Secrets Of Success: Brown's property U-turn is spot on

The Chancellor's change of mind over what you will and will not be allowed to put into a self-invested personal pension (Sipp) come next year has, I am glad to say, taken some of the sting out of what I was planning to say about the hidden perils of A-Day, the new pension regime that begins in April.

By removing the opportunity to put directly owned residential property, wines and antiques into your Sipp, Gordon Brown has hardly done the terrible thing that the anguished howls of the financial services and property industry might lead you to believe. Perversely or not, I think it is one of the more sensible things that Brown has done in recent years.

On this occasion, unusually, I find myself sharing the view of Which?, the consumer group. It said a few weeks back that watching the build-up to A-Day has been a bit like standing on the side of a railway line, helplessly watching a train crash about to happen.

For you can be certain that, while the smart, the well-advised and the wealthy will take full advantage of the new pensions regime, as they always do, the less financially sophisticated run a serious risk of finding themselves being taken for a ride.

Look back through financial history and you will find countless instances where doing things for a tax reason alone has led to unfortunate consequences. Combine that with the fact that, in practice, tax concessions tend to be the financial services industry's most potent selling weapon, and the Sipp rules, as originally proposed, were shaping up as a potential recipe for damage to innocent people's wealth. (I have no problems with the Sipp concept, itself, which is an excellent one for anyone who is prepared to take the responsibility of managing their own money, but should the Government really be encouraging so many people down that route?)

It is no surprise to me that the biggest howls of protest about Brown's change of heart have come from the intermediaries and professional firms that have been trying so hard to persuade people to part with their money in order to take advantage of the new rules, for example by buying off-plan flats in the hope of getting an effective 40 per cent discount on the purchase price. Nice work if you can get it (for the advisers and promoters that is), but try as hard as I can, I cannot think of a single valid reason why second homes, designer flats and vintage wine should attract this kind of generous tax benefit.

The marketing men may have lost a nice little earner, but the country, as a whole, is surely better off for Brown's change of heart on this specific point (not least because most of the assets that have now been disqualified already look dangerously overpriced, and the latest wave of tax-induced demand threatened to push prices even higher). Far from whingeing, if it is true that they won't now go ahead with the transaction, those who have been buying flats and wine ahead of the Budget for the promised tax benefit should be grateful for the lesson they have been handed.

Quite apart from the investment risk of chasing tax wheezes, the broader lesson is that governments should never be trusted on tax, as they can and do frequently change the rules to suit the purpose of the day. If you commit too much money to your pension purely for the tax benefits, you are putting that risk right at the centre of your investment strategy - with the added drawback that once committed, you can only get 25 per cent of the capital tied up in your pension back.

On the other hand, the news that real estate investment trusts, or Reits, as they are known, are now to go ahead is generally good news. The absence of a simple, tax-efficient way to own a share of a diversified property portfolio has been an obvious investment anomaly in this country for some time. Even if this is not the best time to start buying into commercial property, in particular, over time it seems a safe bet that Reits will flourish and become a routine part of many private and professional investors' portfolios, just as they have in countries such as the United States and France. (You will also be allowed to put them into a Sipp as well, as the rules currently stand).

It is true that we don't yet know exactly how the conversion charge - the tax that existing property companies will have to pay if they want to convert to Reit status - will be set. Exactly how onerous this proves to be will determine how many quoted property companies eventually choose to become Reits.

The share prices of most property companies have risen strongly in the past 18 months in anticipation of the new regime coming into force, and many already look richly valued, underlining the wisdom of the old market adage: "buy on the prospect, sell on the new".

Nevertheless, a converted property company will not be the only source of Reits. You can be sure that we will soon see a raft of new property funds coming to the market in one form or another, to take advantage of the new regime.

There is probably no need to hurry to put one of these new creatures into your pension, but the attractions of having a significant property element in your portfolio are proven and obvious, independent of the tax-break status.

In Standard Life's annual Global Horizons publication, out this week, Andrew Jackson, the property investment director, points out that annual returns from commercial property have been very strong in the past few years, and may drop from double to single digits during the course of the next few years.

However, even if there is a bit of a bust when the global residential property bubble starts to deflate, property has earned its place as one of the core assets with which investors should be constructing their portfolios, not least because of its diversification benefits.

The chart below illustrates how this might play out for Reits when they appear. According to Standard Life, a balanced portfolio of property, held as a mixture of direct investment, ordinary and geared funds, has historically produced strong returns with relatively low risk. The exceptional returns of Reits in other countries to date have come at a cost of higher volatility - suggesting that there is, indeed, some sort of bubble developing in their shares at the current time.

On that basis, on valuation grounds, the next cycle may be more profitable than the current one.

