Are VCTs and EISs the answer to reduced pensions allowances?

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Are VCTs and EISs the answer to reduced pensions allowances?

This month's question: Have VCTs and EISs provided the solution for the pension allowance reductions?

Yes

 Jason Hollands, MD at Tilney Group 

The pincer movement of the latest cut to the lifetime allowance from £1.25m to £1m, and the introduction of a new tapered annual pension allowance for those earning more than £150,000 pa, have together shut the door on further pension investing for some. Alternative tax-efficient schemes such as VCTs and EISs are therefore a useful part of the armoury for those investors who have to consider a much wider range of tools beyond pensions in constructing a tax-efficient retirement plan.

Both schemes offer a 30 per cent income tax credit on subscriptions for new shares, and an annual allowance of up to £200,000 for VCTs and £1 million for EISs.

It is important to understand that these are niche and higher risk schemes. They are narrowly focused on earlier stage small, unquoted or Aim-traded UK companies, and therefore cannot be considered as a simple like-for-like replacement for a mainstream pension fund, but might be part of an overall mix alongside fully utilising Isas and maximisation of capital gains tax allowances. VCTs can be particularly useful for generating retirement income due to the tax-free nature of their dividends and the high yields on offer within the sector. 

However, a major challenge is that while demand is buoyant for such schemes available capacity is very limited. Increasingly so due to a tightening of the investment criteria that came into effect in the 2015 Finance Act, which has refocused these schemes on younger businesses.

No

Sian Thomas, adviser at Hargreaves Lansdown

There is no denying the attraction of enterprise investment schemes (EISs) and venture capital trusts (VCTs) from a tax perspective.

However, a lack of liquidity particularly with regards to EISs, as well as the considerable risks associated with them, means that they would only typically be considered suitable for experienced and sophisticated investors. They are not the mainstream choice for those looking to provide income in retirement and have not been designed as a fall-back plan for those bumping up against the annual and lifetime allowances.

New legislation introduced in November 2015 imposed greater restriction on the relief’s available. For example, EIS reliefs will not be available for share issues in companies that have been trading for more than seven years, shareholders will only be able to claim relief on new share subscriptions, and EISs/VCTs can no longer be used to fund the acquisition of an existing company or trade. These changes serve to push EISs/VCTs more into the realm of niche investments.

I expect fund-raising for VCTs to be about half that of 2016 due to these restrictions that will limit supply, despite the potential for increased investor appetite as a result of the significant reductions in the annual and lifetime allowances over the last few years.

EISs/VCTs are more complex, higher-risk investments suitable for those who are prepared to accept those risks and do not need access to their capital over the long term.