VCTs in retirement saving
As the UK establishes itself as a leading tech hub, and against the backdrop of rising tax burdens for millions of UK taxpayers, VCT investments have emerged as an increasingly popular option for those investors looking to provide capital for fast-growing, early-stage UK companies; particularly in exciting and high-impact industries such as artificial intelligence and medical technology. For those who are comfortable with the higher risk profile of VCTs, they present a strong investment case, while being highly tax efficient.
The Budget announcements by Chancellor Jeremy Hunt have imposed record tax burdens on high earners and investors. This presents challenges to clients when it comes to retirement planning, as the impact of ‘fiscal drag’ means that increasing numbers of investors find themselves in higher tax brackets and liable for inheritance tax. With dividend and capital gains tax also impacted, and many allowances frozen until 2028, more and more are looking to alternative investments to provide a buffer against higher taxes in anticipation of retirement.
The recent abolition of the lifetime allowance on pensions is a ray of light, in an otherwise worrying landscape; however, this won’t become a certainty until confirmed in a bill due for 2024.The Labour opposition party have made no secret of their desire to reverse the Chancellor’s decision and reinstate the allowance, should they come to power.
Alongside these factors, high inflation is currently impacting affordability and is a particular issue for those who have already retired, with inflation being felt disproportionately by retirees, typically more so than those who are working age. Added to this cocktail is an increasing state pension age, as well as rising life expectancies. All of this means that people need to consider greater and more flexible retirement provision. This is also becoming more important to consider earlier in life; recent data from the Venture Capital Trust Association shows that the average age of VCT investors dropped from 67 in 2017, to 56 in 2022, as a new generation of investors discover the opportunities provided by VCTs as a supplement to traditional pensions and ISA investments.
Pensions are an excellent place to start when it comes to retirement planning, but they lack flexibility in retirement and offer largely taxed retirement benefits. On the other hand, ISAs provide a more flexible retirement pot that offers tax-free income, but no tax relief on investment.
VCTs provide investors with the opportunity to invest in smaller, often unquoted companies. Introduced by the UK government in 1995 to encourage investment in start-ups and smaller businesses, VCTs offer a range of benefits, including: 30% tax relief on investment, tax-free income, and flexible, tax-free access to capital.
Up front income tax relief at 30% is available to UK taxpayers who invest up to £200,000 per tax year in VCTs, provided shares are held for at least five years. They also offer tax-free income, as dividends paid out by the companies in the VCT are tax-free. In the context of reduced dividend allowances, this allows investors to secure a supplementary income during retirement, without incurring further tax liabilities. The flexibility of VCTs is another major benefit. Unlike pensions, which have strict rules around when, and how, the money can be accessed, VCTs offer flexible, tax-free access to capital. This means that, after the minimum five-year holding period, investors can access their money whenever they need it.
As well as providing flexible options for retirees, VCTs are playing an increasingly vital role in fuelling UK businesses. With AUM of around £6.6bn, VCT funds have helped to generate high-value jobs and provide evergreen, patient capital to a fast-growing class of innovative entrepreneurs; with over £1bn raised in 2022/23 it is clear that demand for funding is showing little sign of diminishing.
For paraplanners and advisers, VCTs can become a vital part of clients’ retirement planning. While pensions and ISAs are excellent options, they lack the flexibility and tax benefits offered by VCTs. By including VCTs in your clients’ investment portfolios, you can help them make the most of their retirement savings and provide them with the flexibility they need to enjoy their retirement years.
Hugi Clarke, Partner at Foresight Group
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