Investment Sipps: Retire on a jackpot

City high-flyers are set to pour billions into new, property-based pensions, says Chris Partridge

City bonuses are expected to hit a record high this Christmas, and analysts predict that up to £1bn might be injected into the London property market as a result.

As many as 3,000 bankers and brokers will get bonuses of more than £1m in the biggest City jackpot for years. Some 100,000 middle managers will be getting smaller payouts.

A substantial proportion of the money is expected to be invested in property, despite the lacklustre performance of the private rented sector recently. The security of bricks and mortar is still a big draw, and there are few alternatives that offer any better returns.

But the main attraction will be the ability to put residential properties into self-invested personal pensions or Sipps, which will become possible next April. Sipps effectively cut the cost of investing in a property by 40 per cent, and recipients of City bonuses will be able to pay cash - most small investors will be prevented from benefiting by restrictions on borrowing.

Liam Bailey, head of research at Savills, the property services group, believes the property market in central London is already being perked up in anticipation of the bonus bonanza.

"The market since August has been incredibly busy after a bad start. I think people are reserving property in expectation of their bonuses," he says. "About 40 per cent of central London properties go to buyers with City links."

This is an obvious opportunity for buy-to-let landlords who see a rather dreary outlook for the next few years.

"As far as buy-to-let goes, we are predicting 2.5 per cent growth next year, level pegging with inflation," Bailey says. "People are now more confident there will be no crash, but investors will have to work hard for their return."

Landlords should be patient and wait until next year to sell, however.

"If you want to cash in your capital gain, you should wait until spring, when people will be looking for properties to put in their Sipps," he says. "From the buyers' point of view, there is no point in buying a property now and then selling it to the Sipp when the regulations change."

Jim Ward, residential research director of Savills, is even more optimistic about the prospects for the prime central-London market."With the prospect of high city bonuses and continued buoyancy in the financial markets, we are forecasting a 5 per cent growth in prime central London in 2006 and if this year's performance in the financial markets continues into next year, that could prove to be a conservative estimate," he says.

The arrival of residential property-based Sipps will create a surge of activity, he says: "We do expect a one-off blip in the spring, and people have stacked up a lot of money in Sipp accounts waiting for the day."

Some buy-to-let landlords will transfer their portfolios into their Sipps, assuming the trustees approve of the properties (high-risk properties are not judged suitable for pension funds).

Longer term, Sipp providers are likely to introduce shared ownership, allowing less plutocratic investors to add residential property to their pension plans, Ward predicts.

"There will be opportunities to invest in part shares of properties, so you retain the benefits of identifying promising investment property yourself," he says.

The injection of money from pension plans will be significant, Ward believes: "We estimate Sipp investment in residential property could build to the order of £6bn per annum - around 3 per cent of housing market turnover. This would support investor markets but not have significant impact on mainstream house-price inflation."

The emerging profession of Sipps provider, people who act as fund trustees and managers, believes that the prospect of owning property has ignited enthusiasm for a vehicle that has until now only appealed to the very financially aware.

David Baker, a director of Sipps provider James Hay (part of the Abbey group) has discovered that there is a lot of money now lined up for buy-to-let pension investments.

"One financial adviser told me he had 50-plus clients who were planning on putting in the full £215,000," he said.

Baker foresees that Sipps will evolve, perhaps by allowing properties worth more than the £215,000 to be shared between the Sipp and the private investor.