Guide to Investing in Property Through Your Pension in Ireland Using an SSAP
A Summary Overview
A Small Self-Administered Pension (SSAP) is a Revenue Approved scheme which is set up by a company for an employee or for a director.
The key benefit of an SSAP is that the individual has more direct control over his/her investment choices versus a traditional insurance company scheme or occupational group scheme.
Tax relieved employee contributions (subject to the usual age and salary restrictions set by the Revenue) and tax-free employer contributions (not subject to the same age & salary restrictions) can be made to your SSAP.
An SSAP represents a suitable medium to long-term investment vehicle for those who earn more from their employment than they require to cover their personal living expenses on an ongoing basis.
By making additional contributions to your SSAP now, you are in effect lowering the amount of your income now when you might not necessarily need it, and thus you are lowering the amount of your income subject to the highest rates of income tax, PRSI and USC over your lifetime.
The funds building up tax-free in your SSAP can then be used to make a range of investments – the returns / income on those investments roll up tax free in your SSAP, while any capital appreciation will also be earned tax free as capital gains tax will not apply to any profits made on the sale of your investments.
As with any pension plan, you are restricted from personally accessing your funds (in a tax beneficial way at least) in your SSAP until age 50 at the earliest– and there are many revenue rules surrounding allowable investment types and the amounts of borrowings that can be raised within the SSAP.
Further, SSAPs must at all times have a Revenue approved independent professional trustee called a pensioner trustee, who must be a cosignatory on all financial transactions and investments made by the scheme. As such, we always recommend getting advice before setting up an SSAP.
In this document we outline at a high level the investment options available and the types of Revenue restrictions that apply to an SSAP, the capacity for borrowing in an SSAP and we give a high level summary on the key benefits in establishing an SSAP.
Common Investment Options for an SSAP & Types of Revenue Restrictions
As such, the general rule of thumb or intention of the revenue rules is that for a direct property investment to qualify it needs to be a standard buy-to-let type investment whereby you or your employer have no connection to or history with the property or the vendor in question.
Other Revenue Rules Applying to SSAPs
- “Pride of possession articles” are prohibited investments. That is, works of art, jewellery, vintage cars, yachts and so on.
- An SSAP cannot give a loan to a member of the scheme or to any other individual having a potential interest in the scheme, for example, to a spouse or child of a member or to a company.
- Investments by SSAPs in private companies is limited to the lower of 5% of scheme assets and 10% of the company’s share capital.
Capacity for Borrowing in an SSAP
- The maximum loan term is the lower of 15 years or the length of time remaining to your “normal retirement age”.
- Interest only loans are not permissible
- The maximum loan to value is 50%
- Only assets purchased by borrowing may be used to provide security to the lender
Borrowing can be a good way to fast-forward a direct property investment, repayments can be made out of tax free rental income and in this way can be paid down more quickly than, for example, a personally owned rental property whereby repayments must be made from after tax income.
Summary Advantages of Establishing an SSAP
- You have more control over your investment options versus other forms of occupational pension schemes.
- It is particularly suitable for direct property investment, and you can borrow within the scheme allowing you to leverage your savings.
- The returns / income on those investments roll up tax free in your SSAP, while any capital appreciation will also be earned tax free as capital gains tax will not apply to any profits made on the future sale of your investments.
- There are obvious tax planning advantages in terms of deferring income to your retirement phase rather than paying the highest rate of income tax, USC & PRSI on income that you might not necessarily need at this stage of your life.
- Employers can make contributions into your scheme – the contribution is completely tax free, and allowable as a deductible expense in their own corporation tax computation. Further, employer PRSI (as high as 11.05% in 2020) does not apply to employer contributions, which represents another significant tax saving for your employer on your compensation package.
- An SSAP will almost always work out cheaper for you in terms of ongoing pension charges and costs versus an insurance company scheme.
Closing Points to Note
This guide outlines at a summary level the restrictions and benefits of establishing an SSAP based on the current rules and pensions environment in Ireland, and it is not intended to be an exhaustive compilation of all of the restrictions and regulations in place.
An EU directive called IORP II which was intended for transposition into Irish law in 2019, is currently stalled in the Irish courts system. The impact of IORP II in its current format on single member SSAPs would be quite significant, imposing more restrictions on the proportion of your SSAP that can be invested in any one asset class for example. However, the Association of Pension Trustees of Ireland (APTI) are seeking an exemption for single member pension schemes and this is a pending process.
SCK Group would be delighted to help you with any questions you may have, or if you would like to work together in developing your retirement plan feel free to contact us.