Self Administered Pensions
A self administered scheme is geared towards the owner director of a limited company. It would be expected that pension contributions would be towards the higher end of the scale.
A self administered pension scheme, similar to a self directed pension plan, allows the beneficiary of the pension to take complete control of his/her pension investment decisions. The difference with a self administered scheme is that a pension provider such as an insurance company, is not used for the provision of the pension structure.
Instead, a pension trust is set up and administered by the appointed trustees. One of the trustees must be a pensioneer trustee, who is revenue approved. On top of the normal duties of a trustee, the pensioneer trustee ensures that the trust operates in line with revenue rules and relevant pension legislation. The pensioneer trustee will administer the pension and ensure returns are made to revenue when required.
There are now a number of approved providers of pension trusts and pensioneer services across Ireland. These providers will charge for their services, with initial set up costs and annual scheme administration charges.
The trust sets up a bank account to which the beneficiary’s company makes contributions and to where the beneficiary can also make contributions. Along with his/her advisors, it is entirely up to the pension beneficiary as to what the trust invests in, as long as those investments comply with revenue rules.
Global Range Of Funds
Unlike a self directed pension, which may be limited to the list of funds under offer from the self directed pension provider, the self administered scheme can choose across the full range of fund providers and their investment funds.
Direct Equity Investment
The pension investor will also be able to make direct equity investments by using a chosen 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). Using a stockbroking firm, will incur charges which will be invoiced to the pension trust.
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, as there will be transaction costs on all stock trades completed.
Property For Pension
Single member Self Administered pension schemes, also allow for pension investment in individual property units. This is one of the major attractions of self administered pension plans. The pension investor chooses the property with his/her advisors. The next step for the pension investor is to inform the pensioneer trustee that they want the pension trust 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 trust 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 an entry level apartment in either Ireland or the UK, the pension investor will need a minimum of €150,000 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 €25,000 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, or if the contribution is made from your company it is treated as a deductible business expense. 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.
Tax Efficient
For a company which is cash rich, a distribution to directors in dividends or in directors fees will usually incur personal tax liabilities for each of the directors. The only way to permanently transfer generated cash from the business to the business owners, without raising tax liabilities for the directors, is to make pension contributions on behalf of each of the directors.
In addition, the transfer of funds from the company to the pension scheme is treated as a business expense for the business, lowering taxable business profits. This contrasts to a distribution through dividends which is not treated as a business expense and comes from after tax profits.
For a comparison of Self-directed pension arrangements versus Self-administered schemes, please « click here »