Pension changes draw investors towards VCTs

Pension changes draw investors towards VCTs

Pension changes have turned investors and advisers towards venture capital trusts, despite fresh legislation having a dampening effect on the market, according to Alexander Associates’ Peter Gale.

Speaking at FTAdviser’s Tax Efficient Investing event on 20 January, wealth manager Peter Gale said tax-relief options available through venture capital trusts would increase demand, particularly if the government decides to tweak the tax perks available in pensions.

The Financial Times has reported that pension tax relief for those on higher incomes looks set to be ditched as part of HM Treasury’s overhaul of the pensions system.

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Chancellor George Osborne is expected to announce a move towards a flat-rate government contribution in his March Budget, the FT revealed.

Mr Gale said: “If you’re not already advising your clients on VCTs, then you soon will be,” and added that other options offer less generous tax reliefs.

This is despite legislation changes made in 2015, which include restricting the type of company that VCTs could invest in.

He said that as a result of the changes some VCT managers will either be raising smaller amounts this year, or seek no additional funds at all.

Echoing concerns from Jason Hollands, managing director, business development & communications at Tilney Bestinvest, last week, Mr Gale warned advisers that clients who plan to invest in VCTs in this tax year maybe disappointed to find out VCT investment opportunities are already filled up.

Mr Gale pointed out that over the last year, choosing VCT companies has been less about performance risk and more about legislative risk. “With that comes a more finite pool of potential deals, which is arguably less competitive.”

But he added that many providers are already in the space that HM Revenue & Customs has moved to, in terms of the type of companies allowed to be held within the VCT wrapper, and are not changing any of the criteria for their funds.

Waseem Herwitker, financial adviser at First Alliance Financial Services, said even if the government did tweak pensions, this product still offers good tax relief.

Mr Herwitker said: “I see VCTs as an addition to all of the planning including pensions, rather than instead of it.”

He said he might consider VCTs if the government opted for a 25 per cent rate relief for pension savers, but pointed out that even that rate still offered a good tax incentive, so he would not rule it out from an estate planning perspective.

Colin Selway, an adviser from First Alliance Financial Services, said it is important to look at the whole picture for each client and, currently, none of First Alliance’s clients suit the criteria for VCT investment.

“You’ve got to look at every aspect of tax-efficient savings, and everything will have its place for the right client, but it doesn’t have its place for every client.”