Don't rush to turn your home into your pension

Gordon Brown's new scheme sounds enticing but look before you leap at it, says Chris Partridge
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The hype surrounding self-invested pensions plans (SIPPs) may persuade people to rush into inappropriate and expensive investment decisions, experts are warning. The Budget announcement that residential property will be free from tax if placed in a SIPP - which is currently restricted to commercial property - has got buy-to-let investors excited.

The hype surrounding self-invested pensions plans (SIPPs) may persuade people to rush into inappropriate and expensive investment decisions, experts are warning. The Budget announcement that residential property will be free from tax if placed in a SIPP - which is currently restricted to commercial property - has got buy-to-let investors excited.

The idea of putting your own house plus your holiday home in Greece, your wine collection and your art works into a tax-free envelope, accumulating value for you to cash in when you retire, is enticing.

But there are limitations and wrinkles in the small print that investors need to take careful note of. And the situation is made more complex by the simultaneous introduction of "pension simplification", a root-and-branch reform of pension rules. Estate agents also fear that a rush to buy houses and flats will develop when they can be "wrapped" into a SIPP next year, causing a property bubble that could hit house prices longer term.

The essential thing to note is that a SIPP is for the long term, says Richard Cotton, of Cluttons, so if you might need the money the next time you go to Tesco for the family shop, a SIPP might not be appropriate.

Putting a property into a SIPP means you don't own it any more - the fund's trustees do, although you get the benefit and can manage it (or delegate management to your agent). To help savers with financial and legal matters, several financial advisers have set up specialist divisions. "A number of specialist SIPP providers have emerged which are FSA-regulated and charge £300 a year for admin," Cotton says.

Investors need to plan for the day all this happens, 1 April, 2006, or "A-day". The well-heeled investor with an existing SIPP needs to be particularly careful, Cotton says. "There is currently no limitation to the amount you can put into the pension pot, but after A-day, if you have got a pension pot of more than £1.5m, it gets taxed at 55 per cent, except for any pot registered as at A-day." There will also be a temptation to buy residential property in advance of A-day, but this may be counter-productive."If you buy something now and put it in the SIPP after A-day, you will pay capital gains tax and income tax on your profits until then, so there is little merit in anticipating the event," he says.

SIPP hype has so alarmed the Association of Residential Letting Agents (ARLA) that it has commissioned a series of articles giving a sober assessment ( www.arla.co.uk/btl/sipps.html).

Investors building up a SIPP portfolio based on residential property risk putting all their eggs in one basket, says Steve Osbiston, of Baker Tilly Financial Services. "Most people's largest asset is their house; to fill a pension with residential property is going to concentrate all their investments in one asset class."

SIPPs are not an easy way to get out of paying tax, but a great opportunity to take control of your own pension investments.

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