Well before the UK general election earlier this year, it was widely known that the government was going to introduce a simplification of pe...

Well before the UK general election earlier this year, it was widely known that the government was going to introduce a simplification of pension schemes which, amongst many other things, was going to allow pension schemes to invest in residential property and other new asset classes, such as fine wine and works of art. This was specifically intended to rekindle interest in pensions, and to get people more focussed on saving for their retirement. As part of his Pre-Budget Report last Monday, Gordon Brown, the UK’s Chancellor of the Exchequer, announced “Anti-avoidance and fraud measures published today,… will address… the misuse of SIPPS schemes to purchase second homes”. The detail behind this announcement is that investment in residential property, fine wine, works of art and other “exotic” assets will not be allowed after all. Fraud has always been a legitimate target for the taxman, and in recent years, we have come to understand that the UK government increasingly sees little difference between tax evasion (which is illegal) and tax avoidance (which was previously understood to involve arranging your affairs, quite legitimately, in a tax efficient manner), and so tax avoidance has also come under the taxman’s spotlight. But investing in these “exotic” assets was a deliberate part of the strategy to get people interested pensions. It was not going to be fraud, nor tax evasion, nor even tax avoidance: it was to be encouraged. From a macroeconomic viewpoint, the government has missed an opportunity to get the private sector to fund the development of affordable housing. That is perhaps not what was in the sights of many potential pension investors in property, but it is something the government could have encouraged fiscally rather than just abolishing the whole idea. There is no doubt that the proposals, as they existed up until the Pre-Budget Report, were far from perfect. Had the legislation gone ahead in its original form it would almost certainly have propelled the cost of property beyond the reach of many first time buyers as prices were driven upwards by the massive demand from the pensions industry. The legislation as proposed would have also benefited most those who needed it least, the very wealthy. But was it really necessary just to abolish the whole idea? The ramifications go further than just stopping a few wealthy people from getting some tax relief. The change is a massive blow to property developers, many of whom had already purchased sites to cash in on the pensions bonanza. This, when taken together with the announcement of the Planning Gains Supplement yesterday, strikes a heavy blow against the construction industry. In addition, the changes to the pensions regime as previously announced were designed to stimulate investment into pensions to alleviate what is known to be a massive funding shortfall. The announcement of the U-turn yesterday will do nothing to encourage people to invest into pension. Lastly, and perhaps most damagingly, people who had made detailed and costly plans to see their pension funds benefit from the original proposals will no longer trust announcements from the government which should perhaps learn the lesson not to give commitments to the public until they have been completely thought through. Perhaps the clearest message to professionals providing advice to private clients is: don’t count your chickens.