Mortgage for property in pension

[brian]

Hi,

Pre-crash some banks lent for the purchase of a property to be held in a pension.
I understand these loans are riskier for the banks as they cannot be secured against any other properties.

It is more tax efficient to have a buy-to-let in a pension fund, albeit much less liquid.

Does anyone know of any banks who are lending now for such purposes?

thanks,

Brian

 

[Brendan Burgess]

It is more tax efficient to have a buy-to-let in a pension fund, albeit much less liquid.

Not sure why you say that.

A pension is separate from your other finances.

If your pension fund decides it wants to hold a property that is fine.

If you decide to buy a property in your own name, that is fine too.

Pensions, are too some extent, more efficient than direct investment. It doesn't matter whether the pension or investment is invested in shares or property.

Brendan

 

[brian]

Hi Brendan,

Perhaps I should clarify - it is more tax efficient to have a buy-to-let in a pension fund, rather than a but-to-let purchased privately.
There should be no tax liability incurred on monies to purchase the property.
In addition, the rental income is not subject to income tax, nor will capital gains tax be payable on the sale of the property.
The property fund can even be registered for VAT if required (although not sure which expenses can be re-claimed).

I am a contract worker with my own ltd company.
I have heard that mortgages to purchase properties maintained in a pension fund are difficult to get.

Does anyone know of any banks providing such mortgages?

thanks,

Brian

 

[Brendan Burgess]

Perhaps I should clarify - it is more tax efficient to have a buy-to-let in a pension fund, rather than a but-to-let purchased privately.

Maybe I have not explained it correctly.

If you are investing in anything, a pension is tax-efficient up to a certain point.

The fact that it's a property is not relevant.

My gut feeling is that if you are prepared to take the risk to borrow to invest in property, you might be better off doing it in your own name. You get tax relief on most of the interest paid on the mortgage. That tax-relief is not worth anything if you buy it in a company. A

When you draw down the pension, it will be taxed at your marginal rate. So, it could be argued, that you are losing the tax benefit of interest relief.

I think that for pensions generally, you should be taking a very low risk approach. I know a few people who are in their 60s now, and their pension funds are worthless because they borrowed heavily 10 years ago.

Brendan

 

[Steven Barrett]

ICS are now lending for property purchases through pension. 50% loan to value, so you have to have the other 50% in your pension. You also need a 10% liquidity buffer in your pension and funds for fees. For a purchase of €200,000, you will pay out about €20,000 in fees and liquidity. That's on top of the €100,000 you need for your side of the purchase. There's a lot of work involved in getting things set up and approved...and it's expensive.


Steven
www.bluewaterfp.ie

 

[Brendan Burgess]

Hi Steven

That's very interesting.

What are the fees?

And how does the liquidity work?

I need €120k in my fund to borrow €100k to buy a house for €200k.

After the mortgage is drawn down, can I not just use the liquidity to pay down the mortgage?

Brendan

 

[Steven Barrett]

Hi Brendan

The liquidity is to ensure the funds are there to pay fees. If you use the liquidity to pay down the mortgage, how does the Pensioneer Trustee get paid? Or the management company who has to manage the property? Too many cases from the Celtic Tiger of there being no cash available in the fund and no contributions coming in. Add in an unrented property and the PT is getting nothing. They still have their reporting duties to the revenue to pay for.

The liquidity will sit there in the scheme bank account. It can be adjusted if there is a surplus of cash and you can pay down the mortgage or invest in other assets.

You are looking at paying 3 sets of legal fees to borrow to purchase a property through your pension, the Pensioneer Trustees, the banks and your own for conveyancy. Then there's the advisor set up fee to put the whole thing in place, stamp duty, estate agent, fit out cost.

I would question why someone with €120k in there pension would gear it up and invest it all into one apartment or small house. The rental income wouldn't be that strong for such a property, zero diversification and an extremely illiquid asset. It is suitable to people with larger pension funds who will still have investments in other assets. But with people's obsession with property in Ireland, I expect people to be clambering for this offering.

Steven
www.bluewaterfp.ie

 

[cremeegg]

The rental income wouldn't be that strong for such a property,

Why ever not, you could easily get 8% return. Where else would you find it.

zero diversification

True, but that is not necessarily a bad thing. If it is the best investment then why diversify away from that.

People who think shares all day understand that diversification can reduce risk without reducing return, however it is a little different when you move to a different asset class.

an extremely illiquid asset.

True again, but so what. This is another undigested idea from the world of share investing. This is a pension investment, liquidity should not be a requirement. If for some reason a liquid investment is required then of course that is not property.

 

[Steven Barrett]

Why ever not, you could easily get 8% return. Where else would you find it.

Just checked the rental market for an apartment in West Dublin that would cost €200,000. Up to €1,500!! So, I guess you are correct on that one.

True, but that is not necessarily a bad thing. If it is the best investment then why diversify away from that.

People who think shares all day understand that diversification can reduce risk without reducing return, however it is a little different when you move to a different asset class.

I would never advise someone to invest in just one company. A large part of my job is managing risk and expectation. No one has ever given out to me for making too much money. When there is a crash though, I don't want people saying "I didn't know it could fall by that much". No diversification can have great upsides and disastrous downsides. I have seen it already with people who bought apartments through their pension during the Celtic Tiger. Once their income reduced, the first thing to stop was the pension contributions aka mortgage repayments. Property was in massive negative equity, so they eventually let it go and lost all the pension benefits they had accumulated up to that point.

True again, but so what. This is another undigested idea from the world of share investing. This is a pension investment, liquidity should not be a requirement. If for some reason a liquid investment is required then of course that is not property.

Life is about cashflow. If you don't have access to money, you can't enjoy the lifestyle that you want. Property uses up a large amount of cashflow and drips it back into your account. What if your sole pension asset is a property and you get to retirement age? You can't cash in 25% of a property and take the cash? You may not be able to sell the property, so you lose out on your tax free lump sum.

I'm not saying don't buy properties through pensions, just don't go all in on a property through a pension.


Steven
www.bluewaterfp.ie

 

[Gordon Gekko]

Steven,

I agree wholeheartedly; buying direct property through one's pension adds unnecessary complexity and cost. If someone has strong conviction in relation to the Irish property market, he/she should put an appropriate percentage of his/her pension into IRes/Green REIT/Hibernia REIT/IPUT.

Gordon

 

[brian]

Hi,

Many thanks toall who have taken the time to reply.

I see the following as the key benefits for investing in property through a pension over privately:

- Tax relief at marginal rate on monies in pension to fund property purchase i.e. deposit and fees.
- No tax liability on rent received for property.
- No CGT liability if disposed within set out timelines.
- Access to up to 200k tax free on retirement (property disposal may be required).


I am 40 years old and have a pension fund to which I intend to keep contributing separately.
Any property purchased, regardless of vehicle, will be as a long term investment.
I intend to make additional payments to pension to fund the purchase a property around the 100k mark.
I see the tax relief available for pension properties as compelling reasons to purchase the property through a pension fund.

Feel free to point out any salient issues I may have missed,


thanks,

Brian