A sinking SIPP is not necessarily bad news...

Posted by Jaimie Kanwar on Thursday, January 26, 2006

On "A-Day" - 6 April 2006 - the rules governing all pensions arrangements in the UK will change in what is the biggest shake-up of the industry for over 100 years.  The Government aims to create a single simplified and more flexible structure under which all pension schemes will fall, affecting virtually everyone in the UK who is currently saving towards a pension.

The introduction of the new "Self-invested Personal Pension" (SIPP) was just one of many developments that took place under this dramatic overhaul.  SIPPs provides another way of saving towards a pension, allowing individuals or groups to invest in material assets such as overseas property, fine wine or vintage cars instead of the usual options the stock market offers.

Under a SIPP, the Government was offering not only significant contributions towards pension plans, but also, for buy-to-let investors, tax-free rent and exemption from capital gains tax on any profits made from the eventual sale of a property.

... But, alas!  This was too good to be true and in his December pre-budget speech Mr Brown announced that all tax advantages on residential property within pensions would be prohibited.  His stated reason for this U-turn was that earlier arrangements would have left the system open to "abuse" leading to "the misuse of SIPPs schemes to purchase second homes". 

This decision is certain to have aggrieved those who have already bought property hoping to include it in a SIPP or who have taken out a SIPP to include residential property.  And many in financial services who have spent vast resources promoting SIPPs-related products have also been stung.  Simon Kirrane writing in Spanish Magazine this month estimates the industry as a whole has wasted some £20 million.

All in all, there's broad consensus that SIPPS are now a far less atractive option.  As International lawyer John Howell in Homes Worldwide Magazine this month puts it "We believe that this will drastically reduce the attractiveness and take-up of SIPPs at a time when the Government is desperate to encourage more people to save for their retirement."

But where does this leave property investors who haven't already committed to a SIPP?

Well, to start with even while the possibility existed not everyone thought that investing in residential property through a SIPP was a good idea.  Stuart Law of Assetz International comments in this month's Homes Worldwide that "SIPPs would only have been suitable for those with significant retirements savings".  The LTV of 50% allowed with a SIPP also made it very restrictive.  Some actuaries also pointed out that overseas property investments could have been subject to local legislation prohibiting a SIPP in any case.

And others believe that Mr Brown's announcement is good news for the property market as a whole.  SIPPs ran the risk of pushing up property prices making it harder for first-time buyers to get on the property ladder.

But when all's said and done, the fact is there are still plenty of exciting opportunities out there for property investors including property unit trusts, "pooled funds" and forthcoming residential property funds to name but a few.  And for the stubborn-minded, it looks like it will soon be possible to include residential property with a SIPP indirectly through a Real Estate Investment Trust (Real Estate Investment Trust) when these are introducted later in the year. 

And if you consider the health of the buy-to-let market at present, all in all, perhaps the fact that SIPPs is going beneath the waves is not necessarily a bad thing.

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