Pension Mortgage

How You Can Buy Your Business Premises Using a Tax Efficient Pension Mortgage:

How Does a Pension Mortgage Work?

The 1999 and year 2000 changes in the pension legislation have further opened up this method of financing property purchase and investment to the self-employed businessperson and to directors who have more than a 5% shareholding in their company.

A pension mortgage combines the tax advantages of a pension with the tax relief available on mortgage interest to create a very tax efficient way to buy a property. Your business can pay for a pension mortgage for you, and this will provide you with a much higher level of tax relief on the total repayments than the equivalent on an annuity mortgage.

In a pension mortgage you pay interest only on the mortgage loan, and you take out a pension plan in order to build up a fund on retirement, large enough to pay off the loan amount.

In a commercial mortgage, interest is usually fully allowed against tax. Pension mortgages operate by providing not only tax relief on the full interest repayments on the mortgage but also on the regular pension payments, as pension tax relief. The tax relief is available at the higher, marginal tax rate on both the mortgage interest payment and the pension premium contribution. In addition, the pension fund grows tax free until retirement.

In an annuity mortgage, capital and interest repayments are made over the term of the loan. However, as the loan is repaid the interest payments decrease and the capital payments increase. Since mortgage tax relief is only applicable on the interest then the amount of tax relief decreases over the term. No tax relief is available on the capital repayments.

In a pension mortgage the tax reliefs on interest and pension contributions don't decrease over the loan term.

Why You Should Consider a Pension Mortgage Route Now?

Before the retirement regulations were first changed in 1999 you could only take part of your retirement fund as cash, and the balance had to be used to buy an annuity, which would pay you an income for the rest of your life. This restricted the amount of money available to pay off a mortgage when you retired. Under the new retirement regulations if you have a personal pension or are a director with more than 5% shareholding in your company you can take 25% of your pension fund tax free at retirement, but you are no longer obliged to buy an annuity with the balance. Instead you have the option of putting your money into new retirement investment products called Approved Retirement Funds (ARF), or of withdrawing money as cash.

So, if 25% of your retirement fund is not sufficient to pay off your mortgage, you can withdraw some of the balance and use it to repay the mortgage loan. Any cash in excess of the 25% tax free sum will be taxed at your marginal rate of income tax. Unless you have a guaranteed annual income of at least €12,697 you must leave €63,487 invested in an Approved Minimum Retirement Fund (AMRF) until age 75 as security for your retirement. The balance is available for you to invest or withdraw as you choose.

What About Investment Property Rental Income?

Rental income from an investment property is taxed as income under Schedule D. In order to decrease tax paid, mortgage interest payments can be offset against the rental income in any tax year. Any excess can be carried forward to offset against future rental income. Pension mortgages allow you to maximise this benefit, since interest payments do not reduce over the term as they would in an annuity mortgage.

Any Disadvantage to a Pension Mortgage?

The potential disadvantage could be that if the government ever decide in the future to eliminate mortgage interest relief, reduce or eliminate the pension contribution tax relief, or change the 25% tax free rule, then the tax efficiency benefit will be removed. However, most of this is unlikely to occur as investment in pensions and the provision for retirement is to be encouraged. Anything otherwise would increase the burden on the State.

What Are the Advantages for the Self-Employed Buying a Property?

By employing a personal pension to fund a pension mortgage, the tax advantages are significant, and age related. For age ranges between up to 30 to over 50, you can put from 15% up to 30% of your earnings into a pension plan and receive full tax relief for this. This tax relief is at your marginal (higher) rate of income tax. Hence the tax savings can be substantial, particularly where the mortgage is paid off using the just the tax free cash part of your retirement fund. You can retire and pay off your mortgage any time between age 60 and 75.

What are the Advantages for the Company Director Buying a Property?

For Company directors with more than a 5% shareholding in their company they can employ a pension mortgage to purchase a property in their own name, yet effectively have their company pay for it.

You can take out a personal mortgage on which you make the interest payments. At the same time the company sets up a pension on your behalf, which at retirement, can be employed to pay off the mortgage. The company receives full corporation tax relief on the pension contributions.

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 substantial, ranging from 31% up to 188% of annual salary, for ages ranging from up to 30 to 55, 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.

Any Last Advantage?

The last advantage of a pension mortgage is that you also will have provided yourself with a pension to look forward to on retirement!