Investors are turning to venture capital trust (VCT) investment as an alternative to traditional pension fund investment, according to David Hall, managing director of private equity fund manager YFM.
Mr Hall said the prospect of strong dividend yield from qualifying investments into a VCT has lured many income-hungry investors to the asset class.
Research commissioned by YFM Equity Partners, which surveyed more than 1,000 YFM shareholders, revealed 75 per cent identified dividend yield as a key driver behind their decision to invest in a VCT.
Among investors aged less than 60 years old, 54 per cent said they opted for VCTs as an alternative to their pension fund.
Mr Hall said: "More people are using VCTs and especially under younger investors when it comes to income.
"We have even seen people in their late 30s and early 40s who say the strong income streams have attracted them to VCTs."
He said the historic dividends have been "quite consistent" although warned that future dividends may be more volatile, thanks to various changes made over the years as to what VCTs can invest in.
Therefore, he said investors should diversify their investments across VCTs each tax year, perhaps smaller investments in more VCTs from various providers, to spread the sources of income.
"What you don't want to do is put everything into one VCT to get income, based on historic dividend performance, and then it doesn't perform in the short-term", Mr Hall stated.
Tax relief was the top reason for investing into a VCT, with 90 per cent of respondents citing this as a reason to invest.
Mr Hall added: "Our two VCTs, British Smaller Companies (BSC) and BSC2, have produced a dividend yield between 5 per cent and 15 per cent over the last five years, with the growth rates differing depending on where each investment is in its growth cycle.
"Of course, it is this growth in small businesses which drives the dividend yield.
"As with any long-term investment, VCTs can be a volatile ride in the short-term, but, as our shareholders have seen, those who are patient, certainly reap the rewards."
He said the research also found that investors were tending to stay invested in VCTs for longer - with many now preferring to hold VCTs for 10 years rather than sell out within the five years needed to qualify for the tax relief.
Patrick Connolly, certified financial planner for Bath-headquartered Chase de Vere, said: "For some of our clients we do use VCTs for income.
"However, we will typically look at pensions and Isas first and then only consider VCTs for top up amounts for those clients who understand and accept the extra risks of VCT investments."