arms length basis from the beneficial owner of the pension arrangement. This includes but is not limited to any connected person or entity e.g. their employer or associated company and family members.
- Any purchase of a property which is subsequently used by a person or entity connected to the beneficial owner will be deemed to be a distribution from the pension arrangement from the date of first use and taxed accordingly.
- Purchases of property with a view to development and immediate disposal is prohibited.
- The purchases of holiday homes is permitted as long as no party to and or any person or entity connected with the beneficial owner of the pension arrangement uses the property. If the beneficial owner or any connected person or entity uses the property, it will be deemed to be a distribution from the pension arrangement from the date of first use and taxed accordingly.
- Harvest Financial Services Limited (HFS) and / or Harvest Trustees Limited (HTL) must be able to demonstrate that they have control over any property investments, especially in the case of non-Irish property.
- Any borrowing associated with the property purchase must comply with applicable Revenue rules.
Buying a Property through your Pension – Initial property details to be provided when
- Marketing material for the property;
- Purchase price as agreed and confirmed on purchase contracts;
- Purchase contracts to be registered correctly in the name of the pension arrangement;
- Confirmation if you have paid the deposit personally (if applicable), so HFS can refund same from the pension arrangement; an
- Solicitor contact details for the pension arrangement and the vendor.
- From this point the usual property closing administration will apply, which include a request for the beneficial owner of the pension arrangement to complete a Pension Arrangement Property Purchase Application Form.
Administration on Buying a Property through your Pension.
HFS will have to interact with both solicitors on all documentation including purchase contracts, which must be correctly registered in the name of the pension arrangement. All documentation would be remitted through our office for vetting to ensure the provisions contained therein are compliant with the Revenue guidelines and restrictions.
When Buying a Property Through Your Pension we will ensure:
- That all documentation pertaining to the purchase has been vetted to comply with the Revenue rules for property investment;
- The property is correctly registered to the pension arrangement, with full legal title registered. HFS use a solicitor from a panel selected by Harvest for all pension purchases – a quote can be arranged. A HFS administration charge of €100 is applicable for the use of an alternate firm covering provision of additional certified documentation. For completeness the purchasing solicitor handles the conveyancing of the property at a cost to the beneficial owner, this is not completed by a solicitor from a panel selected by Harvest.
- That the property is let and managed at arms length on an ongoing basis. HFS have a discounted rate from a property manager, who understand our ongoing requirements and can supply the required reports, of 6% as a letting fee and 7% as a management fee for all residential lettings; and
- That all costs (set-up and ongoing) will come from the pension arrangement. This means we will require a regular current account to be opened with one of our preferred banks in the name of the pension arrangement. This account would then act as a receptacle for rent and from which costs would be debited. HFS would also have to authorise all transactions in and out of this account.
Gearing possibility when Buying a Property through your Pension.
The Revenue have set out a number of rules outlining what is permitted in respect of borrowing. Any lending bank will also have their own lending criteria which they will apply on a case by case basis. Gearing is not permitted for Approved (Minimum) Retirement Funds.
- Only assets purchased by borrowing may be used to provide security to the lender.
- Assignment of rental income to the lender is not permitted.
- Life cover on the amount of the debt may only be provided outside the pension arrangement.
- No cross collateralisation with pension arrangement, corporate or personal assets.
- Interest only loans and loans for a period of more than 15 years are not permissible.
- The loan should be amortised in full prior to normal retirement age (typically 60).
- Use of other pension arrangement assets to clear residual debt is not permissible.
The banks have outlined their approach to this type of lending as follows:
- All the parties to the pension arrangement would be party to any borrowing (including the Pensioneer Trustee where applicable).
- Lending is only considered to a pension arrangement for property as the asset.
- In most cases, the banks will only lend up to 50% of the value of the property backed up by a substantial statement of net worth for the beneficial owner.
- All borrowings should be amortised in full prior to normal retirement age (typically 60).
- Obviously normal commercial lending criteria can be expected to be applied and so far the banks are considering proposals on a case-by-case basis. Currently there is only one bank that might consider this type of non-recourse gearing as it represents quite high risk lending for them.
Assuming there is no gearing, our fees for the initial purchase of the property would be between €750- €2,000 depending on complexity, including vetting.
Ongoing property administration will attract an annual fee of €500, which will cover the Revenue reporting and administration of property expenses.
Regular valuations are required by the Revenue at a cost of between €100-€150 annually for the unit trust structure, every 3 years for the Liberator.
An enhanced Public Liability policy is effected by HFS to cover any potential injury claims from tenants at an annual cost of €160.