What is a Sipp?

A Self-Invested Personal Pension is just a collection - or "wrapper" - of pension products, organised by an individual, that allows the management of a wide-variety of investments for retirement.

What are the tax advantages of Sipps?

Sipps benefit from the same tax advantages as traditional pension schemes. All contributions up the age-related limits attract tax relief of between 23 and 40 per cent, dependent on earnings. At retirement, investors have the same options as they would with an ordinary pension: they can take a tax-free lump sum of 25 per cent of their fund and use the remainder to buy an annuity or opt for income drawdown.

What benefit do Sipps have over traditional pensions?

The principal advantage of a Sipp is that it offers more flexibility than a conventional pension scheme. Sipp holders can manage their own pension, choosing from a wide variety of different asset classes rather a small selection of managed funds.

What rules has the Government changed?

From April 6, 2006, the Government was going to allow individuals to invest 100 per cent of their income (up to a cap of £215,000 each year) in Sipps and expand the number and type of assets eligible for the scheme – including residential property. The idea was to encourage people to invest for their retirement. But the Government then decided to limit the type of assets allowed so that people will no longer be able to place residential property, fine wines, classic cars, art or antiques in Sipps after all.

Why has the Government decided against allowing residential property in Sipps?

The huge tax breaks available in Sipps meant that the purchase of a £100,000 property would have cost a higher-rate taxpayer just £60,000. This would have created a surge of demand in buy-to-let properties, sending prices higher and making it even harder for first-time buyers to afford. In effect, the Treasury was providing massive tax relief to the wealthy at the potential cost of young couples and key workers wanting to buy their own homes.

In his Pre-Budget Report, the Chancellor of the Exchequer said the rule change would address the "misuse" of Sipps to purchase second homes. The official explanation from Revenue & Customs said the U-turn was to "prevent people benefiting from tax relief in relation to contributions made into self-directed pension schemes for the purpose of funding purchases of holiday or second homes and other prohibited assets for their or their family's personal use".

What does the pension industry make of the Government’s U-turn?

Many within the industry are furious with the Government not so much because of the decision but because the change has come so late in the day. The plans were due to come in to effect in just five months' time and many pension providers, buy-to-let companies and accountants had spent a lot of time and money preparing for the change.

Jerome Melcer, the actuarial director at BDO Stoy Hayward, summed up the industry’s feeling when he said: "Gordon Brown has wasted thousands of hours of professional time. An entire industry has been set up to deal with property-based Sipps and now it’s all been canned.

"Having said that, this is where we should have been heading all along. The Government has finally realised that investment in residential property created enormous complexity not just for themselves but also the pensions industry."

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