Should you invest your pension in property?

Should you invest your pension in property?

The demand for property In Ireland has been a hot topic for nearly 10 years now. The Dublin bay skyline is a collage of cranes and scaffolding; however, we are still in short supply. Building projects are underway, and while we all sit back to wait for another few years to roll by, the financially intuitive amongst us can’t help but wonder, “Should I invest my pension in property?” Let’s take a closer look at some of the moving parts in property investing.

What you need to know about investing in property in 2019

New EU rules could prevent you from investing in property

If you’re pondering over your occupational (provided by your employer) pension pot and wondering whether you should be moving your funds into property, you will need to decide quickly! Updates to EU legislation regarding the Institutions for Occupational Retirement Provision (IORP) are due this June. These changes are meant to better regulate pension plans, but unfortunately one of the fallouts will be a restriction on occupational pensions from investing in property (this will not affect Personal Pensions, PRSAs, etc.). If the Irish government does not table legislation to exempt one-person occupational pensions from these new draconian rules that are designed for large schemes, the days of freely choosing what you can do with your pension will end. However, the legislation is not through yet so now is the time to act if you are serious about investing your occupational pension in property.

Property values are on the up

According to research at Daft, there were 3,641 properties available to rent on the 1st January 2019. That is up by 11% compared to the year before, so the supply of property is improving. But this is still slow going. 3,641 properties is a number far below the 5,000 that were available just before the property bubble popped in 2007. The government is currently under pressure to bring 50,000 Social Housing products to the market over the next three years. This is a huge challenge, considering there are currently 17,000 people looking for accommodation and that in 2018 the Dublin City Council only managed to house 1,461.

What does all this mean for the projecting investor? There is a very high demand for property, and we can expect it to last for a while, which means a steady source of income for the pension pot over an extended period.

Tax benefits

You might be surprised to hear that there can be tax benefits to investing in property. Typically, you have to pay income tax on collected rent exceeding €5000 p.a as well as local property tax, insurance and capital gains tax (CGT), should you choose to sell the property. However, if you purchase property through your pension fund you can avail of impressive tax benefits. Certain rules and regulations need to be adhered to, which is why the advice of a financial advisor is worth considering, but by buying property through your pension fund your investment can be completely exempt from income tax and CGT.

Property assets are not liquid

Property is an illiquid asset and investing in property is a medium to long term commitment. Therefore, you should have a pension strategy that ensures you have access to the necessary funds to lead the lifestyle you desire during your retirement. This is why diversifying your pension portfolio makes sound financial sense. How much money do you need access to on a week-by-week, month-by-month basis? How will you make sure you have easy access to this during your retirement? By keeping a certain amount of your pension liquid while bolstering the overall pot with smart medium to long term investments, you can lower the volatility of your portfolio while still positioning your pension for growth.

High up-front costs

Yes, the initial cost of buying a property can be unnerving but there are ways to ease this burden should you need to. It is possible to get a loan to fund your property investment. There are restrictions, such as interest-only loans or terms beyond 15yrs. you can’t have an ARF and you won’t be able to borrow or take out an interest-only loan for more than 15 years. However, if you are considering this as a long-term investment then this is a perfectly acceptable way into the market, but EU rules once implemented will close this window.

As you can see, there are plenty of good reasons to invest in property in 2019 if you approach it with a pension strategy tailored to your needs. However, there is also a unique, time-sensitive opportunity available at the moment that you may be interested in with regards to social housing…

Have you considered investing in social housing?

Did you know that right now there are 25-year leases in social housing available that start at net yields of around 5.5% p.a. in Dublin, but with annual rent linked to Irish inflation (Harmonised Index of Consumer Prices – HICP)? Units are bought at market prices directly from their owners and refurbished where required to get them to the required specifications. They can be sold back into the market with the unexpired lease to the next buyer at any stage, so there’s no lock-in. The break-even to recover all entry costs is around two or three years. Units currently average €250k and typically are fully repairing leases, where the counterparty is a State body or local council. Most importantly there is no vacancy risk (saving a default by the State itself) so income is guaranteed for 25 years and moves with European inflation!

This is hugely significant for retirement income, but, this opportunity is still a property investment which means there are associated risks attached. If you’d like to know more about this investment opportunity get in contact with us today and have a read of our blog on “Social housing as an investment”.