In this article we aim to touch on a number of key pension areas for clients as they navigate their way through the current pandemic and evolving government and EU policy on pensions. We look at the rise in popularity of Self invested pensions in the current market, the importance of pensions funding as part of retirement planning but also a part of client’s business exit strategy and direct property as an asset class in your pension.

Self Invested Pension Market

Since the last major market correction in 2007 pension investors have been looking for tangible assets to invest in. The Self invested market allows them access to this. The figures reinforce this as over the last 15 years the market has grown from 3% of the total defined contribution market to 16% of the market, primarily driven by the desire of clients for greater investment choice, which includes;

  • Commercial or Residential Property
  • Share Portfolios
  • International Fund Managers
  • Alternative investments
  • Loan note investment

As you can see the choice is very broad and there are specific Revenue rules which apply to all investments however clients are demanding this type of choice. With this level of choice, the need for sound financial advice and guidance is vital and cannot be understated. As the pension administrator, Newcourt require all clients to engage a financial advisor to help them maximise the benefits of pension funding and investment.

Pension Funding

The need to consider all of the options available on disposal of a business is imperative and in many cases it is a combination of the following:

  • Pension funding
  • Retirement relief
  • Entrepreneur relief
  • Ex gratia termination payments
  • Participation exemption/substantial shareholding relief

Pension funding is a vital element when planning a client’s business exit strategy. The current tax efficient threshold for pension planning is €2,000,000 per individual. When considering how a client should fund, one needs to consider a number of factors as follows:

  1. There is no timeline on pension funding, you can start the day you commence working and fund for 5 years or 30 years depending on your retirement timeline.
  2. Currently there are very generous tax reliefs available on company contributions made to occupational pension schemes. An employer can contribute many multiples of an employee’s annual earnings to a pension and claim full tax relief assuming certain funding conditions are met. These include date of joining service, salary and term to retirement.
  3. We believe that on the introduction of auto enrolment, some tax reliefs on Company contributions, currently available, may be capped or even removed, as happened in the UK.
  4. We also believe that Covid19 may have an impact on the tax reliefs available on pension contributions as the Government tries to balance the Budget.

When considering all the uncertainties, we believe clients should fund as much and as soon as they can to take advantage of the current generous tax reliefs available.

Property as an asset class

Over the years direct property investment has proven popular and in the longer term a great investment for many. In the example below we have set out a very simple example of the tax reliefs available and how, if your client wishes to invest in property, pension investment is the most tax efficient way to do so.

Purchase PersonallyPurchase Through Pension
Purchase Price (Net Income)€150,000Purchase Price (Gross Income)€150,000
Cost of Purchase€6,000Cost of Purchase€6,000
Total Cost €156,000Total Cost €156,000
Annual Rent€12,000Annual Rent€12,000
Annual Expenditure€2,000Annual Expenditure€2,000
Net Rent €10,000Net Rent€10,000
40% Income tax€4,000
USC & PRSI (assume 11%)€1,100
Tax on Rent€5,100Tax on RentNil
Net Annual Rent€4,900Net Annual Rent€10,000
Net Annual Rental Yield3.25%Net Annual Rental Yield6.6%

As you can see purchasing a property with tax exempt funds, a company has received full corporation tax relief on the contributions, the rents and any capital gain are tax exempt within the fund on disposal. However, many pension investors hold on to the property to provide pension income in retirement and simply transfer the property, in its actual form, to their Approved Retirement Fund.

Pension Tax Exemption:
– Rental income payable to fund tax free
– If sold in the pension, no capital gains tax payable at 33%
– Tax relief on original contributions
All investment income and gains are tax exempt within the pension structure. This makes your pension fund the ideal place to purchase property.

We believe property will continue to be a core investment asset of Self invested pensions. Please note Revenue rules apply to all pension property investments and the purchase of property is for long term investment purposes only and not for development purposes.

If you require any further details please contact us.

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