Pension changes such as the reduction of the lifetime allowance (LTA) from £1.25m to £1m have meant investors are seeking other tax-efficient investments to bolster their savings for retirement.
According to Paul Sheehan, investment manager for WH Ireland, more people are starting to look at alternative means of income and tax-effective investing to help provide a comfortable retirement.
Mr Sheehan says: “Retirement planning is increasingly complicated, with pensions no longer providing the solution they once did for high-net worth investors.”
Add to the LTA reduction the introduction of the tapered pension allowance for those earning more than £150,000, and it is understandable why people are looking for ways to shore up their pension pots.
George Bull, senior tax partner for RSM UK, explains there are many reasons why people are starting to consider alternatives such as enterprise investment schemes (EIS) and venture capital trusts (VCTs) to boost their retirement income.
“Patterns of behaviour are changing, partly as people come to terms with the lifetime limit and the need for many to organise non-pension investment income for their later years.
“More people than ever are looking at alternative, tax-efficient investments”.
Data appears to bear this out. According to the Association of Investment Companies, funds raised in the 2015 to 2016 tax year for VCTs reached £457m, compared with £429m for the 2014 to 2015 tax year.
The amount raised by companies seeking funding through EIS reached close to £1.7bn in 2014 to 2015, according to the EIS Association, with similar figures estimated for 2015 to 2016.
However, Mr Bull adds: “But there is a world of difference between the treatment of pension contributions (the policy rationale for which is to encourage people to save for their retirement without incurring unacceptable levels of risk or investing in in appropriate assets), and EIS/VCT, where the availability of tax reliefs is accompanied by significant, higher levels of risk.”
The main attraction for pension investors is the prospect of regular, tax-effective dividend income through VCTs.
“VCTs provide 30 per cent income tax relief on new investments, are free of capital gains tax and can pay tax-free dividends. The tax-free dividends from VCTs are particularly attractive from a retirement income perspective”, says John Glencross, chief executive of Calculus Capital.
He adds: “At a time when tax-relieved pension contributions are being severely curtailed through reductions in allowances, with additional restrictions on high earners, EIS and VCTs provide alternative routes to making tax-efficient savings.
“It is clear from conversations with intermediaries and investors more people who have been affected by these changes are considering these funds.”
There are various types of VCTs, which can also help focus investors’ choice on what might make a more appropriate investment to boost their pension pots.
A client might want to invest in Alternative Investment Market stocks and take advantage of the tax incentives available in Aim stocks, or invest for a set period of time, using a Limited Life VCT.