THE countdown has started. Sweeping changes scheduled to come into force next year will allow us to indulge our passion for property and tax breaks like never before. From April 6, 2006, investors will be able to buy homes, holiday bolt holes and buy-to-lets with their pension funds. After that date property bought via a SelfInvested Personal Pension Plan (Sipp) will not attract capital gains tax when it is sold, and income from rent will be tax-free.

Investors can already buy commercial property through Sipp, a type of personal pension where you can pick the underlying assets. But residential landlords are now preparing to cash in on the changes ahead.

Developers report a surge in the number of investors buying properties off plan that are scheduled for completion after April 6, 2006. Some landlords are even demanding special contracts to ensure that the developments are not ready before the crucial date. Investment advisers have also seen a rise in activity, with savers ploughing more money into pensions in readiness for what the industry is calling A-day. At the moment there are only 130,000 Sipps in existence. Experts predict that by 2010 the number will have risen to 500,000.

Many investors are taking out Sipps for the first time so that they can take advantage of the tax breaks that will boost their property-buying power. Tax relief on pensions means that the Government pays £22 for every £78 that you invest, taking the total contribution to £100. Higher-rate taxpayers receive a further £18. On top of this, you will be able to borrow 50 per cent of the value of your pension fund to buy property. Rental income will be free of tax.

Researchers at Savills estate agents calculate that the tax advantages of buying property through a Sipp would almost double landlords’ returns over a decade. An ordinary buy-to-let investor who buys a flat for £150,000 with a 50 per cent mortgage could see a profit of about £70,000 after ten years, assuming prices rise at a rate of 4.5 per cent a year. The same property held through a Sipp would see returns of more than £140,000.

With such a tempting offer on the table, some financial experts predict that billions of pounds could be ploughed into residential property via Sipps over the next few years. The cash injection could revive the buy-to-let market, which has lost some of its appeal as house prices have stagnated.

It all seems very neat. So what is the catch? For most investors, the greatest setback will be the size of their pension pot. There is a limit to the amount you can plough into your pension. At the moment your contribution ceiling depends on your age and salary. From A-day, the limits will rise. You will be able to invest the equivalent of your full annual salary or £215,000, whichever is lower.

But property is not cheap. The average house now costs about £160,000, according to the Halifax. That means investors must build up a pension worth about £100,000 before they can even consider buying property through a Sipp. Most pensions pots are not that large.

The big sums involved partly explain why the take-up of commercial property through Sipps has been relatively low over the past decade. This is not a sector for the modest investor.

But even for a wealthy landlord, there are other practical issues at stake. If you buy a property through a Sipp, it will be owned by the pension scheme and controlled by the pension trustees, not you. All legal paperwork will have to be put through the trustees, who may be more stringent in their requirements than the average property buyer. This could make the buying and selling process even more lengthy and expensive than it already is. Maintenance costs of the property could also be pushed up if trustees insist on hiring professional workmen to carry out the sort of basic repairs that hands-on landlords often do themselves.

The greatest concern, however, is that stock market uncertainty, a distrust of professional pension providers and a blind faith in bricks and mortar will attract too many savers to Sipps for all the wrong reasons. Tom McPhail, head of pensions research at the financial adviser Hargreaves Lansdown, fears that those with modest incomes but a large occupational pension may be tempted to use their savings to buy a much bigger home than they would normally afford. He explains: “A civil servant in their forties on £20,000 a year who has built up a pension pot of £400,000 would be able to buy a house for £600,000 if they transfer their pension to a Sipp. They shouldn’t do it, but I can see it happening.”

That may be an extreme example, but homeowning landlords with plans to make property the cornerstone of their pensions should think again. The sector may seem like a safe haven compared with other investments, but nobody can predict the future. The surest way to safeguard your retirement is to invest in a range of assets. Putting all your investment eggs in one basket is never a good idea. Not even at Easter.

Catherine Riley is away

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