I wrote a few weeks ago about the probable end of owning a property through your pension under the IORPS II legislation that is due to be enacted early this year. For those who still want to use their pension to fund a property, there is a solution…the return of the pension backed mortgage!
You get an interest only loan from a bank to purchase the property. You own the property personally and you can rent it to whoever you want (no arms length restriction). The property itself is completely unconnected to any pension.
Alongside it, you have your pension plan. As the property is outside of the pension, it doesn’t have to be a self directed pension. It can be a pension with an insurance company or your occupational pension scheme.
At retirement, the tax free lump sum is used to pay down the capital owed on the mortgage. If there is a shortfall on the lump sum (maximum lump sum is €440,000), you have to cash in some of the remaining fund and use that to pay off the capital sum.
If you own a property through a pension, you don’t own the property, your pension does. Any rental income is paid into the pension fund tax free. If you sell the property at a profit, there is no Capital Gains Tax on the profit. There is an arms length rule so you can’t rent it to someone you know. You also can’t manage the property yourself, you have to employ a property management agent that is on the Pensioneer Trustees panel.
Under a pension backed mortgage, you own the property yourself. As it is outside your pension. the rental income is taxed as income and the profits on sale are subject to Capital Gains Tax. You can manage it yourself and rent it to whoever you want. The pension is just being used to pay the capital sum at the end of the mortgage term.
Like the Endowment Mortgage fiasco, the biggest danger is that your pension fund won’t be big enough at retirement to pay the capital owed. This could be because of under performance or you don’t contribute enough to the plan.
The estimated maturity values quoted to you at the beginning are only estimates, so you need to keep your pension under constant review and make adjustments as needed, which will most likely be putting in more money to your pension.
As the limits for personal pensions and PRSAs are quite low, a pension backed mortgage is not that suitable to most people who are self employed. The contribution restrictions on company directors and employees are much bigger, so a pension backed mortgage will be more suitable.
Not very. Banks can’t assign pensions against loans so they are going on a promise that you will use your pension at retirement to pay off the loan. Therefore, they are very cautious in lending. You can expect to only get a loan for 50% of the property value, the same as buying it through a pension. They will also expect you to have other assets outside your pension that can be used to pay off the capital sum.
If you have any questions, drop me an email at firstname.lastname@example.org
11 February 2019