Venture Capital Trusts  

How pension freedoms affected the VCT market

This article is part of
Guide to VCT investing

"People who are now unable to put £40,000 into a pension or are coming close to the LTA are turning to VCTs as an alternative."

And this is the case for people in all walks of life and career choices: teachers, doctors and business owners, he adds, which is why Mr Davies believes investing in VCT and EIS is "becoming mainstream".

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A word of caution from Mr Latham: "It must be noted that capital is at risk with a VCT, and the tax treatment does depend on an individual's circumstances. 

"Tax reliefs also depend on the VCT maintaining its VCT-qualifying status."

Stuart Veale, managing partner for Beringea, acknowledges that the underlying investments are riskier, but adds: "The large number of companies in VCTs' portfolios diversifies much of this risk away.

"The holding period is only five years, rather than to age 55, after which the VCT shares can be sold and the proceeds invested in another VCT for additional tax-relief."

He also reminds that "income from a VCT is tax-free, whereas income from a pension is taxable". 

Pension freedoms

In April 2015, the pension freedom and choice regime came into force, meaning from age 55, people in the UK are entitled by law to access their pension as they wish, subject to taxation and to any rules around defined benefit (DB) scheme membership.

Whether this has given people more freedom to contemplate the relative merits of VCTs and decide to invest some of their pension money in them, is not yet clear. Some people believe pension freedoms has had an effect.

Darius McDermott, managing director of Chelsea Financial Services, says: "We have seen an increased number of people interested as, rather than topping up pensions, they are looking for other tax-efficient investments, so pension freedoms and tax changes have made a difference."

In FTAdviser last year we reported on research from VCT provider YFM, which found that 54 per cent of VCT investors under 60 chose VCT investment instead of a pension fund. 

It is worth noting an adviser commenting under the article says VCTs have been used increasingly in retirement planning.

But according to George Bull, senior tax partner for RSM UK: "Pensions tax changes seem to have boosted VCT investment, but the pension freedoms are unlikely to have had any material impact."

He highlights that although the 2016 to 2017 tax year saw a record £570m invested in VCTs, which coincided with the lower annual and lifetime allowances for pension contributions, as well as pension freedoms for access to pension savings, he thinks the high levels of VCT investment might not necessarily be a result of people being able to get hold of their pension pot at age 55.

Mr Bull explains: "Most people might not choose to withdraw a pension lump sum and invest in a VCT - this could be a high-risk investment strategy."