The housing and investment markets are gearing themselves up for big changes next year, when new regulations on investing pension funds in property come into force on April 6 2006 (‘A’ Day). However, experts are warning that investors need to exert extra caution to ensure their investments avoid potential pitfalls.

A-Day will see major changes to the rules regarding Self-Invested Personal Pensions (SIPPs). At the moment a SIPP can only, with a few minor exceptions, invest in commercial property. After A-Day, it will be possible to invest pension funds in residential and non-commercial property in the UK and overseas with the benefit of certain tax relief.

Investment properties are tipped to rise by 15% as a result of increased competition from investors. Nick Clark, managing director of the Property Investor and Homebuyer Show said, "This will benefit existing homeowners and property investors who could see their buy-to-let returns substantially increase as the market booms."

However Stephen Harper, managing director of pension and property specialists Millfield Fountain, warns that investors need to do their homework before getting involved with SIPPs: "A-Day brings with it massive potential for the housing market through the huge amounts of money it will bring into the market, both in the UK and overseas. However, as with any investment, it is essential that investors do their research and make sure they are dealing with an expert in pensions as well as property."

"SIPPs are the biggest bandwagon in the property and personal finance sectors of the moment, and this inevitable leads to a lot of people trying to get involved who don’t fully understand the area."

Buying property with a SIPP is not straight forward, particularly when buying international property where there are separate tax and legal issues to take care of, says Harper. "For example, although SIPPs are tax-free, many countries do not recognise the exemption status of trusts and so you could still be liable for tax. However these problems are solvable to a degree, providing you use an absolute expert."

John Howell, senior partner at solicitors John Howell and Co. offers advice: "If SIPPs investment is done properly then it has great potential. The tax breaks are fantastic and it is a huge opportunity to use existing funds to buy residential and overseas property. But it is essential that investors get the right advice and assistance in order to maximise these benefits."

"Also people must be aware that putting a property into a SIPP means it must stay there and form the backbone of your pension, so it has to be a long-term investment. In addition, while the decisions regarding the property rest with the individual, the property must be owned by the fund and managed by the SIPP trustee, which can incur additional costs."

Both Millfield Fountain and John Howell & Co Solicitors will be at the Property Investor and Homebuyer Show North (24 to 26 June, G-Mex, Manchester) along with other experts and seminars on all aspects of property buying.