This month’s wealth article explores how profitable business owners can benefit, due to concessions in the finance act of 2004. Once your business is on track and delivering profits, the most important consideration is how to maximise you and your family’s future income for you from these profits. This article looks at a topic that has grabbed much media attention recently – using your profits to invest in a company pension, which uses property as the investment vehicle. A Pension Mortgage is one of the most tax efficient methods of repaying a loan on an investment property.
There are 4 principle type of pension that a person can take out. Indeed when you get talking to the tax and pension specialists, these options seem to multiply by the second. In the end you don’t know whether you are coming or going.
I am going to focus on painting a picture to explain a tax efficient method for extracting company profit. This picture, could serve as the basis for a discussion with your financial advisor, and help you then make a more informed decision.
The two vehicles I would suggest are a Self Administered Pension Scheme (SAPS), combined with a pension mortgage.
How a Self Administered Pension Scheme (SAPS) works
Pension premiums paid by a company on behalf of a director are deducted as an expense against corporation tax.
If you are self employed, or are a director with more than a 5% shareholding in your company you can take up to 25% of your retirement fund in cash, tax free. Pension contributions are invested in funds, which grow tax free. This means that you are not liable for the 23% tax that other savings products incur.
The amount of money a company can pay into a pension plan on behalf of a director depends on your salary, the length of time you have been with the company and when you intend to retire. The amount of money which can be paid to a pension is very substantial and allows you to build up a large retirement fund, from which to pay off your mortgage. You can choose to retire any time between age 50 and 70.
The SAPS is probably the most flexible pension for company directors/ self employed. It does, however require a reasonably high level of contributions for it to be cost effective as set up costs tend to be €2,000 upwards and annual management fees around €1,000.
How a Pension Mortgage works
On March 25th 2004 legislation changed to allow investors to combine the attractions of good quality property investment and related borrowings with the generous tax breaks afforded to pension plans.
A Pension Mortgage is one of the most tax efficient methods of repaying a home loan because customers utilize the cash value of a personal pension fund to repay the amount borrowed.
Some of the typical features of a pension mortgage are as follows; - The initial equity amount may be made up of a transfer value, single premium, or the first regular premium. Financial institutions will typically fund between 50% and 75% of the purchase price of the property.
- All pension contributions can be offset against taxable income within Revenue approved funding limits.
- Rents can be used to offset interest payments and as such are tax free.
- A Pension mortgage is like an endowment mortgage, with only interest being paid on the loan.
- You will probably be asked to take out a life policy to protect the lump sum in the event of death.
- Investors have to remain at “arms-length” from any property invested in such a scheme, this means that they, or any person connected with them, may not utilize the property.
On exit from an investment, the property may be disposed of without capital gains and the capital can be put into an approved retirement fund.
This method provides tax relief not only on interest repayments but also on pension contributions (therefore, tax relief is also received on the capital repayments). In addition, the pension fund grows free of tax.
How you combine the two pension vehicles
This means that a company director with more than 5% shareholding in their can use a pension mortgage to purchase a property in their own name, yet effectively have the company pay for it.
You take out a personal mortgage on which you make the interest payments. At the same time the company sets up your SAPS on your behalf which, at retirement, can be used to pay off the mortgage. The company receives full corporation tax relief on the pension contributions.
It is important that all aspects of the investment are looked at, including the potential for over-funding.
This article was written by Peter Lawless, founder of 3R Sales and Marketing - www.3r.ie. For previous articles like this, visit 3R's Articles. Alternatively, subscribe to Success our free monthly Information Bulletin with sales and marketing articles.
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