Pensions 'will fuel investment boom'

Some Sipps have minimum investment levels of £100,000, others set a threshold of just £1,000. The real test on whether you should invest is if you will be an active investor wanting to make and change investments that could not be catered for in cheaper plans. Charges are a big drawback of Sipps, and will put off many people who might otherwise want to invest in residential property. The IFA Informed Choice lists the following charges as typical: a one-off Sipp establishment charge of between £300 and £600; annual fees of £500; and transfer-in charges of £25 for each investment. Sipps can currently invest in commercial properties and residential property charges are likely to follow the same pattern. Typical property charges in Sipps now include a one-off set-up fee, per property, of £550; an annual administration fee of £185; a mortgage set-up fee of £100; an annual mortgage administration fee of £100 and an annual property administration fee (for collecting the rent and so on) of £400.

How will the property investment work?

From 6 April, investors can buy a new property from existing funds in their Sipp or by using their annual contribution limit (set at the lower of £215,000 or their earnings for 2006/07). The property could be one they already own as a buy-to-let or holiday home, for instance - although there would be fees to pay such as stamp duty, land tax and conveyancing costs. The Sipp will be able to borrow up to 50 per cent of its assets, so if the Sipp has £200,000 in it, it could borrow another £100,000. This borrowing could be used to help buy the property, and the loan interest and repayments would be costs of the Sipp. Users of the property (whether buy-to-let tenants or the Sipp-plan holder living in his or her own home or visiting a holiday home) need to pay a commercial rent. The rental goes into the Sipp as non-taxable income.

What are the disadvantages?

There are plenty. Sipp charges are discussed above. As also outlined above, if the Sipp planholder uses the property, they have to pay a commercial rent for the use. There is another option, but this is also expensive: if they do not pay rent, they will be taxed at between 40 and 55 per cent of the commercial rent (even if they are not taxpayers). Owning one's own home through a Sipp is unlikely to be attractive for many people. As homeowners already get relief from capital gains tax on their principal private residence, Sipp-holders would lose that exemption by putting the property into a Sipp. Regarding inheritance tax, there would be relief from IHT if the Sipp-holder died before retirement, but the Inland Revenue is setting up special rules, which are likely to see such properties taxed at 35 per cent (a small saving on the 40 per cent IHT rate) if the Sipp-holder dies after retirement with his or her main residence in a Sipp.

Sippdeal's research has found that few people are planning to hold their main home in a Sipp. The need to pay rent would also put many potential investors off going down this route for second homes. And there could be complications if you used it for a property abroad. 'Some countries don't recognise trusts,' says Donna Bradshaw, of the independent adviser IFG, referring to the fact that your pension fund, not you, would own the property in trust. 'And holding overseas property within a pension might not shelter it from local taxation.'

What happens now?

Potential investors and Sipp specialists are investigating the opportunities. Paragon Mortgages, a specialist buy-to-let lender, is teaming up with James Hay, specialists in the Sipp market, to offer these vehicles. John Heron, of Paragon, expects that some investors will start researching the property market and setting up Sipp structures soon, although transfers into the Sipp cannot take place until 6 April.

There are familiar problems with the rules, or lack of them. The Inland Revenue has published the outlines but has yet to consult on the details. Sometimes the Revenue does not get its rules published until days before the start of new laws.

Where can I find out more?

Informed Choice is letting Observer readers download its Buy To Let Property Pension Guide for free rather than for the usual £15 charge. See www.informedchoice.ltd.uk and follow the Observer readers link.

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