I spent over half an hour trying to come up with a catchier title for this blog post but sometimes it's just as easy to go with the bleeding obvious!
We've seen a significant increase and inquiries from clients seeking to discuss the option of purchasing a property with some or all of their existing pension fund. As is the case with all financial advice it's an entirely personal thing and what I'm about to go through below is simply a guide to the number of benefits of this type of investing. Always seek advice.
So you’d like to buy a property with your pension pot?
The first step is to set up a Small Self-Administered Scheme (SSAS). I’ve produced a handy FAQ on these as an Appendix to this piece below.
Once you have taken this decision then it's a question of funding it. This is the piece you won’t find in the websites promoting pension property investing, you need a decent sized pot! Typically, I wouldn't advise any client to go near investing directly in a property with their pension fund unless they had at least €200,000 accumulated. Why? It's not just a question of buying the property. You have solicitor fees, trustee fees, minimum liquidity requirements (too much detail to get into here!) as well as my desire to encourage clients to have a diversified portfolio so let’s not go putting all of our eggs into a single asset basket.
Once you've cleared these hurdles, you're free to begin the prospect of purchasing a property with your pension. This is the exciting bit! I've outlined below 5 reasons why we believe investors should consider this type of investment for their pension.
It’s pretty self-explanatory but it boils down to this - it's tax efficient. I'd go so far to say as if you have the option to invest in property directly with your own cash versus direct investing in property directly with your pension it's a no brainer to choose the pension option.
Why would investors choose property as part of their investment strategy?:
- You choose the property you wish to purchase. It can be residential or commercial.
- Rental income in the pension is tax free.
- Non-recourse borrowing can be available.
- There is no capital gains tax on sale.
- Consistent rental income eases the worry of running out of money in retirement.
The last point is subjective. getting a consistent rental income is the Holy Grail and whilst the Irish rental market is extremely buoyant right now there's no guarantee it will continue to be so in the future. The good news is there are some opportunities for long term leasing with security on rental income which we're happy to discuss with any client.
In conclusion pension property investing is not for everyone. it really boils down to the usual mix of decisions when making an investment –
- Risk tolerance
- Time frame
- Capacity to make future pension contributions
- Investment experience
Ultimately its the job of your advisor to help you with this decision and we're certainly happy to take a call from anyone who wishes to discuss it further.
Q. What is a (SSAS) Small Self-Administered Pension?
This is a Revenue Approved scheme which is set up by a company for an employee or indeed for a director. The individual controls how the SSAS is invested.
Q. What are the benefits of a Small Self-Administered Pension?
A. The benefits are that the pension is flexible and allows you a high element of control. You have a large selection of investment options such as direct properties, shares and bonds to suit your risk profile. Your pension can not currently borrow so we work with you to choose the right investment strategy. You have complete investment control of your pension. You also have large scope to make contributions into the scheme. Another advantage of a SSAP is that you can make Company Pension contributions as and when it suits!
The following is a summary of the advantages of establishing a SSAP:
- You act as your own trustee in tandem with us as Pensioneer Trustees (gate keepers)
- You can work with your Accountant, Advisors to control your own destiny by designing your own investment portfolio
- You have the option to purchase your own shares, property, unitised funds and many other investments
- You can control the amount of contributions into your scheme
- You can work with your advisors in a flexible way using the vehicle as an important estate planning tool
- Excellent vehicle for moving assets into a pension scenario.
- You have obvious tax advantages of having a SSAP
- A SSAS / SSAP will give you a clear understanding and transparency on costs associated with your pension
- The SSAS / SSAP allows you to cut out commissions and unrelated fees associated with your pension
- The SSAS /SSAP will reduce the costs of having a pension and allow you to deal direct with Fund Managers and Asset Managers by cutting out in many cases the middle man
How can I set up a Small Self-Administered Pension Arrangement (SSAP)?
We can help you here. We have agreements with several approved Trustees, so the process is very straightforward.
What is the difference between a Small Self-Administered Pension and normal pension?
Small Self-Administered Pension arrangements are deemed by Revenue to be “self-administered” where contributions are invested through us as the Pensioneer Trustee rather than going through the normal route of an insurance company. They believe that in many cases the SSAP / SSAS method can save you costs by cutting out the insurance company though this is highly dependent on the amounts concerned as there are usually minimum fees on SSAP’s which wouldn’t apply to the likes of an Executive Pension. If they think you are not suited to a Small Self-Administered Pension they will let you know. Remember you also have the option of investing within an insurance company through a Trustee Investment Plan so you can get the best of both worlds.
The typical annual management charge of an Executive Pension is 0.75% net to advisor fees.
Q.What happens if i die before retirement in a (SSAS) Small Self-Administered Pension?
The value of your SSAS fund at the time of your death is used to provide benefits to your dependants.
