The days of new Section 23-type tax relief schemes might be long gone but tax-free investment in property is still commonly available - as long as investors are prepared to keep their cash tied up until they reach retirement age, writes Laura Slattery.
Last year, insurance company Standard Life launched a product which it claimed would open up the valuable tax breaks on pension fund property investments to middle-income earners, including Special Savings Incentive Account (SSIA) holders.
The Government removed restrictions on borrowing within pension plans three years ago in the Finance Act 2004. This made it possible for retirement savers to invest their pension contributions in a single property or portfolio of properties which they can select and control themselves.
Several banks, investment houses and wealth-management firms have since launched schemes aimed at pension savers who want to diversify their retirement investment away from traditional pension assets such as equities and bonds.
But just as Section 23-type property schemes were criticised for allowing already rich people to benefit from tax relief, borrowing to invest in property through a pension was initially only practical for company directors and affluent business owners with access to small self-administered pensions (SSAPs).
The Standard Life product, however, allows a wider range of retirement savers to purchase residential and commercial property in Ireland and the UK and take advantage of the tax relief on pension contributions.
The pension product allows people to club together in syndicates of up to six people to buy property using their pooled pension funds, which they can start building with minimum contributions of just €175 a month. They can also go it alone, should they have sufficient income.
The Standard Life pension is available to self-employed people, employees making additional voluntary contributions (AVCs), people who have left occupational schemes and are transferring their funds, and retiring people investing in approved retirement funds.
Under guidelines from the Revenue Commissioners, borrowings made under a pension cannot exceed a 15-year term and they cannot be interest-only loans. There are restrictions on the percentage of income on which tax relief can be availed.
Although it notes that there are a number of advantages in buying property through a pension plan, Deloitte Pensions & Investments cautions investors to remember that in a market where interest rates are rising, there will rarely be surplus rental income.
One alternative to investing in property through a pension fund is a pension mortgage. Under a pension mortgage, property investors repay their loans on an interest-only basis and then make tax-free contributions to a personal pension policy, with the intention of using part of the pension fund to pay off the mortgage balance on retirement.
