After Gordon Brown’s U-turn on SIPPs, what next for pension planners and long-term property investors?

Last year, there was considerable hype about Self Invested Pension Plans (SIPPs) and how, from April 6 this year, it would be possible to use a SIPP to buy residential property – with enormous tax advantages.

Businesses were set up to respond to the new era, millions of pounds were spent, and investors bought thousands of properties ready to put into a SIPP.

But all that came to a juddering halt in December when Gordon Brown did his famous U-turn and announced that residential property would be a prohibited investment for SIPPs.

It is true that for some time there had been disquiet as to whether residential property was an appropriate investment for many people, fuelled by the buy-to-let craze, the activities of some investment clubs (which the DTI closed down) and the fact that property investment is unregulated.

The Treasury was also waking up to the potential for abuse and the huge tax breaks that would be generated had SIPPs gone ahead.

However, Chris Banks, of London-based mortgage specialist Cobalt, thinks that the Chancellor threw the baby out with the bathwater: fair enough to ban second homes in SIPPs, but not genuine buy-to-let investments.

As far as property is concerned, what pension investment vehicles are we left with?

• First, you can still have commercial property in a SIPP and there are SIPP providers offering, for example, stakes in office blocks.
• Second, REITs – Real Estate Investment Trusts – are set to launch this year. Listed on the stock market, they will pool money from investors and buy a range of properties, such as shopping malls, offices and apartment blocks, and then distribute the rental income.

• Third, it’s probable the Government will let you put your REIT into a SIPP, which means the income from the investment would be tax free. But so far, all the Chancellor has said is that he is ‘minded’ to allow this.

• Fourth is the possibility of other indirect property investment funds being allowed in SIPPs. For example, this could include a new property fund from Assetz which will be buying apartments in regeneration areas.

However, this is all a long way from the original SIPPs plan. REITs allow you to own shares in a portfolio of property, but not own the property itself. Nor can you have personal use of the property – for example, you cannot set up a REIT, own 100% of the shares in it and buy a villa in France in which to spend your summers.

SIPP as originally proposed could have owned property outright – which led to accusations that they were tax-avoidance vehicles for the rich. However, REIT investors need only put in, say, £5,000 (the minimum required by the Assetz fund).

John Brown, of Manchester-based stockbrokers WH Ireland, believes that because of their inherent diversification, REITs are a safe savings product: “They allow you to invest in various types of property without the personal hassles of physically buying into bricks and mortar. “The investment trust invests in properties which are then leased – rather like buy-to-let, but on a much bigger scale – and which include shopping centres, office buildings, cinemas and industrial units as well as residential property. In fact, one of the ideas behind them is to promote investment in UK property, as part of a wider plan to increase the supply of housing.

“We shall certainly be promoting the positives to our clients.”

Nick Braun, of Taxcafe, says: “The details are still sketchy but the main advantage will be the ability to invest in a professionally managed, broadly diversified, liquid property portfolio, for small lump sum investments.

“The main drawback with REITs is that gearing (borrowings) will probably be limited. Some investors will see this as a serious drawback because, when property prices are rising, gearing can provide a massive boost to your returns.

“However, when property prices are stagnant, as they are now, gearing becomes slightly less important. Holding on to the rental income, instead of using it to pay mortgage interest, becomes more enticing.

“Having low levels of gearing also reduces your risk substantially. Property, after all, is not a very risky investment – it’s the borrowings that cause the problems.

“The other drawback is that the prices of stock market-listed property investments are more volatile than direct properties.

“However, they’re a lot less volatile than other shares and much more liquid than other types of property: you can buy or sell them in minutes rather than months.”

Much less enthusiastic is Chris Banks, who believes that REITs are as unexciting as shares and with similar drawbacks: “People won’t be ploughing into REITs with the same enthusiasm as there was for SIPPs.

“Despite their inherent diversification, collective investment vehicles will never achieve the same popularity as something you can physically enter through a door, especially while many investors are still feeling the fallout from the stock market crash that began in 2000 and the pensions mis-selling scandal of the late eighties and early nineties.”