Q. How many people can have a Small Self-Administered Pension?
In practice most SSAP's attract a membership of one member but you can have more than one member if required. Often the Trustees will be listed with the Pensioneer Trustee. Most schemes will have a Husband and Wife as the Trustees .
Q. How are contributions transferred into a (SSAS) Small Self-Administered Pension?
- The employer mostly pays the contributions, sometimes the member of the SSAS can make a personal contribution if they choose to. Contributions are tax deductible.
- Transfer values from another scheme can be moved over to a (SSAS) Small Self-Administered Pension.
Q. A (SSAS) is established under Trust, what does this mean?
It is a legal requirement for your SSAS to be established under Trust. The trustee will have a legal document prepared called a Trust Deed. In the Deed a number of nominated persons are appointed to hold the assets in accordance with the legislation. These people are always the Pensioneer Trustee and the Beneficiary Trustee, known as Trustees. The Deed is submitted to Revenue for Approval of the scheme.
Q. Who act as Trustee on a Small Self-Administered Pension?
One of the attractions of Small Self-Administered Pensions over insured arrangements is that there is NOT an onus on the company to act as Corporate Trustees to the scheme. It is our job to ensure that your scheme is compliant and that you are fully up to speed with the very latest in pension practice. They will arrange for any relevant training to ensure you as the Trustee know your obligations to your scheme. There is a lot of increased compliance for Trustees in the current pension's framework documentation which is making insured arrangements unattractive. That is why they see more companies prefer to set up Small Self-Administered Pensions for their staff. In the case of your Small Self-Administered Pension you are the Trustee and the Pensioneer Trustee (Signature Trustee Services) act as the co-Trustee. Basically, it is our job to work with you to ensure that your pension stays within the remit of the legislation.
Q. Is there ever a reason why an individual cannot act as a Trustee?
Yes there are many reasons, but the most common reason is as follows:
- If you are bankrupt
- If you are restricted by the Companies Act from acting as a director
- If you are prohibited from acting as a Trustee by the Pensions Board
- If you have been convicted of an offence
How do i control my SSAS / SSAP - Small Self-Administered Pension?
A small Self-Administered Pension is ideal if you are a company director or if you have a pension scheme which you want to control. Effectively when they set up your Small Self-Administered Pensions under Trust, they allow you as the co-Trustee / Beneficiary an element of control of your pension. For example, this is beneficial when you are looking to buy a particular investment property to place in your pension arrangement. The Trust gives the Trustee flexibility and control of the assets that they chose to sit within their pension arrangement. The Trustee acts as Pensioneer Trustees to ensure that your pension meets the relevant guidelines set down by the Revenue Commissioners and Pensions Board. It’s their responsibility to ensure all investments are in line with Pensions Authority guidelines.
What are the fee’s & charges relating to a Small Self-Administered Pension?
In our opinion, if you are not sitting a property into your pension than you will need a fund of circa €200,000 to justify the initial cost of a Small Self-Administered Pension. It also helps for you to have a clear strategy in mind for your pension going forward. They will tell you if it makes financial sense to establish a SSAP as not every individual is suited to a Small Self-Administered Pension. Sometimes they may recommend for you to establish an Executive Pension for a few years until your fund is large enough to set up a Self-Administered Pension or SSAS / SSAP. The cost of a SSAP /SSAS will depend on the size and amount of assets that sit into the portfolio. If you have multiple properties and other investments, then the fee will reflect the work that is required for the Trustee to act as Pensioneer Trustees.
Generally, the cost of setting up a SSAP varies depending on the client’s assets. Most of our clients pay €2,500 in the first year, this covers the preparation of the Deed and the legal work involved in putting together a Deed which reflects the latest pension changes. Once set up, clients can expect to either pay a flat fee of 0.5% -1% pa. This will be advised prior to making any decisions over which Trustee to go with.
If there is a property adding to the scheme the Trustee may have to charge an additional fee per annum. You can be confident that all fees are agreed in advance and they don’t take any hidden commissions or charges. The annual agreed fee covers all the administration work for your scheme and it also takes into account time for common queries and questions that you or they as your advisors may have during the year. Rarely, do they need to charge additional time and if this is the case, they will tell you in advance before they carry out work on your scheme. The reason for a slightly higher fee in year one is because they tailor a specific Deed complete with the latest changes in pensions legislation for each new pension they establish.
