The Irish pension landscape is changing rapidly. 2021 saw a plethora of publications, primarily from the Pensions Authority setting out the framework under which pension schemes will have to operate. There is more to come between now and when Auto Enrolment (a pension investment Scheme making personal pensions mandatory for all employees) arrives in early 2024 as part of Government’s strategic plan to increase pension coverage in Ireland to help combat long term pension deficits as our population ages.
In 2021 IORP II was transposed into Irish law, and this has been a game changer for those that want to invest and control what their pension scheme invests in, the popular asset being property. While the pension framework has become more complicated and requires sound professional advice to navigate through, it is still possible to invest in unregulated assets such as property or assets not readily available through off the shelf pension scheme. Indeed, it remains possible to borrow within a pension arrangement to invest in property. The key is to understand each pension arrangement, and which one is right for you?
Small Self-Administered Schemes were the traditionally known arrangement to invest in property. For those less affiliated with the jargon, the title covered all pension types regardless of whether you were a company director, sole-trader, employee or retired. Other than the professionals within the pension sector, the titles became almost irrelevant to the objective: to invest ones pension fund in directly held assets such as property and avail of the associated tax benefits to save for retirement.
As pension Schemes fall under IORP II, they have become all but defunct for the purpose of investing in unregulated assets such as property. Schemes are established under Trust, sponsored by an employer for the benefit of the member. Schemes were commonly used by companies to provide retirement benefits for their directors and employees. IORP II limits the exposure to unregulated assets and imposes onerous obligations on Trustees making self-administered Schemes unworkable where the investor wants to invest the majority of the pension fund in unregulated assets such as property.
Instead, PRSA’s and Buy-Out-Bonds (also referred to as PRB’s) have become the primary arrangement now used to invest in property. They are governed by separate legislation to Schemes, are not subject to IORP II and they do not encounter the same restrictions when it comes to investment in unregulated assets. They can move smoothly between both regulated and unregulated investment assets with no limitation on the exposure to either type of investment.
Put self-administered in front of the title, PRSA or Buy-Out-Bond and you then have an arrangement that allows for investment in property or other assets giving choice and control back. The process of investment remains the same, the pension holder sources the property, and their self-administered pension purchases the asset. The property is then held on the “balance sheet” of the individual’s pension, for it is the asset of the pension, not a personal asset of the pension member. On retirement the pension assets such as property does not need to be sold and can be rolled over into an ARF (Approved Retirement Fund) thereby extending the life of the investment and generating income in retirement.
The purchase costs and legal fees are paid from the pension fund, as are any running/maintenance costs for the property. Any rental income generated from the property goes back into the pension fund and is not subject to income tax. If the property is sold there is no capital gains tax applicable on any capital appreciation of the property.
It is not all about property… it is simply unwise to keep all your eggs in one basket. One must cast their mind back to the Irish property crisis and the devastating impact on personal wealth. Self-administered arrangements can invest in multiple asset types and when coupled with the attractive tax incentives make a very powerful vehicle for long term wealth accumulation. There is now a need more than ever before to get professional specialist pension advice to enable you to navigate the transfer network so as to invest your pension in unregulated assets such as property if desired.