Investors had been hoping they could use their pension fund to purchase a buy-to-let property or holiday home abroad after A-Day.

Commentators predicted that up to #5 billion could be poured into the UK rental market this year alone following the changes which would enable people with Self-Invested Personal Pensions (SIPPs) to invest directly in residential and overseas property.

Countryside groups warned that that local people in rural areas would be priced out of the market as investors rushed to snap up holiday homes.

Others suggested the move would lead to a boom in the number of Britons owning property abroad, while sales of SIPPs were expected to soar.

The new rules would also enable people with one of the pensions to invest in other asset classes, such as fine wine, art, antiques and even vintage cars.

But in a dramatic U-turn in last year's Pre-Budget Statement, Chancellor Gordon Brown announced that people using SIPPs to buy alternative assets, including residential property, would no longer qualify for tax relief.

The move incurred the wrath of the pensions industry, with people bemoaning the thousands of hours of professional time spent getting ready for property-based SIPPs, while others complained that many consumers had already taken out SIPPs or bought property in anticipation of the changes.

But financial information group Defaqto predicts the uptake of SIPPs will still accelerate as a result of ADay, despite the Government reducing their attraction.

It said the flexibility and personal control they offered meant they were likely to appeal to people whose current pensions had high charges, limited investment opportunities and poorly performing or unstructured portfolios.

Matt Ward, head of pensions at Defaqto, said: "It is clear that SIPPs are coming of age as a pension instrument and are a solution for more than just very rich investors."

But Richard Harwood, head of pensions at Grant Thornton, warned that as a result of the hype surrounding SIPPs many people were likely to take them out when a personal pension would be more suitable.

He said: "The coverage of SIPPs will undoubtedly make them appear more attractive to many investors who may well enter into expensive contracts which add no benefit in their particular situation."

He said set up and annual management charges on SIPPs were higher, and if people were simply going to use their SIPP to invest in unit trusts, they could do that more cheaply through a personal pension.

He said people would only really benefit from a SIPP if they wanted to be able to invest their pension fund themselves, rather than having a fund manager handle it, and if they wanted greater flexibility in the types of asset they could invest in. SIPPs allow investors much greater control over their pension investments.


SIPP stands for Self-Invested Personal Pension. It is distinct from traditional pension vehicles in that individuals have complete control over where their pension is invested. With other pension products, a pension fund manager invests on behalf of the client.

For the less sophisticated SIPP investor, there is the option of paying for an advisory service and making investment decisions based on advice from an independent financial expert.

For those who know the sort of fund they want at the outset but would like their adviser to handle all the dayto-day management decisions, there is the option of a discretionary service. This service does not come cheap as it involves paying a manager to look after a fund in isolation.


In theory anyone who is under 75 and resident or ordinarily resident in the UK for tax purposes and has UK net relevant earnings.

If investors wish to be a member of their employer's pension scheme and open a SIPP, there will no longer be any restrictions on contributing to both of these types of pension scheme at the same time.


Each year there is an annual allowance. In 2005/06 this will be #215,000 and will rise each year.

Savers can contribute in excess of the annual allowance if they have earnings to support the contribution. The annual allowance is simply the annual amount of contributions that are taxprivileged. If the annual allowance is exceeded, a tax charge of 40 per cent will be levied on the excess.


It depends what a provider offers - but all of these could be included in a SIPP:

* Shares traded on the London Stock Exchange (including AIM and OFEX); US, European and selected over-seas markets.

* Investment trusts, unit trusts & OEICs (open-ended investment companies), insurance company managed funds.

* Gilts and foreign government securities.

* Corporate bonds and other fixed interest securities.

* Covered warrants.

* Futures, options and CFDs (contracts for difference).

* Commercial property/property funds

* Cash

* Loans

Investors will be able to go for both listed and unlisted shares, and they can also invest in OFEX companies for the first time, if their SIPP provider offers them that option. OFEX is the UK's independent market focused on small and medium enterprises from around the world.

There will be no restriction on the amount of unlisted shares a pension fund can own.

