As property prices continue to recover, we are seeing more and more enquiries from existing and prospective clients regarding the options available under Self-Administered Pension Schemes. Most queries involve the investor spotting a property that is great value (in their opinion) and wondering how they could fund the purchase of this great investment via their pension fund.
I am sure that lots of these proposed investments will in time turn out to be great investments, however, there is the danger that a significant portion of them will not work out. I have a self-administered pension fund. I bought an apartment in Limerick in 2007 through the pension fund. I used significant pension contributions along with debt from one of the main Irish banks. I still have this pension property investment, so I know what I’m talking about!
This is my take on the pitfalls:
Arm’s Length Transactions
All purchases must be at arm’s length from the pension holder. That means you cannot purchase from a relative or a business associate. Furthermore, you cannot use the property yourself or for your business. A simple rule here is that, if you have to ask, the answer is “NO”!
Bank Lending is Nearly Impossible
Lots of banks were badly burned by these types of investments. This is because the bank cannot have recourse to the pension investor personally. So lots of people just walked away from these investments and the banks could not pursue them for the debts remaining. For this reason, it is exceptionally difficult (despite what anyone else might tell you!) to get lending for a pension fund. We have seen the best deals turned down as the banks are running scared from these types of deals. To be fair, I can see why this type of lending would not be attractive to any bank.
There are charges associated with the set-up of a self-administered pension fund. They are typically 1% per annum. So if you buy a property for €300,000, you can expect your pension contract to cost you €3,000 per annum. This causes all sorts of problems down the road when the pension investor wonders aloud what the pension provider is doing for the €3,000 fee. They often forget that they agreed to this at the outset. There are a plethora of boxes that the pension provider has to tick, not least ensuring ongoing revenue approval. Our advice would be to be very clear at the outset what charges are applicable.
Limited Amount of Providers
The market is very small in terms of competent providers for this type pf pension contract. If you come in and meet us we can tell you about each contract that is available and the pros and cons of each contract. We often get calls from existing clients wondering why they aren’t with Provider X. There is always a good reason but too often the pros of a particular contract are the only items considered.
Investing in One Asset Type Only
If you were to suggest that you would only invest your pension fund in one asset type only out of equities, bonds, property and cash, we would tell you that is simply a bad idea. If you then came along and said that you are going to invest in only one particular country, we would tell you that is just looking for trouble! If you then said you wanted to buy an apartment in Limerick or a commercial property in Dublin with your entire pension fund, we would have to tell you that’s just insane. Investing in one single illiquid asset is a bad idea.
What is your exit strategy? At some stage you need to draw down on your pension fund. Will there be enough cash to generate your tax free lump sum. Will you have to sell the property to fund your income? What if the property market is in serious decline? You need to think all these things through before deciding on your investment.
Property Related Charges
Your rental yield is depleted by the property charges, management charges, rental company charges and refurbishment costs. I have seen my own rental yield almost halved consistently for 7 years by charges.
There are advantages ……..
Of course there are advantages of buying a property through your pension fund such as:
- You control the investment
- You purchase the property through tax free pension contributions
- Rent is paid back to the pension fund without any tax implications
- When you dispose of the property, there are no Capital Gains Tax implications
The Metis Ireland View
We are consistent at Metis Ireland that a prudent pension investment strategy will involve a widely diversified pension fund. This is the best way of ensuring that your pension fund will not suffer the massive falls that property markets in Ireland suffered over the last 5/7 years. It will also ensure that your pension fund isn’t entirely susceptible to the huge equity market falls that occurred a few short years ago.
We have a saying in Metis Ireland that “Market timing is Mission Impossible”. We think about stock markets when we say that. However it is equally pertinent for property market returns.
Let me put this another way. Find me a pension investor who set up a self-administered pension fund in or before 2008 to buy property who is happy with his or her decision. I think you’ll be looking for a while. So why will it be different this time?
Diversify, diversify, diversify, diversify!!!!!
Having said all that …..
If you still think you want to pursue a self-administered pension fund, contact us here and we will be happy to meet and discuss the risk and rewards associated with a SSAP in more detail, we will also be able to point out the best provider in the market for your particular requirements.
Co-Founder, Director & Self-Administered Pension Property Holder!
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