The Pensions Policy Institute recently reported that people who believe their property will provide their pension are deluding themselves. Property will at best be a complement to an occupational or personal pension, not a substitute, they reported.

Falling stock markets and rising house prices mean that more wealth is held in housing than in pensions – about £1,904bn in housing compared with £1,120bn in pensions.

In its Property or Pensions? report, the Institute stated that a third of people in work said they were saving in property to provide retirement income – and 15 per cent said they planned to use income from properties other than their own home to finance their old age.

But the reality is that just 2 per cent of non-retired people – 750,000 in total – report owning more than one property. Despite their recent growth, there are only about 400,000 mortgages on buy-to-let properties. And, according to the Institute, those who believe that their own home will provide their pension either have false ideas of how much of their housing equity can be released or will have to trade down significantly to release money for income.

Property can help in old age, the report concludes. But it qualifies this by stating that ‘most people will not be able to rely solely on their equity’.

In practice, most people, even in high-value areas, would need both pensions and property. Save for a wealthy few – who tend to have good pensions anyway – ‘for most people, property will be at best a complement to occupational or personal pensions, not a substitute.

New rules on the horizon
New pension rules come into effect from 6 April 2006 and will include the possibility of avoiding tax on residential property by transferring ownership to a pension fund. Pension savers will be able to hold residential property in their pension fund under the new system, which will roll the eight existing tax regimes into one.

They may also have the chance, for the first time, to pass on their pension fund assets even if they die after the age of 75, which is currently the point at which all pension funds must be used to buy an annuity. This will leave pensioners free to continue drawing an income directly from their fund after age 75 if they choose.

Their pension fund must be used to provide benefits for dependants on death after age 75. If there are no dependants, the pension fund assets can be reallocated to other members of the pension scheme. A similar situation arises if there is a dependant who chooses to continue to draw income from the fund and is aged 75 or over on death. Children, or grandchildren, for example, could join the pension scheme to take advantage of this new flexibility.

Bold changes will give pensions a big boost
When the rules affecting pension savers are radically overhauled from 6 April 2006, the intention will be to simplify them.
There is going to be plenty on offer to entice the pension saver, but most of the immediate rewards will be available only to those with large funds or the ability to pay significant contributions under the new regime.

The proposed legislation covers the three basic building blocks of pension schemes: How much can you pay in? What can you invest in? How much can you get out?
So how can accumulated pension money be invested? This is where some of the most radical proposals have been introduced and it is likely that self-invested personal pensions (SIPPs) will become the individual pension vehicle of choice due to the investment flexibility offered by such schemes.

Virtually all existing investment restrictions will disappear. Pension schemes will be able to invest in residential as well as commercial property. This will include buy-to-let, second or holiday homes both in the UK and abroad (although there are some legal and tax complications with overseas properties) and, interestingly, also the member's main residence.

Less voluntary than you think
Inheritance tax must be ‘made effective and less easy to avoid, particularly for those who have come to regard it as a voluntary tax’. That was the Labour Party's view before it came to power, as stated in an internal Party document in 1994. It said the very wealthy avoid the tax but many others are drawn into it.

So what has changed? Is it still a voluntary tax, or have Gordon Brown's Budget crackdowns moved the goalposts?

Brown has left the system alone and concentrated instead on closing down avoidance loopholes with IHT being a sleeping tax over the last eight years.

The amount raised by inheritance tax has doubled in the last 10 years, from £1.3bn in 1993-94 to an estimated £2.5bn in 2003-04. It is projected to rise to £2.8bn this year.

The Chancellor raised the nil-rate band, the threshold at which inheritance tax becomes payable, in the Budget from £255,000 to £263,000. This was in line with inflation, as measured by the Retail Prices Index, which generally gives a higher number than the Consumer Prices Index that the government has adopted as its main measure of inflation. Brown said that only 5 per cent of estates would fall into the inheritance tax net in 2004-05.
But experts say that is the tip of a very large iceberg.

Rampant property price inflation could bring much of middle England into the inheritance tax net. The average house price is now £166,404 for England and Wales, according to Land Registry figures, rising to £262,685 in Greater London.