VCTs: the new pension for higher earners?
Whilst pensions have become tainted in the eyes of many after never-ending government reforms, they have probably been the best and most tax-efficient way over time to save for retirement. Up until earlier in this decade, some high earners could invest £255,000 per tax year in a pension and get a significant percentage of that back in tax relief.
Those days are gone.
Since the years immediately following the financial crisis, the tax
benefits pensions offer have gradually been eroded by successive governments
eager to collect more tax.
Rule changes make it very difficult to build a decent retirement fund
From 6 April 2016, many high earners will only be able to contribute £10,000 per tax year to their pension. In addition, because of the lifetime allowance being reduced by 20% to £1million, many will be unable to make any contributions at all.
These restrictions along with miserly gilt rates mean getting a
decent investment income from many products designed for retirement is almost
So what options are there for those who want to invest tax
efficiently but have already used up their pension allowances?
The answer in my view could be one that is surprisingly
under-publicised. Venture capital trusts, or VCTs as they’re commonly known.
The similarities to pensions are there: upfront tax relief and tax-free
growth. However, you currently receive two added bonuses:
- With VCTs, your annual allowance is much more generous
– £200,000. When you invest you also
receive up to 30% income tax relief, so your effective cost could be as little
- You get tax-free dividends. So to receive £1,000 in
your hand from a VCT, you only need a £1,000 dividend as there is no tax and it
doesn't even need to be listed on the annual tax return. Compare this to a
"normal" investment. As an additional-rate taxpayer you would need a
cheque for £1,444 to receive £1,000 in your pocket after tax (under current
pre-April 5 2016 rules).
As with any other dividends, the manager aims to deliver a
certain yield, typically around 5%, but cannot guarantee this will be achieved.
If you don't want income now, and you are planning for your
future retirement then many VCTs offer a dividend reinvestment scheme. The
shares bought within the scheme will count towards your annual VCT investment allowance
and qualify for the 30% upfront tax relief. Therefore if you make large
contributions you need to ensure this doesn’t take you over the £200,000 limit.
A big difference between pensions and VCTs is in where they are
invested. A pension such as a SIPP is generally invested in shares and bonds of
large companies, in the UK and overseas. VCTs instead invest in very small UK
companies so they are considerably riskier. Please read the Risks and Commitments to find out why these products are not
suitable for everyone.
Please remember that should you be in any doubt about the
suitability of these investments or your pension provision then you should
obtain professional financial advice.
That said for those who are limited by the new much lower annual
pension allowance or who may have hit the lifetime allowance, VCTs could be an
interesting addition for more sophisticated investors as part of a balanced portfolio.
Details of the latest VCT offersRead more about VCT Offers