Charles Batchelor, Financial Times

Gordon Brown’s decision to exclude residential property and other “exotic” investments such as fine wines and stamps from self-invested personal pensions (Sipps) was an electrifying moment in an otherwise unexciting pre-budget report.

In what must be a record for any government – closing a loophole before it has even been opened – the chancellor put a block on what many savers saw as one of the most appealing aspect of pensions reform.

Savers will now no longer be able to put that holiday home on the Croatian coast or that buy-to-let apartment on a prestigious Thames-side development into their pension plan and enjoy the expected tax breaks.

Nor will those cases of Lafite Rothschild 1982, the collection of Southern Rhodesian commemoratives or that surefire winner of the 2006 Grand National pass muster in the Sipp stakes.

Despite its widespread impact, scant reference was made to the U-turn in Brown’s 34-minute presentation to parliament. For a more detailed explanation, investors had to turn to paragraph 5.63 on page 107 of the report and a technical note, the wording of which initially confused even the experts.

If the chancellor thought no-one would notice, he was soon disabused. The reaction from the Sipps providers and financial advisers was unanimous. “It is a massive U-turn,” said Andy Bell, managing director of AJ Bell, a Sipps provider. “I am still reeling.”

The government’s sudden change has left individuals who were planning to put some of these investments into their Sipps, and the Sipps providers, facing sizeable bills for work that has been wasted.

“There are people out there who have signed up to buy property relying on the Sipp to finish off the financing of the deal,” says Richard Meek, principal of Punter Southall, financial advisers. “They will be relying on ‘dead’ money in their pension funds and on the tax breaks and the borrowing facility in the Sipp to complete the purchase.”

The cost of setting up a basic Sipp could be £400-£700, with more complicated schemes costing up to £5,000, Meek estimates. In addition, individuals may have paid commissions of up to 3 per cent of the value of their funds if they took independent financial advice in setting up the Sipp.

The pensions industry will also be out of pocket. “We have incurred substantial costs and a lot of preparatory work is now wasted,” says Stewart Ritchie, pensions director at Scottish Equitable.

The knock-on effects will also be felt in sectors that were set to benefit from pension investors’ new-found freedoms. Berkeley Homes, a housebuilder that was planning to launch a buy-to-let Sipp with a number of financial services groups, expected between 5,000 and 20,000 people to buy property for their Sipps in the first 12 months after A-Day. This could hit the already struggling market for new flats.

“Clearly this has taken some demand out of the market but this will not create a market crisis,” says Jim Ward, research director at Savills, the estate agency. “In the short-term people were putting existing properties into their Sipps but we were looking to see it support the market longer term. The Sipps factor was giving people confidence.”

The wine trade, which earlier this year was reporting strong demand for the best vintages on the back of Sipp interest, appears relatively relaxed. “This will impact prices for a while but I don’t expect falls because there is not enough stock about,” says Simon Staples, sales director of Berry Bros & Rudd.

However, the prices of a few fine wines appear to have already started falling following Monday’s announcement.

The rule change on alternative investments was only one aspect of the Sipp reforms aimed at simplifying the UK’s pension rules. These will still go ahead on A-Day – April 6 next year – as planned.

When the shock of the government’s abrupt U-turn has subsided, there may be a positive side to the matter. Many Sipps providers were concerned that savers were not aware of the complexities of putting alternative assets into their pension schemes. Property could not be put to personal use without paying a commercial rent to the Sipp while paintings and wines would have had to be put into storage or a bonded warehouse. The trustee – often the same firm as the Sipp provider – would have to be sure that a property was being properly managed. Many trustees had also been unwilling to allow overseas properties into a portfolio. One trustee company described the risks of including residential – as opposed to commercial property – in a Sipp as “terrifying”.

In addition, investing in a single property would have made for a very concentrated risk profile. Government approval for real estate investment trusts, or Reits, that can invest in residential property will allow for much more diversified investment. “There is still a huge opportunity for collective investment schemes,” says Julian Warden, pensions specialist at Close Wealth Management.

Finally, for all the unnecessary confusion caused by the government’s change of mind, the issue of exotic investments has focused attention on the need for people to plan their pensions. “People now realise there are cost-effective ways of managing their pensions,” says Bell. “The genie is out of the bottle.”