Independent Partners: 10 top tips for retirement. Get your free guide here

Sport
Thiago Silva pulls Arjen Robben back to concede a penalty
world cup 2014Brazil 0 Netherlands 3: More misery for hosts as Dutch take third place
Sport
Robin van Persie hands his third-place medal to a supporter
Van Persie gives bronze medal to eccentric fan moments after being handed it by Blatter
News
Ian Thorpe had Rio 2016 in his sights
people
Life and Style
Swimsuit, £245, by Agent Provocateur
fashion

Diving in at the deep end is no excuse for shirking the style stakes

PROMOTED VIDEO
News
scienceScientists have developed a material so dark you can't see it...
News
Monkey business: Serkis is the king of the non-human character performance
peopleFirst Gollum, then King Kong - now the actor is swinging through trees in Dawn of the Planet of the Apes
Arts and Entertainment
Blackman: Landscape of children’s literature does not reflect the cultural diversity of young people
booksMalorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
Voices
Mrs Brown's Boy: D'Movie has been a huge commercial success
voicesWhen it comes to national stereotyping, the Irish know it can pay to play up to outsiders' expectations, says DJ Taylor
Arts and Entertainment
Curtain calls: Madani Younis
theatreMadani Younis wants the neighbourhood to follow his work as closely as his audiences do
Life and Style
Douglas McMaster says the food industry is ‘traumatised’
food + drinkSilo in Brighton will have just six staple dishes on the menu every day, including one meat option, one fish, one vegan, and one 'wild card'
Life and Style
Once a month, waistline watcher Suran steps into a 3D body scanner that maps his body shape and records measurements with pinpoint accuracy
techFrom heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
Sport
Mario Balotelli, Divock Origi, Loic Remy, Wilfried Bony and Karim Benzema
transfersBony, Benzema and the other transfer targets
News
Soft power: Matthew Barzun
peopleThe US Ambassador to London, Matthew Barzun, holds 'jeans and beer' gigs at his official residence. He says it's all part of the job
Sport
Joe Root and James Anderson celebrate their record-beaking partnership
cricketEngland's last-wicket stand against India rewrites the history books
News
Gavin Maxwell in Sandaig with one of his pet otters
peopleWas the otter man the wildlife champion he appeared to be?
News
Rowsell says: 'Wearing wigs is a way of looking normal. I pick a style and colour and stick to it because I don't want to keep wearing different styles'
peopleThe World Champion cyclist Joanna Rowsell on breaking her collarbone, shattering her teeth - and dealing with alopecia
Finacial products from our partners
Property search
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Information Security Manager (ISO 27001, Accreditation, ITIL)

    £70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

    Biztalk - outstanding opportunity

    £75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

    Trade Desk Specialist (FIX, Linux, Windows, Network Security)

    £60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

    Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

    £35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

    Day In a Page

    Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

    How Saudi Arabia helped Isis take over northern Iraq

    A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
    The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

    The evolution of Andy Serkis

    First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
    You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

    You thought 'Benefits Street' was controversial...

    Follow-up documentary 'Immigrant Street' has got locals worried
    Refugee children from Central America let down by Washington's high ideals

    Refugee children let down by Washington's high ideals

    Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
    Children's books are too white, says Laureate

    Children's books are too white, says Laureate

    Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
    Blackest is the new black: Scientists have developed a material so dark that you can't see it...

    Blackest is the new black

    Scientists have developed a material so dark that you can't see it...
    Matthew Barzun: America's diplomatic dude

    Matthew Barzun: America's diplomatic dude

    The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
    Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

    Meet the 'Quantified Selfers'

    From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
    Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

    Five-star reviews are just the opening act for British theatre's first non-white artistic director

    Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
    Mrs Brown and her boys: are they having a laugh?

    Mrs Brown and her boys: are they having a laugh?

    When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor
    Gavin Maxwell's bitter legacy: Was the otter man the wildlife champion he appeared to be?

    Otter man Gavin Maxwell's bitter legacy

    The aristocrat's eccentric devotion to his pets inspired a generation. But our greatest living nature writer believes his legacy has been quite toxic
    Joanna Rowsell: The World Champion cyclist on breaking her collarbone, shattering her teeth - and dealing with alopecia

    Joanna Rowsell: 'I wear my wig to look normal'

    The World Champion cyclist on breaking her collarbone, shattering her teeth - and dealing with alopecia
    Bill Granger recipes: Our chef gives raw ingredients a lift with his quick marinades

    Bill Granger's quick and delicious marinades

    Our chef's marinades are great for weekend barbecuing, but are also a delicious way of injecting flavour into, and breaking the monotony of, weekday meals
    Germany vs Argentina World Cup 2014 preview: Why Brazilians don't love their neighbours Argentina any more

    Anyone but Argentina – why Brazilians don’t love their neighbours any more

    The hosts will be supporting Germany in today's World Cup final, reports Alex Bellos
    The Open 2014: Time again to ask that major question - can Lee Westwood win at last?

    The Open 2014

    Time again to ask that major question - can Lee Westwood win at last?