Pension Planning

Pension Rules allow the use of retirement funds for the purchase of real property assets in individual, co-ownership, or syndicated funds.

Properties held fall under the categories of residential, commercial, industrial, or may be a combination of each of these held within syndicated funds.

Reasons to invest pension in property:

• You can pick the property you wish to purchase with your pension, residential, commercial, and industrial or a combination of each can be held with the fund.
• Income tax relief on contributions made to fund the purchase are at the higher rate of tax.
• There is no income tax on the rental income and no Capital Gains Tax (CGT) on the eventual sale of the property.
• Upon retirement, you can take 25% of the value of the pension fund as a lump sum, of which €200,000 is tax free. The property can transfer in specie to a self- administered Retirement Fund (ARF) and the rental income can contribute to your income in retirement (retirement income is subject to PAYE).
• You have control over every aspect of your pension.
• Gearing (Borrowing money from a lender) can be used to assist in purchasing the property.
• If you are purchasing a Commercial Property, the fund can be registered for VAT if required.

Yes, but they are not too onerous and include:

• The vendor must not be related to you, your employer, it’s directors and associated companies.
• The property cannot be sold or let to relatives, your employer or its directors and associated companies.
• Personal use of the property is prohibited.
• The development of a property with a view to its disposal is not allowed. 

Yes, but the loan must comply with certain rules including:

• “Limited Recourse” – the lender can take security over the property only.
• Maximum loan term of 15 years or NRA if sooner.
• Subject to bank’s lending criteria.
• The pension scheme cannot borrow retrospectively

• You cannot use the property – it must be for investment only.
• Risk – Gearing significantly increases the risk profile of the investment.
• It is an illiquid asset.
• The property will tend to be Irish based limiting the investment choice.
• Your risk exposure is concentrated in Ireland, with no exposure to Global Assets

• Generous tax reliefs on funds to purchase property.
• All purchase costs are met by the pension.
• Rental income is exempt from income tax, PRSI and USC.
• There is no Capital Gains Tax on the sale of the property.
• You can transfer the property in specie into your Approved Retirement Fund (ARF) at retirement

Firstly, we are living a lot longer, according to the Central Statistics Office life expectancy in 2012 had increased to age 81.

Of course, this is good news for most people who can look forward to a long and healthy retirement, but for the companies responsible for paying their pensions it’s a massive financial burden.

Other factors which have contributed to a continual decline in DB schemes, include recent investment market crashes, low bond yields, increased regulation and accounting requirements, combined with the general rise in salaries during the boom years.

At this stage, many companies have come to the obvious conclusion, that they cost too much, and those costs are loaded with uncertainty.

According to the Pensions Authority the number of DB schemes in Ireland fell from 2,557 in 1991 to approx. 598 in 2018, with only 388 of them being active schemes. Today, many people are wondering whether their pension scheme will still be there when they retire.

The level of protection in place for members of DB schemes is also relatively weak in Ireland compared to our closest neighbours.

A great number of people with retained benefits in defined benefit pensions are reviewing the option to take a transfer value from their plan, to gain ownership of the capital value and manage their own retirement income.

For some, this decision will be as a result of the uncertainty outlined above, moreover people are also focusing on the positives of moving to a defined contribution arrangement:

• Potential to pass on wealth to the next generation (DB pensions end with the current generation)
• Income flexibility
• Potentially a larger tax efficient lump sum payment

More employers are also “topping up” transfer values called enhanced transfers, to incentivise members to exit DB schemes and ultimately reduce the cost and risks of maintaining a DB scheme.

Areas that give people reservations, during these conversations are:

• “What if I live too long and my fund runs out”
• “What if there is a market correction or recession”.

Areas to consider when assessing a DB transfer option and what factors need to be weighed up?

1. The Quality of the Promise

On first impressions, a Defined Benefit pension scheme is the best type of pension you can have – the “Rolls Royce” Pension. However, this depends on the scheme’s ability to fund its’ pension obligations for all members going forward.

Benefits under Defined Benefit Schemes are not guaranteed. If a scheme’s assets are not sufficient to pay the benefits, and the employer is not in a position to meet the shortfall (and is NOT obliged to), the pension promised to you may have to be reduced.

Consideration therefore needs to be given to the financial health of the Scheme and the future financial health of your former employer – in so far as this can be determined.

2. The Hurdle Rate

This is all about calculating the assumed level of investment growth required on the transfer value, to provide you with the same level of benefits that the Defined Benefit Scheme promised to pay.

3. Cashflow Position

By retaining ownership of the pension capital value, you retain greater flexibility to structure future income streams, and aim to stay within the 20% income tax rate.

