SAVERS are expected to stockpile up to £11 billion in their pension funds over the coming months, ready to buy property when new tax perks come into force next year.

From April 2006, investors will be able to buy residential property, such as holiday homes and buy-to-lets, with a personal pension. The property would therefore be free from tax on rental income and capital gains. You will be able to put both new and existing properties in a pension.

Ros Altmann, an independent adviser to Downing Street, said: “This is the biggest tax giveaway for higher earners that I have ever seen. Frankly, I find the proposals astonishing from a Labour government.”

Savers who contribute to their pension schemes in order to buy property will get tax relief on the money. The government pays 22p for every 78p that you invest, taking the total contribution to 100p. Higher-rate taxpayers get a further 18p through their tax return. So someone who wants to purchase a £100,000 property would need to contribute only £78,000. Higher-rate taxpayers would get a further hand-out of £18,000.

Labour would pay more than £4 billion in higher-rate tax relief if investors contributed £11 billion to pensions.

Once a buy-to-let or holiday home is in your pension, the rent will have to be reinvested in the fund and used to pay off any mortgage, but it will be free from income tax at 40%, assuming you are a higher-rate taxpayer. Any capital gains when you sell will also escape tax.

The perks could almost double returns from buy-to-lets, according to Savills, a property firm. Someone who bought a £150,000 property outside a pension with a 50% mortgage and sold it 10 years later might net a profit of about £75,000. The figures assume that any surplus rent after tax and mortgage interest is used to clear the debt and that house prices grow by 4.5% a year.

If the property were held within a pension, however, the tax breaks would boost your profit to about £140,000.

However, you will not be able to access the cash until the age of 50, rising to 55 from 2010, when you can take 25% of your pension fund as a tax-free lump sum and use the rest to provide a taxable income. You will be able to continue working even after taking the benefits.

Experts say investors are already boosting pension contributions to take advantage of the new rules. Pension schemes will be able to borrow only 50% of the value of their existing assets to buy property, so you would need a fund of £100,000 to buy a typical property worth £150,000 in April 2006.

Trevor Abrahamsohn of Glentree International, an estate agent, said: “Clients are already putting money in pension funds and keeping it in cash. The new rules will unleash a wall of money into the residential property market.”

Investors will typically use self-invested personal pensions (Sipps) to buy property. People who already have standard personal pensions — about 6m — can switch to a Sipp at any time.

Another 10m people in occupational pensions cannot currently take out Sipps alongside their company schemes, but this rule will be lifted from April 2006. If they want to build up their pension contributions in the meantime, they could take out a free-standing additional voluntary contribution scheme and switch into a Sipp next year.

John Lawson of Standard Life, the insurer, estimates that savers will use a combination of existing pension assets and new contributions to purchase buy-to-let properties worth between £7 billion and £11 billion from April 2006 — or 10% to 15% of the current market.

Millions of pounds more could flood into the market from new purchases. Abrahamsohn said: “This can only serve to increase demand and push up prices.”

The government’s new rules could even help the housing market to avoid a severe downturn. Last week, Halifax said prices rose by 1.1% in December after two months of falls. However, it expects house prices to slip by 2% this year; other economists are predicting falls of up to 15%.

Even if the new rules prop up prices, however, most economists expect house-price growth to be lacklustre at best over the next few years. This has raised fears that some pension savers could be disappointed with the returns from buy-to-let.

Andy Bell of AJ Bell, a Sipp firm, said: “There is a danger that inexperienced investors could be getting sucked into the property market at precisely the wrong time and be left with all their eggs in one basket.”

Alternatively, savers could buy holiday homes abroad with their pension funds — although they would have to pay rent to their scheme when they used the property and they might be taxed in the foreign country.

Steve Bee of Scottish Life, a pensions firm, said: “Millions of well-heeled people in company schemes will now be able to set up a Sipp to invest in a much broader range of assets, including their gite in France.”