Would you hang your retirement cash on the wall?

Sam Dunn reports on the new freestyle pension that will let more of us than ever before invest huge sums outside the box
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It's a portrait of a pensions controversy - a high-profile private pension plan that is dividing its audience.

Last week, visitors to the British Art Fair in London were implored to consider "Art for pensions!", as publicity went on to describe how, from 6 April next year, you can buy art with a self-invested personal pension (Sipp).

Similar ebullience was sweeping over insurer Standard Life as it celebrated the £1bn poured into its Sipps, largely by wealthy investors, during the past nine months.

And in two weeks, a cheaper version of this plan is to be launched by Standard Life. Marketing director Barry O'Dwyer says it "will be the first for the mass market", with lower charges and greater flexibility.

But the Financial Services Authority (FSA) took a very different tone. On Thursday, the City regulator warned financial advisers that it would watch Sipp sales closely to make sure consumers were treated fairly and not left out of pocket.

Elsewhere, at a pensions seminar, Charles Kaye of law firm Reynolds Porter Chamberlain said financial firms needed to tread carefully with "Sipp fervour" or risk opening themselves up to mis-selling and negligence claims. "Individuals may be better off [staying] in existing [pension] schemes and advisers must avoid accusations of advising clients to switch in order to earn themselves commissions."

The catalyst for this debate, as we wait for Adair Turner's Pensions Commission to report on how Britain should solve its long-term savings crisis, is "A-Day", 6 April 2006, when the rules governing what we can put into our pensions are overhauled.

At the moment, investments are limited according to your age, salary and pension type. From next April, though, you will be able to contribute huge sums annually - up to £215,000 in the 2006-07 tax year.

But, rather than just invest in funds, a Sipp will let you borrow up to half the value of your pension pot to buy property, including a buy-to-let or even your own home.

No longer will you have to buy an annuity - an income for life - by the age of 75. Instead, you will be able to take an "alternatively secured income", which offers a lower monthly income but lets you pass on any unused pension at your death to a loved one, subject to an inheritance tax charge.

At retirement, you will be allowed to withdraw 25 per cent of your pension pot in tax-free cash, including any money in additional voluntary contri- butions to occupational schemes - a practice that is currently forbidden.

And, for a dash of the exotic, a Sipp will let you put wine, art or even a classic car into your pension.

All these options can make Sipps sound like a key to untold fortunes. For example, the tax breaks - particularly for the wealthy - are considerable: in effect, they will let a higher earner buy a £100,000 holiday flat for £60,000 inside the Sipp.

But there are plenty of risks to consider and the precise rules on how these plans will work are still being interpreted by the industry.

Say you wanted to go into buy-to-let: to spread your investment risk, you would need a sizeable fund to be able to buy a property at the same time as keeping money spare to invest in other assets.

If property markets fell, the house could become hard to sell, reducing the value of your pension too.

Meanwhile, placing a foreign holiday home in a Sipp could lead local tax authorities to impose high charges on rent and capital gains - wiping out any earlier tax relief benefits.

With other luxury assets, such as cars and art, there will be "benefit in kind" tax charges if you enjoy them while they sit in your Sipp.

For example, take your vintage motor out for a spin or hang a Damien Hirst on your wall and you will either pay a yearly "market rent" of 20 per cent of its value back into your own pension pot, or give a smaller sum - 40 per cent of this annual rent - to the taxman.

Annual charges for these flexible Sipps will also be much higher than the 1 or 2 per cent usually paid to invest in stock market funds.

Savers need to think hard when they're listening to the sales pitch, says Mr Kaye at Reynolds Porter Chamberlain. "The danger is that the tax and borrowing advantages will be stressed regardless of whether the property fits into the pension plans.

"Advisers must make it clear that the Inland Revenue could introduce retrospective regulation removing tax benefits at any time," he adds. Indeed, the Treasury is set to launch a consultation into Sipp regulation.

But Tom McPhail, of independent financial ad-viser Hargreaves Lans- down, is more upbeat: "The Sipp revolution could be a long-overdue catalyst to encourage people to think a lot more carefully about their investment strategy."

Whether, post A-Day, a Sipp is right for you largely depends on your age and how much you've already saved in pension schemes.

The general rule is that direct investment in property will only be suitable for a small number of investors - usually those with at least £500,000 in their pension, says Mr McPhail.

A Sipp simply gives you more control instead of leaving it up to your employer where your cash is invested. The choice of stock market funds is greater than in a stakeholder, for example.

You can also still invest in a Sipp if you're in a company scheme.

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