Pension funds may invest in hotel rooms in new scheme

Hotel rooms have become the latest asset in which Irish investors can place their pension funds.

More than 200 condominium units in Fitzpatrick's Hotel in Chicago have been put up for sale by retirement planning firm Finance Life and Hibernian Life & Pensions as part of a $63 million (€52 million) pensions-backed investment scheme.

The scheme takes advantage of legislation introduced in the 2004 Finance Act that allows pension schemes to borrow for investment purposes.

Prices for the hotel rooms start at $245,000 but people who invest in the asset using a self-administered pension will require an investment of €100,000 upfront, with the balance borrowed within the fund.

The investment would require ongoing monthly contributions, on which investors would receive tax relief up to the annual pension limits. The property will be managed under a 20-year deal with the Fitzpatrick Hotel Group, with income from the room rates pooled among investors.

A forthcoming EU directive on pensions, due to be enforced in the Republic in September, is expected to outlaw the practice of borrowing directly within pension funds, effectively reversing the measures in the Finance Act.

However, EU member states can enact an exemption under the directive so that schemes with fewer than 100 members, such as one-person self-administered pension funds, will continue to be permitted to borrow.

The Government did not enact this exemption in the last Social Welfare and Pensions Act but, following lobbying from the industry, the Minister for Social and Family Affairs Séamus Brennan set up a working group to investigate the prudential and tax issues relating to borrowing within pension schemes.

The ability to borrow within a pension scheme is highly valued by the industry as it facilitates tax-free investment in property.

It is expected that the Government will enact the exemption for smaller schemes, although specific regulations governing borrowing within schemes have not yet been published.