14th May 2021
The above title might sound a bit dramatic coming from someone that uses Self-Administered Pensions to help clients capitalise on opportunities, and indeed to avoid massive errors. But the fact remains; in the wrong hands a Self-Administered Pension is a recipe for disaster, and it really needn’t be that way. In this short piece (I promise), I’ll share
Before we jump in, quick note to advise that the current rules are the Tax Act, the rules being enforced by Revenue. These are separate to any potential restrictions that IORPS II (which came into effect in May 2021, and which has impacted Occupational Schemes only, for now!) will have on what a pension scheme could or could not do. Also worth being familiar with that fact that IORPS II is proposed to apply only to an actual Occupation Scheme (a Small Self Administered Scheme SSAS for example, see Blog 123) and not to the following:
Most of us will use or have access to use one of the above if the need ever arose or if it makes sense to do so, which it often does for most of us. Having read the details, and spoken to several independent experts, it appears that if you are already using a reputable Trustee which carried out it’s existing responsibilities, and you aren’t a massive property-fiend via your Pension then it is probable that IORPS II may have a limited impact on how you or your scheme currently operates. We wrote about IORPS II and the impact on your pension buying property last year here – which may be useful reading if you are into that sort of thing. Anyway, back to the current state of play and what Irish Tax rules allow you to do via your Self-Administered Pension…
Funnily (or not), the ‘what you can do’ list is a lot shorter than the ‘what you can’t do’! And that is totally fine if you ask me because some of the ‘can do’ stuff is totally unnecessary and unnecessarily risky as it is. There are a couple of clear advantages that Self Administered Pensions offer:
There is a lot to like about that list, and the primary reasons that we have a preference for them are Transparency, Value, Access to Index Funds and Client Asset protection (as per Client Asset Regs laid out by Central Bank). It is a by-product, in my view, that they also allow investment in some left-field options (which I tend not to encourage!).
To confirm, these options apply to all forms of Self-Administered Pensions (ARF/PRB/BOB/PRSA/SSAS). And needless to say the risks of capital loss can be significant in some of these options:
Chapter 19 of the Revenue Pensions Manual is a handy source of truth on what you can’t do with a Self-Administered Pension scheme. Firstly, all investments (no matter the type noted above) must be at arm’s length. In other words, the scheme cannot/should not carry-out a transaction (an investment) with anything that is in any way connected to the scheme owner, in any way.
Examples of such ‘transactions’ are:
Revenue state that, as you would expect, when you draw funds from an ARF (income draw-down) they are treated as a taxable income right? We all accept and acknowledge that as fact. In the same breath, they also state that there are certain transactions, which if done by any other form of pension structure, will be deemed in their eyes as an income draw-down by the beneficial owner. So, while you may think it was ‘an investment’ made by your Self Administered Pension, Revenue will deem it to have been an income draw-down, and you’ll be taxed as such!
I heard a story third-hand so can’t confirm nor deny it, but I have heard of cases where Revenue travel/monitor property that were supposedly invested-in at arm’s length by a pension scheme, and found the pension owner using said ‘investment property’. All tax relief rewound, and I believe penalties/fines applied to boot for the deliberate tom-foolery. It’s simply not a good thing to do, so don’t!
To be fair, if your Trustee/Advisor are on the ball and doing what they should, they’ll help steer you in the right direction and keep you off the rocks. Ultimately it’s the Trustee’s role to oversee such decisions and to ensure the scheme is oeprating in accordance with Revenue rules.
So, some things to do to ensure you are treading carefully and abiding by Revenue rules here:
Hope that all helps clarify some confusion, helps you avoid some costly mistakes, and ultimately to capitalise on some of the wonderful benefits of effective retirement planning.
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