Hi Sarenco
These are really helpful in forcing me to anticipate the questions I will be asked. Keep them coming.
• Would the amount borrowed from the pension fund constitute a taxable distribution or would it be tax-free?
No it would be like any other borrowings. The borrowings would have no tax consequences.
• Would tax relief be available on principal repayments (i.e. are they treated the same as pension contributions)?
No principal repayments would be like the principal repayments on any other loan. They would not attract tax relief.
• Do the principal repayments count towards the maximum annual contributions that attract tax relief?
No.
• Could a borrower make principal repayments and new pension contributions at the same time?
Yes.
• What about interest payments – are they tax deductible and do they count towards maximum annual contributions?
No, they are like interest payments on any other mortgage.
No, they don't count towards your maximum annual contributions as they are not contributions.
• Who determines the interest rate payable on the loan? What about the loan term?
All up for negotiation.
I would think that the interest rate should be something like inflation +2%.
Loan term is interesting. In America, it's 15 years for borrowings from the 401(k).
• What happens if the loan isn't repaid in accordance with its terms? Does the full amount outstanding (including accrued interest) become taxable income in the hands of the borrower?
No. The fund has an asset which is growing. It is secured on the property.
• What happens if the loan isn't used to purchase a PPR? Does this have to happen within a prescribed time period of drawing down the loan?
Absolutely. A bit like the drawdown cheque from the mortgage lender, it would go to the solicitor to pay for a house purchase and nothing else.
• What happens if the borrower dies with an outstanding loan from his pension fund?
What happens a person's DC fund at present?
I presume that the fund goes to the estate?
It would be treated the same way.
Say I have a house worth €200k , an AIB mortgage of €100k. To make it difficult, assume no other investment in the DC fund except a loan to me of €20k,
The house is sold.
AIB gets €100k, leaving €100k
The pension fund loan is paid off.
The estate now has €80k cash and a pension fund with €20k in it.
• Who pays for the costs of documenting and administering the loan (legal, etc.)?
The borrower or his pension fund.