So farewell, sexy pensions: you were just a dream
We thought we could invest in second homes, wine and classic cars tax-free. We were wrong
Sunday 11 December 2005
Bob Penny stared ruefully out of the window at a half-built home last Monday.
The self-employed building contractor, who lives near Bath, had learnt that his plans to put the buy-to-let cottage he was constructing into a self-invested personal pension (Sipp) had just been scuppered.
"I'm building a £100,000 cottage-style house that I was hoping to put into a Sipp after 6 April 2006," he said. "That won't go ahead now and so I won't get the tax relief. It's very disappointing; it was going to be my pension."
His downbeat mood was brought on by the Chancellor, Gordon Brown.
His pre-Budget report last week was light on details for the proposed real estate investment trusts (Reits) and shared equity housing plans for first-time buyers, but dealt an unexpectedly heavy blow to the private personal pension industry.
Mr Brown shocked the financial services sector by putting the kibosh on government plans to let savers purchase residential property for use in a Sipp pension from 6 April 2006 (known as A-Day) - either as a buy-to-let, holiday home or even their main home - and attract up to 40 per cent tax relief.
Other potential, and exotic, pension fund investments including fine wine, art and classic cars have been outlawed too.
His decision to clamp down on proposed rules that, until Monday, had been routinely used by financial advisers, property companies and life companies as a major Sipp selling point - and more than 200,000 have been sold - was taken "to prevent ... potential abuse", the pre-Budget report said.
The fear was that "people could claim tax relief for the purpose of funding purchases of holiday and second homes for their or their family's personal use".
The appeal of the rules had been in the tax breaks - particularly for the wealthy. In effect, a higher earner could have bought a £100,000 holiday flat for £60,000 inside the Sipp.
In the 18 months since the proposals were first fleshed out, consumer groups, regulators and financial services companies had repeatedly warned the Treasury that the tax relief would have a big, and harmful, impact.
Their concerns turned on the money expected to flood into buy-to-let and second homes, pushing up property prices and making it even harder for first-timers and, in rural areas, local families to buy.
These warnings, on top of regular reminders that it offered wealthy savers a juicy tax break, had seemed to have little effect on Mr Brown's officials.
However, it appeared that the predictions of a distorted housing market were finally heeded and, just months ahead of A-Day, the Treasury did a sharp U-turn.
Now, savers who had planned to take part in the more adventurous elements of the Sipp revolution have to unpick their messy finances, and many in the industry who had based their business on selling these pension plans feel betrayed.
Barry O' Dwyer, the marketing director at insurer Standard Life, expressed "terrible disappointment" and said that the challenge now was "to make sure consumers don't get turned off [pensions] again". But residential property could still have a future inside a Sipp, he says. If, as he believes, the change of heart was down to concern at countryside holiday homes lying empty for much of the year, "then let's [rule] that out and keep the [buy-to-let and other benefits]".
Melanie Bien, an associate director at mortgage broker Savills Private Finance, argues that buy-to-let is not open to the "abuse" pinpointed by the Chancellor.
"Even if one does accept the potential for abuse by including holiday homes and main residences in a Sipp, this isn't the case with buy-to-let. That's a pure business venture and so doesn't apply."
It appears there are still hopes of a second Treasury change of heart. Meetings on Wednesday and Thursday last week between Revenue & Customs (R&C) and Treasury officials, and members of the financial services industry, offered some hope of a slight tweaking of the rules before A-Day, it's understood. But no one is banking on much in the way of flexibility.
For now, the real concern is for the thousands who took steps to invest in a Sipp with residential property in mind.
The worst-off are likely to be those who had put down deposits on new flats yet to be built and were relying on Sipp tax breaks to make the full purchases affordable next year.
The money will now have to be found elsewhere, although R&C has set up an "exit" of sorts. If these people can sell their unbuilt flats before they actually become residential properties, they will still qualify for tax relief after A-Day.
However, there are downsides. These include a likely knockdown price for a quick sale and money that is now stuck in a Sipp unable to invest in residential housing.
Other unfortunates include those who have set up the plans for investing in property next year, and those who have already bought bricks and mortar ready to put into a Sipp, says Jonathan Davies, a partner at law firm Reynolds Porter Chamberlain. Anyone who was advised to do so probably won't have any comeback for mis-selling because Sipps and their sale are unregulated investments.
Despite the let-down, the popularity of Sipps will continue to grow, predicts Tom McPhail of independent financial adviser Hargreaves Lansdown. Today's pension saving limits, which restrict your investments according to age, salary and pension type, will be thrown out. Instead, you will be able to contribute huge sums annually - up to £215,000 in the 2006-07 tax year.
And you will still be able to invest in residential property through Reits.
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