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Investors’ plans to purchase buy-to-let property or holiday homes with their pensions were dashed on Monday by the announcement that residential property and other exotic investments such as fine wine or classic cars will not attract the tax perks of pensions.

The financial services industry had been predicting strong demand for residential property from pension investors following the introduction of new “A-day” rule changes in April that would have given pension investors much greater freedom to diversify their pension savings.

But in a briefing paper accompanying the pre-budget statement the Treasury said self-invested personal pensions (Sipps) – vehicles that already enjoy significant investment freedoms – “will be prohibited from obtaining tax advantages when investing in residential property and certain other assets such as fine wines”.

The clampdown extends to all alternative assets including art, antiques, stamps and racehorses. Pensions experts said the turnround would leave thousands of investors out of pocket.

Financial advisers and Sipp providers have reported that growing numbers of investors have set up Sipps or paid deposits on flats in property developments with the aim of completing the transaction after the rule changes in April.

Richard Meek, principal of Punter Southall, financial advisers, said: “To leave it this late before introducing legislation – after explaining on a number of occasions how it was going to work – is extraordinary. Most people were led to think this was definitely going to happen. Many people will have started to make financial plans and will have incurred costs setting up a Sipp for no reason.”

Others predicted the change would damp public excitement over pensions. Richard Proctor, tax partner at Grant Thornton, said: “Because people were turned off by the stock market it was a way of getting them back into pensions. This U-turn could nip a potential revival in pensions in the bud.”

But some lobby groups were happy about the climbdown. Jenny Harris, policy leader at the National Housing Federation, the trade body for housing associations, said the previous proposals would have led to house price inflation.

Industry was also concerned that the unregulated investments would have led to another pensions mis-selling scandal. Sipps will not come under the Financial Services Authority until 2007 at the earliest.

Under the rule changes unveiled yesterday, pension investors will still maintain valuable pension tax perks if they invest in residential property via “genuinely diverse commercial vehicles”, such as the soon-to-be-introduced Real Estate Investment Trusts.

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