COMMENT
How To Buy A £200,000 House For £120,000

Although self-invested personal pensions have been around since 1990, SIPP holders cannot invest directly in domestic property. As things stand, SIPPs can invest in property funds, property-company shares, land or a single commercial property, but they can't invest in residential or buy-to-let property.

However, from pensions A-Day on 6 April 2006, all this is set to change. SIPP investors will be able to invest in buy-to-let properties using their funds – and use a mortgage to increase their buying power.

For example, Bertie Buy-Tolet is a well-off investor with £200,000 in his SIPP, consisting of his contributions of £120,000, plus £80,000 of tax relief from the taxman. (Note that it would take years to amass this kind of sum in a personal pension, even with the removal of earnings capping and the higher contribution levels granted after A-Day.)

Bertie's SIPP uses this £200k, plus a mortgage of £100k (50% borrowing is the limit in a SIPP), to buy two rental properties worth £150k apiece. He rents out these properties and his SIPP receives this rent as a tax-free income. Bertie's SIPP never needs to sell this property, and it may be inherited by his son after Bertie dies, plus he isn't forced to buy an annuity. Also, it may be possible to avoid income, capital gains and inheritance taxes if the inherited fund is worth less than £1.8 million (or whatever this limit has been raised to at that time).

It may even become possible for homeowners to sell their home (or second home) to a SIPP and rent it back, paying a market rent, which the SIPP receives as a tax-free income. (The government has yet to announce the precise rules concerning SIPP investments in property, so some of the finer details have yet to be revealed. The Budget is next Wednesday, so we may find out then.)

Some over-excited buy-to-let lenders, estate agents and other firms with vested interests in the property market are foaming at the mouth, predicting a fresh property boom on the back of these SIPP reforms. But most of these reports are pure stuff and nonsense. Personally, I think it's nothing but wishful thinking, and I expect that property SIPPs will have only a tiny impact on the housing market. After all, with almost 1½ million properties changing hands each year, a few thousand SIPP investors won't make much impact on the overall demand for property.

Initially, of course, BTL investors will transfer existing properties into SIPPs, but these transactions will have no effect on the market. And, undoubtedly, there'll be a delay while investors amass enough money in a SIPP to begin buying properties. Indeed, in most parts of the UK, a six-figure fund will be needed to buy even a single BTL property.

In time, SIPP property investments will certainly have some effect on the private rented sector, but not on the ridiculous scale that some daft property commentators are claiming. Currently, there are around 47 million adults in the UK, yet there are only 85,000 SIPPs currently in operation. And, with around £17 billion of assets held by SIPPs, the average SIPP is worth £200,000 - and much of this total is invested in shares.

Although demand for SIPPs is expected to increase substantially, they will probably remain niche vehicles for the rich. In fact, most personal pension funds are worth less than £50,000, which isn't enough to buy half a property in most parts of the UK.

I'll leave you with a recent hysterical headline from yet another press release from a property firm, "Pension property changes will boost housing market by 15%" Yeah, right! I'll believe it when I see it.

More: More about SIPPs | Visit our Pensions centre.