Using your pension fund to invest in property is a secure and attractive investment strategy. Given Ireland’s current housing market conditions, where demand significantly exceeds supply, rental yields are particularly strong. While this situation presents challenges for tenants, it creates an ideal environment for investors seeking to maximize the value of their pensions.
A major advantage of buying property through your pension fund is the favourable tax incentives available. For instance, rental income generated by your property, when directed into your pension fund, is entirely tax-free.
Additionally, if you decide to sell the property in the future, you won’t be liable for Capital Gains Tax. Furthermore, after reaching retirement age, you have the flexibility to retain the property and seamlessly transfer any rental income into an Approved Retirement Fund (ARF), continuing to benefit from your investment into retirement.
Investing in property through a pension involves specific rules to maintain its tax-exempt status, most notably the “arms-length rule” which requires the property to be managed by an independent third-party and not be used by the pension member or related parties. Additionally, the property cannot be purchased from or sold to connected parties, and personal use is prohibited.
Key Rules for Pension Property Management:
1. Arm’s Length Principle: The property must be managed by a regulated property manager and cannot be used by the pension member, their family, or related business partners.
2. No Connected Party Transactions: The property cannot be purchased from or sold to individuals or entities connected to the pension member, including family members, employers, or their directors and associated companies.
3. No Personal Use: The property cannot be used by the pension member or their family for personal purposes.
4. Rental Income and Tax: Rental income from the property is tax-free within the pension framework.
5. Lease Registration: Qualifying leases must be registered with the Residential Tenancies Board (RTB).
6. Approved Property Managers: The property manager should be selected from an approved list provided by the pension provider.
7. Vacant Home Tax: The property may be liable for Vacant Home Tax if not actively marketed for sale or rent.
8. No Borrowing (IORP II Directive): Borrowing to purchase a property within a pension scheme is generally prohibited due to the IORP II Directive.
9. Reporting and Oversight: Pension schemes investing in property are subject to additional reporting and oversight requirements by the trustees.