The not-so-boring truth about pensions

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A good friend of mine (who I’m not going to name) always has time for fun: he’s always (and I mean always!) away on holiday, travelling, going surfing or windsurfing, or cycling, or has some form of entertainment going on. He lives a pretty enviable life, if I do say so myself, and anyone who hears about it says that’s exactly the kind of life they want.  

Do you want to know what his secret is?

The simple answer is that for his whole life, he has been religious about funding his pension: since he was young, he was always careful to throw money into his pension, rather than living a very lavish lifestyle.

Now, I understand that when I use the word “pension” a lot of people’s eyes, including my own, could start to glaze over, and I know there’s a lot of reluctance for people to even think about starting a pension, but this is the one trick that my friend has really mastered, and it’s gotten him into a great position, with a fantastic lifestyle, and a completely passive income that is pretty much guaranteed for the rest of his life.

Free money (almost)

Now why did he get involved in pensions? Well, smart people tend to do it for a simple reason: if you start a pension at a young age, it’s almost like picking up free money that’s lying on the ground. Obviously, there are systems and structures involved that need to be set up, and you should always consult a pensions advisor before you get started.

However, there are so many tax benefits to a pension: you don’t pay any tax on rental income, you don’t pay any capital gains tax, the amount of money that you put into the pension is completely tax-free, when you put money in from a company, the company doesn’t pay any tax on that money, which reduces its tax bill as well. You’re basically reducing all of your taxes by putting your money aside into your pension.

What’s the catch?

The one downside to putting money into your pension is that you can’t access it for many years. In a sense though, that’s also an advantage, because how many of us are tempted to dip into our savings every now and then? Having a pension takes that temptation away, and so every penny that you put in just sits there growing, tax-free, for years and years.  

Another advantage is that your pension is completely protected: if somebody tries to go after you personally for money, it would be very difficult for them to try and get hold of your pension, which gives you some security.  

Buying property through your pension

Back in the 2000s, I was doing a big transaction with an associate. Like the friend I mentioned at the beginning, he had been very prudent and had a big pension, which he’d started before the Irish government introduced the tax-free cap, which was €2million at the time (although you should check what the current rate is as this may have changed).

I was planning to talk to my bank about getting debt to buy the building we were looking at, and encouraged him to do the same. He replied that he didn’t need to, as he would be buying his share (over €2m) through his pension! Every penny that this deal was going to generate was going to be completely tax-free for him, so since then I’ve found the idea of doing it really interesting.

Getting advice

It’s not something that you can just dive in and do though: it’s quite different to a ‘normal’ transaction. I spoke to Christina P Buckley on my podcast, who has experience of buying property through her pension fund, and we talked about the process and the restrictions you have to bear in mind if this is something you want to do.

The first thing to remember is that it’s your pension company buying the property on your behalf, so there’s an ‘arms-length’ element to it. You’re not able to buy property from a relative, or to sell your own property and re-buy it through your pension – there are strict rules involved.

You can’t rent a pension-bought property as an HMO or through Airbnb, or use the property as a hotel: these all have trading aspects and you’re not allowed (in Ireland at least) to trade on your pension. So it’s really important to work with an advisor to find the right strategy in relation to renting that property out.

Make sure you’ve got the right hat on

Another really useful piece of advice that Christina shared on the podcast was to make sure you’ve got the right hat on when it comes to property. For example, what’s important when you’re buying a family home isn’t the same if you’re looking for a buy-to-let property, and that changes again if you’re looking for a pension property. At the end of the day you should be looking for a property that you can rent, which will add money to your pension fund.

Final thoughts

I won’t lie, it’s complicated stuff. If you’re interested in learning more about buying property with your pension, check out episode 154 of the podcast, which goes into far more detail than I’ve included here. Always seek professional advice before diving into anything, and do your due diligence – it’s really important (in this, as with anything) to fully understand what you’re committing yourself to, and to be aware of any implications that could come your way.

Also, if you’re a little older and worried that it might be too late for you, don’t worry! Obviously the younger you start the easier it’s going to be (and the better), but you could start in your 50s and still benefit.

If you’re thinking about really making a career in the property industry, it can be a daunting experience, so why not invest in my FOUNDATIONS course? This course will take you through the fundamentals in simple, jargon-free language, explaining how the market functions, what you need to watch out for, and giving you the steps to help you avoid costly mistakes!