Pensions & Rental Property

By Marc Westlake

Published on: September 6, 2020

Retirement Planning includes pension planning throughout your working life and assessing your options as you approach retirement age.

One of the key features of self-administered pensions is the ability to identify and buy specific property. But, just because you can, doesn’t mean you should.

While this advice may be at odds to much of the financial advice you’ll read online, we don’t recommend using your pension fund to invest in property.

We’ve set out below our reasons why we don’t recommend that most people should hold residential property in their pensions.

There are two ways you can invest in property:

  • Directly – by buying a property as an investment (buy to let)
  • Indirectly – by investing your pension in a property fund

Buying a Property for Investment

You will need to have either a large sum of money, or you will have to borrow, to invest directly in property. There are two main ways you can get a return from property investment including:

  • Rental income
  • Capital growth if the value of the property rises

With property investment you are more vulnerable to potential risks, such as a downturn in the property market. But you may also face risks such as:

  • Rental income may be less than you expected and is not guaranteed. There will also be times when the property has no tenant
  • Increased mortgage repayments if you borrow money to buy the property and interest rates rise
  • Falling property values, which could lead to negative equity
  • Immediate access to your money may be difficult (liquidity)
  • Selling the property may be difficult, time consuming and incur additional expense
  • You may lose money if you are forced to sell the property quickly
  • Difficulties in managing your investment property
  • How do you pay Death Benefits to your Spouse or Civil Partner?

Investing in a Property Fund

You can also invest indirectly in property through a property fund. These funds typically invest in commercial, retail and industrial property.

In Ireland you can invest in commercial property through

  • unit-linked funds from an Insurance Company
  • listed funds such as an Exchange Traded Fund

We don’t recommend unit-linked property funds because the value of these is a matter of opinion of the valuer, and they are typically priced less frequently.


This graph gives the appearance that property funds are less risky than they really are. They are also prone to being ‘gated’ whereby the insurance company will not allow withdrawals with less then six months notice.

Over the 15 years ending June 2021 a typical Irish Property Fund has underperformed Global Equities by a staggering 10% pa.


Our preference for including Real Estate in a pension is therefore via a large, liquid, daily priced global property fund from one of the major investment managers such as Blackrock or Vanguard. These are generally less expensive and better diversified than the alternatives that are available to an Irish pension investor.


We don’t recommend that most private individuals hold individual stocks in a single company (especially their employer), and for the same reason diversification is objectively the single biggest reason not to invest in residential property.

Having multiple properties in your pension isn’t diversification. Diversification means holding different assets that can be expected to perform in different ways to different economic conditions. Holding multiple properties isn’t diversification.

In a pension portfolio, Stocks are diversified with Bonds. Bonds can reasonably be expected to perform differently due to a low correlation with Stocks. You simply don’t get this from multiple property investments.

Evidence  from  practising  investors  and  academics alike points to an undeniable conclusion: expected investment returns are related to exposure to investment risk. Gain is rarely accomplished without taking a chance, but not all risk-taking is rewarded. When considering an appropriate asset allocation strategy, Trustees should also take account of such issues as:

(a) the nature of the liabilities of the trust

(b) an appropriate diversification of investments, including appropriate diversification of credit and counterparty risks

(c) the appropriate liquidity of investments especially where capital is to be advanced to beneficiaries

Successful investing of Trust capital means not only capturing risks that generate expected return but reducing risks that do not. Avoidable risks include holding too few securities, betting on individual countries or specific industries, following market predictions, and speculating on “information”. To all of these simple diversification is the antidote. It washes away the random fortunes of individual stocks and positions a portfolio to capture the returns of broad economic forces.

Significant Assets

Most of us have three significant assets:

  • Our human capital – our ability to earn a wage or if we are company directors, the value of our own business. This is best protected against the most likely and damaging risk by a Permanent Health Insurance Policy which pays out an income if we are unable to work due to illness or disability.
  • Our home – most of us buy our home with the assistance of a mortgage. We protect ourselves and our families by arranging life insurance to clear the loan in the event of our death, and we arrange buildings and contents insurance to protect the property against risks like fire and floods.
  • Our pensions – for many of us, our pension also represents a substantial asset.

