5 questions

1 What exactly are self-invested personal pensions?

A SIPP is a personal pension which allows the individual member to control the underlying investments in a tax-efficient environment. You put money into it in a tax-efficient way; that money then sits in a “wrapper”, of which 25% can be paid out as a lump sum tax free and the balance as an income for life.

2 SIPPs have been around for some time so why are housebuilders suddenly getting interested in them?

That’s because on 6 April 2006 residential property will be introduced as a permitted investment for pensions to hold. Up until now residential property has not been permitted, except in special circumstances, such as buying a flat with a shop attached. The concept of SIPPs has been around for at least 30 years, and personal pensions have been around for 10-15 years. It is in the last five years, however, that the market for SIPPs has really grown as people have wanted to have greater control over their investments.

3 Do you expect there to be a significant influx of investors in residential property through SIPPs?

We are already seeing a growing interest as people are starting to plan for next April. There may well be significant short-term interest in buy-to-let for SIPPs, but how much of that will come to fruition over the long term remains to be seen. We don’t think interest will be sufficient to create a bubble in the property market.

4 Who are likely to buy into residential property for SIPPs?

I can see scheme syndicates buying into the prime residential market for rental, acquiring similar types of property within a development. Individuals may buy a second home, although they may not be able to buy a second home abroad for a SIPP, because many European countries do not permit trusts to own residential property. It won’t be suitable for people too close to retirement – people in their 40s can take a long-term view, but it wouldn’t be appropriate for people in their mid to late 50s, unless they have a large fund and the property only accounts for 25-50%. All SIPPs investors will, however, need expertise in investing in residential property.

5 Are there any specific issues with SIPPs that residential developers need to know about?

The key issue is that the Inland Revenue may not allow residential property to go ahead as an investment on 6 April. The Treasury is believed to be having second thoughts about this because there are so many potential issues. For example, it would be possible for people to transfer their second, or even their first home into a SIPP. There is the potential to transfer a residence to avoid inheritance tax. We are therefore suggesting that those considering an investment opportunity now on a new home with a completion date of April or May next year may wish to defer – and developers need to be aware of that.