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

• What investments you can legitimately make with your Self-Administered Pension
• What you can’t legitimately do with your Self-Administered Pension
• What happens if you don’t tread carefully and in accordance with Revenue Rules
• How to avoid such issues

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:

• Personal Retirement Savings Accounts (PRSAs)
• Personal Retirement Bonds / Buy Out Bonds (PRB/BOBs)
• Approved Retirement Funds (ARF/AMRFs)

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:

• Transparency
• Fee-Only
• Value for Money
• Investment Choice
• Access to Index Funds/UCITS/Stocks not available through other vehicles
• Your assets can be held in Trust by a Global Custodian for you as beneficial owner, and not owned by a provider and sitting on a providers Balance Sheet

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!).

What investments you can legitimately make with your Self-Administered Pension?

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:

• Loan Notes: Your scheme can lend cash to a private company, for a fixed dividend/yield (typically 9% upwards) – which does not allow you participate in the Share price movements as such, but might be an interesting way to get involved and try make returns if you thoughts this was a good idea
• Residential Property: Your scheme can buy and indeed borrow to buy a residential property and can subsequently rent it out (or not)
• Commercial Property: Your scheme can buy a Commercial premises in Ireland or the UK (usually), and subsequently rent it out (or not)
• Private Equity Investment: Becoming increasingly less common is an investment (purchase of shares) in an unlisted Private Company (must be an amount less than 6% of your scheme assets and represent no more than 10% of the private company’s share capital)
• Structured Products: Tracker Bonds sold by some providers that umbrella multiple investors into these products, where you hope to get back a set return on investment (hopefully along with your capital)
• Regulated Investments: Index Funds/UCITs/ETFs – allowing you participate in investing in broad baskets of listed companies, and benefiting from performance, diversification, transparency and low cost (my bias in full display, I can’t help embellishing a little!)
• Listed Company Shares: If a stock is listed your scheme can ‘have at it’ and invest

What can’t you legitimately do with your Self-Administered Pension?

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:

• A loan made to the beneficial owner or ‘connected person’
• An acquisition of property from the beneficial owner or connected person
• A sale of ARF (scheme) asset to the beneficial owner or connected person
• An acquisition of residential or holiday property for use by the beneficial owner or connected person
• An acquisition of property which is to be used in connection with any business of the beneficial owner, or of a connected person. The distribution arises on the date such use commences. The distribution is the amount of the value of the (ARF) assets used in connection with the acquisition and any expenditure on improvement or repair of the property
• An acquisition of shares in a close company in which the beneficial owner or connected person is a participator (Close companies as opposed to listed companies/shares which tend to be ‘open’ companies)

What happens if you don’t tread carefully?

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!

How To Avoid Such Issues?

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:

• Use an effective and reputable Pensioneer Trustee and/or Advisor
• If in doubt, check it out
• If you really must pursue the next left-field investment, perhaps use your own non-pension cash instead of using pension assets to do so

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.

Cheers,

Paddy.