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Verity’s View: Sipp sanity

Many IFAs welcomed the Sipp U-turn as they feared the madness of crowds

The Chancellor’s sudden U-turn on allowing property Sipps was unexpectedly welcomed by the majority of IFAs.

Standard Life, by contrast, was angry. With 7,000 customers investing 1.1bn in Sipps, it would be. Who is right – Standard or the IFAs?

The Chancellor’s justification for the U-turn – that Sipps were in danger of being misused to buy second homes – can be questioned. The industry has been saying for months that pension money would go into second homes and buy-to-let properties and asking HM Revenue and Customs if it was OK to plan for that. So was there evidence it was even being “misused”?

That depends on what the Treasury intended. Did it intend to inflate the price of residential property? The Royal Institution of Chartered Surveyors, expected 160,000 properties to be bought with pension money in the next three years. On some calculations, it would have added 5 per cent to demand for housing, enough to push up prices in an undersupplied and volatile market. To those who believe overinflated house prices are against the public interest, this would make a bad problem worse.

If that was what the Treasury intended ,then critics might well say it should never have intended any such thing. But I doubt that was the reason that most IFAs thought property Sipps a bad idea. I suspect that most IFAs are opposed to investing pension savings in property through Sipps because, for many clients, it would represent terrible advice.

If it were just an option for wealthy clients with other investments in their portfolio, fine but some companies says the chance to invest in property through a Sipp was attracting not just the wealthy but also many normal investors on ordinary incomes.

For many ordinary investors, it is difficult to see how investing all their pension savings in property would be anything other than appalling advice. It breaches fundamentals such as “don’t put all your eggs in one basket”. They would be putting all their money in a geared, volatile investment – residential property – that, according to many economists, is an overinflated bubble. It would be an investment, in the case of second homes, that attracts no steady income and, in the case of buy to let, an erratic one that comes with unpredictable costs, such as fixing the roof.

It is all too likely that it would have prompted many ordinary savers to ignore basic principles and make vital decisions not because they are good investments but due to the psychology. The British obsession with property ownership – and the erroneous belief in its miraculous power to enrich – would have led many clients to insist on buying property through a Sipp, no matter what the IFA said, no matter how it breached all principles of good advice, and no matter how overinflated house prices were.

The truth about this is not that using Sipps to buy property would have been misused. On the whole, it would have been correctly done according to rules set down by HM Revenue and Customs. The trouble was it would have been wildly popular with savers, including those who could afford to take on the risks and those who would be stupid to try it.

Tax breaks and property are a powerful combination – so powerful that they are likely to distort not only individual investment decisions but also the housing market, and with it the whole economy. The Chancellor did not need to go ahead with the Sipp reform to find that out. He only had to look to the house price bubble created in 1988 by the way the Government brought in and then withdrew double tax relief on Miras. In the midst of the mass psychosis that is the obsession with property ownership, IFAs are right to be glad that sanity, in the nick of time, has prevailed. Money Marketing50 Poland Street, London W1F 7AX


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