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Sunny side up for Sipps

Brown’s U-turn on Sipps will prevent unwary investors from putting all their eggs in the property basket

What could Gordon Brown have done to create such doom and gloom after all the excitement about A-Day over recent months? The Chancellor stripped away tax relief on residential property going into pensions. Worse still, he made it a prohibited asset class, along with fine wines, art, classic cars and other exotica.

There is no doubt that the communication of this volte-face was handled poorly but, from a retirement planning perspective, it seems that this could well be the making of self-invested personal pensions.

Let us consider some basic principles of investment management. Investors need to create a balanced portfolio to manage risk, which means not putting all their eggs in one basket. It seems that the anticipated flood of money into buy-to-let property, second homes and overseas properties could have fallen foul of this principle.

For the majority of people, their home is their single biggest asset. To buy a further residential property, be it for buy to let or as a holiday home, would seem to be increasing investment risk further. To make matters worse, buying an individual property has all the associated risks of location, maintenance costs, insurance and so on. One then has to add the risk of tenants who default or trash the place and finding new tenants when the market turns against particular locations or has a general downturn. This does not yet take into account the need for an agent in many circumstances. Finally, there is gearing risk created by borrowing to fund the property acquisition.

Buying two properties is concentrating risk within a portfolio. If you had, say, 300,000 invested in shares, would you buy shares in only two companies?

Pooling equity investments has moved us from an individual share-owning culture to a risk-managed portfolio approach. This principle becomes even more important in retirement planning as the consequence of losses could be catastrophic. It is not just luxuries which are at risk but security and peace of mind in old age. Dependence on the state pension is not an attractive option to many.

Why should the creation of a balanced portfolio be good for volatile equity investments but not be good for volatile property investments? Why should the Government incentivise behaviour which is contrary to basic principles of sound investment management?

Having gone through over 12 years of misselling pain as an industry, why would we want to start all over again? The advent of Sipps has, for the first time in years, given us a chance to move on from the legacy issues which bedevil the long-term savings industry. The last thing we needed was another risk for misselling potential.

But opportunity starts to emerge for us all. It is only right and proper that good retirement planning should include property in the asset allocation. If this can be achieved in a way that does not put all the investor’s eggs in one basket, perhaps we have the makings of a more stable and long-term opportunity.

Where a Sipp holder decides to invest in property, how much better it is to have an option to invest in a pooled fund where the individual property risk is reduced radically. Investment experts select a range of properties and property securities for longer-term investment goals such as income and capital gains. Entry to the asset class can be achieved without the need for borrowing and the asset allocation can be adjusted according to the risk profile and retirement objectives of the investor.

The rules for collective property investments are in the process of being made more flexible. The arrival of real estate investment trusts will boost the retirement planning applications of property as an asset class.

Investing in property via collectives is going to be better than ever. The late and poorly executed decision on residential property for Sipps could be a blessing in disguise.


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