Government tinkering with pensions taxation has pushed many mass-affluent clients to consider alternative means of bolstering their retirement pots.
According to Richard Cook, chief executive of tax-efficient investment provider Blackfinch Investments, various iterations of tax changes from HM Treasury has put pressure on people saving for their retirement.
He said: “More people have been looking at enterprise investment schemes (EIS) and venture capital trusts (VCT) as a supplement to their pension, with the government reducing the lifetime allowance (LTA), the drop in the annual allowance and low annuity rates.
“There are an increasing number of individuals reaching these limits and they are having to look for alternative tax-efficient ways to invest their hard-earned money.”
After A-Day, in April 2006, the annual allowance rose to £255,000 and the lifetime allowance, which was introduced in 2006 with a £1.5m limit, reached £1.8m within a few years.
Reinvesting using EIS is an attractive way to supplement your client’s income and leave their capital where there is still potential for real growth Richard CookEver since that date, successive chancellors have made continued cuts, with the chancellor George Osborne reducing the annual allowances to £40,000.
The latest cut to the LTA came in the March 2015 Budget, when it was slashed from £1.25m to £1m - a 20 per cent reduction.
Mr Cook added: “One of the many attractions of an EIS investment is once the investment has sucessfully exited (usually after three to four years), the proceeds can then be recycled to attract additional income tax relief.
“This could continue every few years, which in essence is an attractive way to supplement your client’s income and leave their capital where there is still potential for real growth.”
The main attraction for pension investors in a VCT is the prospect of regular, tax-effective dividend income, as they provide 30 per cent income tax relief on new investments, are free of capital gains tax and can pay tax-free dividends.
However, while he sees more people using EIS and VCTs as a supplement to pension income, George Bull, senior tax partner for RSM UK, said he did not think this will become widespread.
He explained: “While I observe some investors using EIS/VCTs for annual investments once they have reached their pensions lifetime limit, others will look elsewhere because they are not comfortable with the levels of risk.”
simoney.kyriakou@ft.com
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To read the full Guide to EIS and VCT Investment, which qualifies for 60 minutes’ worth of structured CPD, click here.