Think for a moment about how most of us are measured and prudent when we think about the risks associated with our home or our income.

This same sense of prudence is reflected when investing through the concept of diversification. Not putting all your eggs in one basket is the closest thing we have to a ‘fee lunch’ in investing.

Considerable guidance is available on the subject in particular to Pension Trustees. In the UK for example, the rules on investing in property through pensions are very strict. You can’t buy individual residential properties to hold within your pension. If you put a property into a Pension that HMRC deems to be residential you will  be hit with a big tax bill of at least 55% of the investment.


This is a new EU directive applicable to occupational pensions.

Under this directive, the pension scheme’s assets must be predominantly invested in regulated markets, therefore direct property investments will be restricted. In addition, borrowing will only be allowable for liquidity purposes and only on a temporary basis which will affect a scheme’s ability to borrow for direct property.

Note that other pension structures like PRSAs and Buy out Bonds are not subject to the IORP II directive.

Trustee Investment Act (2000)

For many years UK trustees have had to take care in investment matters. “As an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide” – Court of Appeal, re Whiteley 1886

This was further codified in the Trustee Investment Act 2000 with the following:

Standard Investment Criteria

These are:

a) The suitability of the trust investments

b) The need for diversification

Suitability relates to both the type of investment proposed and the features including its tax treatment.

As a component of suitability, express account must be taken of the size and risk profile of the investment and attention is drawn to the desirability of diversification between complementary investments as a means of risk control.

Trustees must in addition seek to achieve a balance between income and growth that may be a factor of the trust in question.

Similar legislation exists in the USA.

Prudent Investment Rule 1992

Five Principles of Prudence

  1. Sound diversification is fundamental to risk management and is therefore ordinarily required of trustees.
  2. Risk and return are so directly related that trustees have a duty to analyse and make conscious decisions concerning the levels of risk appropriate to the purposes, distribution requirements, and other circumstances of the trusts they administer.
  3. Trustees have a duty to avoid fees, transaction costs and other expenses that are not justified by the needs and realistic objectives of the trust’s investment program.
  4. The  fiduciary  duty  of  impartiality  requires  a  balancing  of  the  elements  of  return  between production of current income and the protection of purchasing power.
  5. Trustees may have a duty as well as the authority to delegate as prudent investors would.

“Restatement of the Law, Trust, Prudent Investor Rule” published in the USA in 1992.

Clearly, Internationally, the weight of legislative and judicial opinion is against highly concentrated, undiversified investments such as residential property and Trustees and Financial Advisers who ignore their Fiduciary responsibilities are sailing close to the wind.

So this begs the question, if professional advisers know that residential property in a pension represents a poor choice for most people, why are they happy to facilitate it?

The answer is, of course, the insidious conflict of interest posed by commission. A commission-based broker is being paid a commission by the product provider to facilitate a transaction.

Whereas a fee-only adviser, such as Global Wealth, is being paid by their clients to exercise professional judgment and act in the best interests of their client.


Gearing or leverage is a wonderful tool in investing, but it is a double edged sword. It’s great when things are going up, but it magnifies the losses when things are going down.

Leverage is the use of debt (borrowed capital) in order to undertake investment. The result is to multiply the potential returns from an investment. At the same time, leverage will also multiply the potential downside risk in case the investment does not work out. When one refers to a property as ‘highly leveraged’ it means that item has more debt than equity.

The concept of leverage is used by both investors and companies. Investors use leverage to significantly increase the returns that can be provided on an investment. Companies can use leverage to finance their assets. In other words, instead of issuing stock to raise capital, companies can use debt financing to invest in business operations in an attempt to increase shareholder value.

Leverage is a multi-faceted, complex tool. The theory sounds great, and in reality, the use of leverage can be profitable, but the reverse is also true. Leverage magnifies both gains and losses. If an investor uses leverage to make an investment and the investment moves against the investor, their loss is much greater than it would’ve been if they have not leveraged the investment.

For this reason, leverage should generally be avoided by pension investors.


Further Insights on Retirement Planning

Read one of our latest guides:

Retirement Planning for Gen X, Y (millennials) & Z

If you are 55+ and closer to your retirement date, then our Guide to Approaching Retirement is for you