Self-Invested Pensions: Anger as new tax break for savers who invest in property is removed

Gordon Brown was facing a furious backlash after abandoning plans to allow savers to hold residential property in their pension plans just four months before the new rules are to be introduced. The Chancellor was accused of a "last-minute U-turn" that would enrage savers and cost the pensions industry millions of pounds.

Under reforms to be introduced in April, savers with self-invested personal pensions (Sipps) were to be given tax breaks when using their pension funds to invest in domestic and international residential property, as well as in a wide selection of alternative investments - from classic cars to fine wine.

The reforms have sparked huge interest in property investment, with pension providers and property developers gearing up to offer Sipps to savers interested in holiday homes and buy-to-let property investment.

Research published last month by UCB Home Loans, the buy-to-let mortgage arm of Nationwide Building Society, predicted the new rules would generate £5bn of property investment during the 2005/6 financial year. Yesterday, however, three years after the Government first announced the initiative, the Chancellor said he was amending the regulations to prevent savers getting tax relief on any residential property investment, or on alternative investments.

Sipp savers will now be specifically charged when holding any direct property investment in their funds, preventing them from enjoying tax-free rental income or capital gains on property price increases. They will also be prevented from investing in fine wine, art, classic cars and similar assets.

"There has been a huge U-turn and we are absolutely astounded, as millions of voters will be," said John Lawson, head of pensions policy at Standard Life. "Savers and pension providers have been planning for the new rules on property and pensions for three years - this is an utterly appalling way to treat people."

Tom McPhail, the head of pensions at Hargreaves Lansdown, an independent financial adviser, said: "It's deeply unfortunate that the Chancellor has taken so long to make this decision - there will be an awful number of people who will be very disappointed."

Mr Brown's change of heart followed a series of warnings that the new Sipps rules could artificially inflate house prices, particularly in areas of the country that are popular with holiday home-owners. The reforms have also been attacked on the ground of cost. Lord Oakeshott of Seagrove Bay, the Liberal Democrat pensions spokesman, said: "We're delighted that the Chancellor has pulled back from this disastrous policy at the 11th hour - it would have hit many first-time buyers very hard and cost the Exchequer billions of pounds in tax-breaks for middle-class savers who did not need them." Lord Oakeshott pointed out that the campaign against the new Sipp rules had been running for more than two years. The Government has repeatedly accused opponents of the reforms of exaggerating the impact on the housing market and tax revenues.

The Treasury insisted yesterday that its pensions simplification reforms would still go ahead. In a press notice, the Treasury said: "The new regime will provide individuals with greater flexibility and choice over their retirement options."

But pension providers are dismayed that the investment options for Sipp savers will now be much narrower than expected.

Jerome Melcer, actuarial director of accountant BDO Stoy Hayward, said he was particularly angry that the regulations were being amended so late: "This has wasted thousands of hours of professional time; an entire industry has been set up to deal with property-based Sipps and now it's all been canned."

Malcolm Harrison, of the Association of Residential Lettings Agents, added: "We have been warning people for the past 12 months to wait for the pre-Budget report before putting extra money into pensions."

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