In Focus: Retirement Income  

The income lure of EIS and VCT

The income lure of EIS and VCT

Investors hungry for income, especially those approaching retirement or in early retirement, have been turning to venture capital trusts and enterprise investment schemes.

According to Paul Mattick, head of sales and investor relations for Mercia Asset Management, pension savers have been attracted not only by the tax-efficient nature of the investments, but also the potential for income that, in a world of low growth, can help boost retirement pots. 

He tells FTAdviser In Focus what the success of VCT and EIS fundraising has been over the past 12 months and whether too much pensions policy tinkering has turned people towards the asset class to fund their retirement.

FTAdviser: How successful has VCT/EIS fund raising been in the past 12 months, despite Covid? 

Paul Mattick: The Northern VCTs, which are managed by Mercia, has delivered some major exits, which meant that we have enough unrestricted cash to carry on investing at the normal pace.

The exits include the sale of Agilitas (October 2020) and Its All Good, plus the recent IPO of Music Magpie (April 2021).

The evergreen Mercia EIS has had a record fund raise in 2020/21, and an impressive series of exits culminating in March with the sale of Oxgene at between 14 to 20x for our EIS clients.

The EIS fund has quarterly closes, targeting deployment in 12 companies in 12 months; for example the tranche that closed at the end of September was 81 per cent deployed by 5th April.

Covid 19 certainly had an effect on our portfolio, and we braced for the worst, but overall the portfolio has been significantly stimulated both in value creation and realisation.

FTA: Word is that more people are using VCT/EISs for pensions. Why is that?

PM: As more and more people are being affected by the pension life time allowance and/or annual limits, advisers are looking at other tax advantaged products and VCT/EIS are seen as a perfect fit.

Both invest in area’s with little or no correlation to major markets and can therefore provide good diversification to a client’s portfolio. Even if clients are risk averse, with the right holistic approach having exposure to small/ micro-cap holdings can be beneficial in reducing risk.

For people looking to augment their income side, VCT’s provide tax free dividends, with Northern VCTs consistently paying strong dividends which can really enhance income, such as in retirement in conjunction with pensions.

For those who are looking to create and manage capital gain, we are seeing a number of advisers recommending annual EIS investments, with a view to the future where a well-diversified EIS portfolio will produce tax free annual exits to enhance income.

Creating an additional cash flow is useful for both pension clients, and those who are still working; reinvestment can be used to mitigate any income tax liability in the future, and take assets out of the estate.