Q. What does the Pensioneer Trustee do for their fee?
There are many duties imposed on the Pensioneer Trustee, broadly the main areas of concern to the PT are as follows:
- The PT will register your pension with the Pensions Board
- Pay the annual registration fee to the Pensions Board
- Appoint a Registered Administrator
- Ensure all financial records are kept and are up to date in relation to the scheme
- Handle all administration of your scheme
Q. What is a Pensioneer Trustee?
They are the people who are authorised by the Revenue Commissioners to act as a professional pension scheme trustee. You need them in order to set up a Small Self-Administered Pension. They simply act along with you or your partner as trustees and our job is to ensure that the scheme stays compliant with the Revenue and Pensions Board legislation. They cannot offer advice; you will always need to consult with us as your advisor when deciding on investments. As the Pensioneer Trustees they are the administrators for your pension, and they are the people who seek approval from Revenue and administer the entire process of maintaining your pension scheme. They will look after everything involved in setting up your new pension and allow you to begin the process of sitting up a share portfolio, property portfolio and various other assets which you want to sit in your pension. They are the gate keepers of your pension arrangement, you would work with your investment managers, accountants and advisors and its their job to ensure that the assets within your pension are correctly administrated and in line with your investment strategy. Unlike other pensions, you have control of your fund!
How can you calculate the amount of a pension contribution into my SSAP?
Much the same as any pension there are Revenue limits to how much you can contribute each year but these are no different for SSAP’s as they would be for Executive Pensions. The amount you can personally make is based on your salary and this can change from year to year.
What are my options at retirement age from a SSAP / SSAS (Small Self Administered Pension/Scheme)?
You have many different options at retirement. One of the most common options selected is for the individual to take 25% out of the fund at retirement tax free. You can then choose to draw down the balance of the fund at your leisure in retirement. These funds are usually placed in a Self-Administered ARF and / or AMRF for you to control at retirement. Currently the minimum you must draw down is 4% per annum. You can take more than 4% but your marginal tax rate will apply to your draw downs. You can take this draw down as a regular income or alternatively you can take it as a once off payment annually.
How is my fund distributed at retirement?
When you retire you can take your tax-free lump sum of 25% with the balance of funds moving into an Approved Retirement Fund (ARF). If you don't have a guaranteed income of €12,700 per annum you need to invest €63,500 into an Approved Minimum Retirement Fund (AMRF). You also have the option of buying an income for Life known as an Annuity.
Q. Who are the parties involved in running my (SSAS) Small Self-Administered Pension?
The Employer: They set up the SSAS and make the contributions. If you own your own company this can be your responsibility to set up the SSAS.
The Trustees: The Trustees run the SSAS, you are the Trustee and beneficiary and you work with the Pensioneer Trustee and any other Trustees to make sure the SSAS is run in line with the legislation. The Trustees legally hold the trust fund assets and they run the Small Self-Administered Pension in line with the Trust Deed. They also have a number of duties which are outlined under Revenue requirements.
The Pensioneer Trustee: All SSAS / SSAP schemes are required by Revenue to have an Independent Pensioneer Trustee. The Pensioneer Trustee must be a co-signatory for all financial transactions.
The Administrator: This is the person who is responsible for looking after the administration of the scheme. The administrator is required by law to ensure that regular returns for the SSAS and any other requirements are made to ensure the scheme remains compliant. Usually the Trustee will have an affiliate administration company who would generally look after the administration of the scheme in conjunction with the Pensioneer Trustee. The role of the Administrator is very important especially now with the recent introduction of a “pensions levy” on all pension schemes.
The Registered Administrator: The Trustees of your SSAS or Small Self-Administered Pension, must appoint a Registered Administrator. This is the person who has the responsibility of keeping the records for your pension. They prepare the Annual Benefit Statement and they make an annual Euro Statistics return to the Pension Board.
The Member: You as the beneficiary are classed as the member and technically your role is to make investment decisions within the SSAS. Most SSAS's would have the member also appointed as a Trustee. As a member in a Small Self-Administered Pension you control the investment decisions made within your pension arrangement. You would work with us to come up with a suitable investment strategy for your fund.
The Investment Manager: You as the member / beneficiary may also wish to appoint an investment manager to help with your investment decisions within your pension. The Trustees of your SSAS would appoint an Investment Manager – usually Rockwell
Q. When can I retire from a Small Self-Administered Pension (SSAP / SSAS)?
You can retire at any time after age 50 as long as you are no longer an employee of the company.
Q. Who are are parties involved in my Small Self-Administered Penson or SSAS?
The parties involved are as follow:
- Your Employer / Company
- The Pensioneer Trustee - Signature Trustee Services
- You the Member
- The Administrator
Q. Why do i need a Trustee / Pensioneer Trustee and what are their duties?
A Pensioneer Trustee is required by Revenue. The Trustee is an excellent “sounding board” for queries as they are duty bound to act in an independent manner and in accordance with the following rules:
- Act in accordance with the terms outlined in your Trust Deed
- Act in good faith and at all times in the best interest of the Trust beneficiaries (You the Member)
- Act prudently and diligently
- Beware of conflicts of interest
- Maintain confidentiality
- Utilise the services of other professions when required (Legal, Accounting etc.)
If you would like any more information on any of the above, please don’t hesitate to reach out to your dedicated account manager at Icon Accounting who will be delighted to organise a call with the team at Rockwell Financial.
Alternatively, you can contact us by emailing email@example.com or by calling 01-8077106.