In this context savings and/or the Tax Free Lump Sum can be used to complement income levels.

4. Legacy

With a Pension transfer the balance of your unused fund value will be retained by your family. Under a DB arrangement, depending on the scheme terms your spouse or children up to a certain age, may receive a % of your promised income, normally 50%.

Having ill health or reduced life expectancy makes the decision to take the transfer option more compelling for most.

5. The Lump Sum

An additional advantage in taking a transfer payment to a Defined Contribution arrangement relates to the options available at retirement.

Defined Benefit Schemes only offer the option of an annual pension and/or a lump sum at retirement. Lump Sums are calculated by a formula relating to final salary and service, with a maximum lump sum payable of 1.5 times final salary.

This Lump Sum is normally required to be commuted from your quoted annual pension, usually at a rate of 9:1, therefore reducing your annual pension and spouses’ pension.

All Defined Contribution arrangements (including Personal Retirement Bonds) now have access to an additional set of options.

In addition to the option of an annual pension, Defined Contribution pensions can pay Lump Sums of 25% of the accumulated fund at retirement and invest the remainder in an Approved (Minimum) Retirement Fund (A(M)RF) post retirement. An A(M)RF is a personal asset.

6. Investment

The long-term expected return on equities and property is unknown but it is common to project on the basis of a 5% p.a. (the Society of Actuaries in Ireland) return before charges. We generally expect Alternative Assets to generate a return somewhere between cash/bonds and equities/property over the long-term.

As part of our overall risk assessment process we assess your capacity to take measured risk, your attitude to risk and through our Fact find and discussions, your overall asset profile i.e. (current savings & Investments – 25% Pension tax free).

If you take the transfer value, you will carry the investment risk. Our Investment strategy helps to avoid “sequence risk” (investment underperforms in the short term relative to expectations) , the 5-year income plan (held in the Cash Fund), provides a buffer to market volatility.

7. Health

We have seen an increase in requests for an additional Health Declaration form by the Trustees of DB schemes. This form is required to be completed by the pension holders GP to confirm members health status.

The reason for this is that some DB Trustees are not willing to allow any member with ill health or impaired life expectancy to take their transfer value.

The view of the Trustees is that permitting such transfers is not in the interest of the remaining members. It would be reasonable to suggest that the transfer option from DB schemes may not continue to be available for everyone in the future.

As mentioned earlier, this is a complex and important decision. If you have a substantial DB pension, it is likely to make up a significant portion, if not the majority of your wealth in retirement, so your next steps are vital. Here are some suggestions:

1. Request up-to-date pension statements and information

2. Engage a specialist in this area – one of the team at D Moloney Financial Services will be happy to help.

3. Bring your family into the discussion.

4. Take your time and consider all your options.

Retirement funds in excess of this threshold of €63,500 are invested in ARF’s.
An ARF is a personal retirement fund which allows you to keep your money invested after retirement, as a lump sum.

You can withdraw from it regularly to provide an income, which may be subject to Income Tax, PRSI and Universal Social Charge (USC) subject to your individual circumstances. Any remaining value left in the fund after the death of the ARF/AMRF holder can be left to your next of kin.

The minimum yearly drawdown requirement is currently 4% for those aged 60 and under the age of 71 where funds are under €2 million. For those over 71 years, a 5% drawdown applies. Larger funds with over €2m value require a 6% drawdown.

ARF holders are subject to income tax assessment whether the income is taken or not. This is called a deemed distribution and ARF holders are advised to take at least the minimum income payment annually.

An ARF invests in various assets such as shares, property, bonds and cash. The growth of your Retirement fund depends on the performance of the assets it is invested in. The fund is designed to grow in value, but your original investment is not guaranteed.

The key attributes of Retirement Funds can be summarised as follows:

• You keep control of your retirement money and retain ownership of the capital
• You have flexibility in terms of when and at what rate you draw on your ARF in retirement
• You can choose how to invest your ARF and select the type of investments that suit your needs and attitude to risk
• Any growth in your ARF is tax-free but withdrawals may be liable to income tax
• You have the option to use your ARF to buy an Annuity at a later date
• There is a risk that the ARF could run out in your lifetime. This could happen if you take income from your ARF at a rate which is higher than the investment growth achieved over a number of years

Income and Capital appreciation within the ARF is not subject to tax . Income distributions to you from your ARF may be exposed to taxation and may be liable to Income Tax of 0%, 20% or 40%. Retired couples over age 65 have an aggregate income tax exemption up to €36,000 p.a. The exemption for individuals over age 65 is €18,000 p.a. – PRSI & USC may also apply.

*Normal Capital Acquisitions Tax thresholds apply