Smash hit

“It is nonsense the way this has been handled. I have exchanged contracts on the basis of legislation which has passed through parliament and concrete advice given out by the Inland Revenue.”

Lerbury’s anger is mirrored by many in the financial services industry who point out that this is not the first time the chancellor has misled investors and businesses.

How did the new pensions policy end up being cancelled by Brown at the 11th hour? The fault, say experts, lies with the Treasury’s arrogance and obstinacy.

The decision to allow individuals to invest in residential property via their pension funds was first taken in 2003 after a review aimed at simplifying the tax regime for pensions. Most private pensions are run by big investment houses which would not find it cost-effective to buy up thousands of individual residential properties. So officials believed the impact of the change would be modest.

But the change also meant investors could set up and run their own pension schemes — known as a self-invested personal pension (Sipp) — to buy up individual flats or homes. Previously, only a few thousand people, largely keen amateur investors, took out Sipps each year; but the new regulations would propel Sipps into the mainstream.

When the announcement was made, the property market was booming and tens of thousands of people were already rushing to snap up buy-to-let flats to help fund their retirement. The financial marketing men sensed an opportunity. Allowing people to purchase buy-to-let properties within Sipps meant they would be able to claim tax relief on these purchases.

Demand for second homes — both in Britain and abroad — was also booming and experts realised the pensions could be used to fund these too. So long as the property was bought and run as a business that would add value to the pension, these could be included too. The rules also permitted people to buy wine, classic cars or even rare stamps.

Suddenly pensions were sexy. The financial services industry could hardly believe its luck. Pension advisers teamed up with estate agents and developers to advertise “tax-free homes” and hundreds of millions began to roll in.

The warning signs of a growing bandwagon were clear, but the Treasury failed to react. The official estimates for the cost of all reforms to the pensions system were put at just £200m-£300m over the next three years and Brown refused to budge on his forecast.

But Lord Oakeshott, a Liberal Democrat peer and experienced City investor said: “It has been obvious to anyone with a brain for at least a year that this was effectively a blank cheque for higher-rate taxpayers. The Treasury demonstrated a dangerous cocktail of arrogance and ignorance.”

Many experts warned that the plan would mean billions in tax relief diverted to some of the country’s wealthiest citizens who would push up property prices and exacerbate the problems experienced by first-time buyers trying to get on the property ladder.

Andy Bell, an expert from A J Bell who also represents the Sipp industry, said: “I told the Revenue straight away that they must be mad, that people would use it to buy their main homes. But the concerns were dismissed.”

Standard Life, one of the country’s biggest pension firms, wrote to the Inland Revenue predicting that up to £11 billion of residential property would be bought through Sipps in the first year of the new rules. The bill for the exchequer could be more than £4 billion. The Inland Revenue disputed the figures.

Ministers were quizzed in parliament but continued to insist the potential costs were overstated. As recently as November 10, Ivan Lewis, a Treasury minister, told MPs: “I am saying that there have been a lot of accusations in the press and elsewhere about the potential of Sipps that are not supported by the evidence.”

But outside experts disagreed. Ros Altmann, a governor at the London School of Economics who has worked for Tony Blair, circulated a paper within Downing Street in May confirming the scale of the problem. It stated: “The social rationale (for the policy) is very hard to discern and the potential tax giveaway to top earners could be enormous.”

In July, the government established the Affordable Rural Housing Commission to study ways of stopping families and first-time buyers being priced out of the market by second-home owners. Within weeks of taking up her post as head of the commission, Elinor Goodman, former political editor of Channel 4, had raised concerns that the forthcoming pension changes threatened to price first-time buyers even further out of the market.

According to insiders, officials at HM Revenue & Customs were quietly asked in October to prepare a new analysis on the likely cost of the new pension rules that confirmed some of the earlier warnings. A Whitehall source said: “About three weeks ago, everyone started panicking. The estimate of the costs from the Revenue seemed to be very high and some work done on the impact on the property market was also alarming.

“The Treasury completely underestimated the power of financial advisers when armed with a top-rate tool for cashing in on the property market with a big tax perk.”

But what has staggered many is the obstinacy of the Treasury over the past two years and its apparent disdain for the plight of the thousands of investors who committed time and money in preparation for the introduction of the failed scheme.

As John Lawson, a pensions expert at Standard Life, said: “People will now have great trouble ever trusting government pension policy again.”

Explore UK News

• Crime News

• Education News

• Health News

• Scotland News

Times Recommends

• The bright side of this winter rain
• Story behind the picture: Snow Leopard, 2008
• Times Charity Appeal: The Place2Be