The rule change is significant as it means investors will be able to invest in the shares of their own business. Higher rate taxpayers will get an effective 40 per cent relief on investments made in the equity of their own limited companies, and growth will take place in a tax-efficient environment.


Chancellor Gordon Brown announced in his pre-Budget speech last year that residential property would not qualify as a SIPP investment. But commercial property can be included.

There are two options here: investors can either buy a property directly or they can invest in a property fund that invests in commercial properties.

In theory investors can buy their own business premises, put them into a SIPP and then rent the property from their own pension fund. But borrowing limits are being reduced from 75 per cent of property value now to a maximum of 50 per cent post A-Day.

A commercial property fund will provide a wider spread of risk as it is not dependent on returns from just one property.

It is important to establish the type of property fund in which the investment is made.

In theory property investment has little correlation with the movement of equity markets, which makes them a good option to diversify a portfolio, but some property funds invest in building companies as well, exposing them to stock market movements.


Real Estate Investment Trusts (REITS) are funds that invest in either residential or commercial property or a mix of both.

By early 2007 it should be possible for pension schemes to invest into these trusts and thus hold shares in residential properties but not buy these properties directly.


It had been intended to allow assets such as fine wine, antiques, artwork, vintage cars and jewellery in a SIPP but that avenue has been closed.

In theory such assets can go into a SIPP but the tax bill will be very high.


There is tax relief on all pension contributions at 40 per cent for higher rate taxpayers.

From April 6, in the event of the pension fund holder's death a facility will be available to allow the funds built up within the SIPP to be passed to other surviving family members that may be free of inheritance tax. This is referred to as an alternative secured pension.

The Budget clarified the position for those looking to defer annuity purchase and take income drawdown until age 75.

There will be no inheritance tax charge payable before age 75, so pension funds can be left to children or grandchildren or named beneficiaries.

But if the pension holder is over the age of 75, inheritance tax will be charged on anyone receiving the value of the pension fund, with the exception of the surviving spouse and a named charity beneficiary.

The Government may also impose a discretionary tax charge if it believes a combination of drawdown and alternative secured pensions has been used on purpose to avoid inheritance tax.

The alternative secured pension will be available in the form of a family SIPP and it will provide an income for the surviving spouse or children.

But for it to work, all family members must have pensions with the same provider.


Transfers from SERPs (state earning related pension schemes) are allowed. SERPs are used by employees to "contract out" of the state second pension scheme (S2P). Over six million people are "contracted out" and they will be able to take control of their funds for the first time using SIPPs.


From A-Day there will be a new cap on the value of a retirement fund. Called the lifetime allowance, it will be set at #1.5 million, rising to #1.8 millionby 2010. If an investor has several pension schemes, they will all count towards the limit. Investors will be liable for a 55 per cent tax charge on any amount above the lifetime allowance.

For example, if a pension pot is worth #1.6 million at retirement and the allowance was #1.5 million, tax would be levied at 55 per cent on the #100,000 excess, resulting in a charge of #55,000.

Experts recommend that investors contact their employer's pensions department, the insurance company providing a pension or financial adviser, to estimate what a fund will be worth.

With personal pensions and money-purchase company plans, the calculation is simple, advisers say: compare the fund value with the lifetime cap.

With final-salary company pensions, however, it is more complex. Pensions savers will be deemed to have a fund worth 20 times their income in retirement. So a final-salary pension paying #75,000 a year will be deemed to be worth #1.5 million.


One of the biggest challenges for pension savers regarding annuities has been compulsory purchase by the age of 75. This will now no longer apply.

Pension investors will be able to move their money into an "alternatively secured pension".

This means money remains invested and income can still be drawn equivalent to 70 per cent of what would have been received from a traditional annuity.

But there is also the option to draw very little income, or none at all if the priority is to leave the money for spouse or children.

Under the old regime, money invested in a compulsory annuity was not passed on to next of kin but effectively died with the annuity holder.

Now there is the opportunity to inherit from another's retirement savings, but the tax treatment on this still needs to be finalised.