PENSIONS were rarely, if ever, a subject for dinner-party discussions until the government decided in 2004 that it would allow investors to buy residential property with their funds from next April. Now, it seems people are talking about little else.

The new rules will undoubtedly be highly attractive to many investors, especially those in their forties and fifties with well-funded final-salary schemes who want to add spice to their portfolios.

However, there is already evidence of a bubble in the making — property clubs are getting in on the act and some people are even buying Bulgarian boltholes off-plan, ready to put them in their pension funds.

It is therefore welcome that Capital Economics, a consultancy, sought to inject a little realism last week. Its analysis shows that there are some cases where you might be better off holding a residential property outside a pension, namely where you take on a big buy-to-let mortgage. Inside a Sipp, borrowing will be limited to 50% of the value of the fund.

Not that Capital Economics wants to encourage us to take on big loans; it is simply making the point that putting a property in a pension is not always the panacea it might appear.

Investors should also bear in mind that if they put property in their pensions, they will not be able to get at their asset until they are 50, rising to 55 from 2010.

Your Sipp provider is also likely to use the opportunity to levy an extra layer of charges that will reduce your returns. And, finally, your tax-free property may not be tax-free after all if it is overseas, because you may still have to pay taxes in the foreign country.

Downsides apart, Capital Economics does say that a higher-rate taxpayer who bought a £250,000 property with a Sipp and held it for 25 years would earn an average annual return of 10.3% (assuming house prices rose by 4.5% a year). If you held the same property outside a pension, assuming a 60% buy-to-let mortgage, your returns would be 8.8%.

The overall message, as with so much else, is to take advice before you jump on the bandwagon.

A big break for China

FINALLY some good news for investors in China: the Chinese government surprised stock markets last week when it announced it would revalue its currency by 2% against the dollar.

While the consensus in the City was that the move was too small to have a short-term impact, it could be positive for Hong Kong and Chinese equity markets in the long term.

Investors in the region have been short on good news for some time. They have piled in over the past few years, tempted by an economy that is expanding by 9.5% a year, but this growth has failed to translate into stock-market returns. The Shanghai A Share index recently hit an eight-month low, having dropped 10% over the past three months and more than 25% over the past year.

Fund managers say that China’s revaluation should reduce some of the risks, including America imposing trade sanctions. The move is also considered to be good for the domestic economy because the cost to Chinese companies of imported goods will come down, which will take pressure off inflation and therefore interest rates.

However, investors should not get carried away. Many Chinese firms are still overvalued and it can be difficult for overseas investors to make money out of the mainstream market because the government retains tight controls.

The best way to make money out of China, according to many professionals, is to buy western firms that have seen its potential. B&Q, for example, is a market leader in the country.

The revaluation is also expected to have an impact on other assets in the long term. It is good news for European and US companies that compete with China — equities in those markets gained on the news — and it could signal the end of the dollar’s recent resurgence.

Spread-betters who have been betting on the greenback should take note.