Self Directed Pensions
A self directed pension allows the beneficiary of the pension to take complete control of his/her pension investment decisions. The pension provider will still provide the pension structure (personal or executive pension) but the pension beneficiary takes the diver’s seat, in terms of investment decisions.
The self directed option allows the pension investor to create a tailored investment portfolio. As well as the providers standard pension funds, there is opportunity to buy equities direct, buy property within the pension fund and to access some private investment schemes that may be offered exclusively to members of self directed pensions.
Direct Equity Investment
There will be a facility for making direct equity investments by using an appointed stockbroker. The services chosen from the stockbroker can be “execution only” (buy and sell only – no advice) or “discretionary” (trade on your behalf after agreeing an investment strategy) or, “advisory” (will help decide on stock selections). To access such levels of investment control, there will be additional charges applied to your pension account.
A pension investor may wish to do their own research on stocks, or use their own financial advisor to assist with developing investment strategies and then use the stockbroker on an execution basis only.
In order be financially efficient, the beneficiary would be expected to be making large annual contributions or have a large accumulated pension fund.
Property For Pension
Self Directed pensions, also allow for pension investment in individual property units. This is one of the attractions of self directed pension plans. The pension investor chooses the property with his/her advisors. The next step for the pension investor is to inform the pension provider that they want their pension to invest in the chosen property. There are a number of revenue rules which the property will need to pass, but most investment properties will fit the revenue requirements.
The pension will need to borrow the required funds through a mortgage. There are certain rules on such mortgages, they will need to be annuity mortgages and the maximum term will be 15 years. Maximum loan to value ratios will be 75%.
For a typical apartment in either Ireland or the UK, the pension investor will need approximately €100,000 in pension funds to cover balance of purchase funds, the purchase transaction costs and at least six months mortgage repayments. In addition as the mortgage term will be over 15 years, there will need to be an approximate pension contribution of €15,000 to help cover mortgage repayments and property management expenses
The major advantage of investing in property through your pension is that, there are no tax liabilities on rental income received within the pension and no capital gains tax on realised gains.
Also, the equity contribution you make to the purchase of the property attracts tax relief at your marginal rate of tax. This is in contrast to a situation where you invest in property outside of your pension, the equity contribution is typically being made from taxed income.
It should be noted that to have a properly diversified pension portfolio, the pension investor should have a balanced pension portfolio of various investments assets and not just rely on property. It should also be noted that the current lack of bank lending to the property sector has made it difficult to secure mortgage funding.
Contributions made by individual scheme members are allowable for tax relief at the individual’s marginal income tax rate. The current maximum limits for income tax relief are as follows:
|Age||Maximum Tax relief
As % of Earnings (NRE)
|30 – 39||20%|
|40 – 49||25%|
|50 – 54||30%|
|55 – 59||35%|
The limits above, include all contributions made by the individual to all pension arrangements and are capped to a maximum earnings ceiling, of €115,000 for 2011.
It is possible to backdate personal once off contributions paid in the current tax year, to the previous tax year, once the contribution has been made before Oct 31st. It also possible to carry forward any excess contribution made, in order to gain tax relief in future years.