VCTs. A lifeline for lifetime allowance sufferers?

With the drastic reduction in lifetime allowance, many investors are turning to VCTs to top up their income.

The pensions lifetime allowance has been cut 3 times since George Osborne became chancellor. It has been reduced from a high of £1.8m to just £1m with effect from April 2016. Any monies above this are subject to a 55% tax charge.

Because of this, many investors have sought alternative tax shelters to help fund their retirement, including venture capital trusts (VCTs). VCTs invest in small companies that need further investment to help develop their business. Generous tax benefits are offered to encourage investment in this important higher risk area.

These include 30% upfront tax relief plus tax free dividends and gains, provided you hold the investment for five years. And whilst the maximum pension annual allowance has been reduced from £255,000 to £40,000 – from April falling to £10,000 for people earning over £210,000 – you can still invest up to £200,000pa into VCTs, depending on the amount of tax you have paid. You cannot reclaim more tax in any tax year than you have paid.

It should be remembered that VCTs do come with increased investment risk, as VCTs invest in small companies that do not have a full listing on the stock exchange, although as with other investment trusts, shares in VCTs themselves are traded there.

VCTs are designed for wealthy, sophisticated investors, who can afford to take a long-term view and can accept falls in the value of their investments. VCTs are not for the faint hearted and the general consensus is that they should comprise no more than 10% of any investment portfolio.

So if you have a well-balanced portfolio, but are looking for additional retirement income in this ongoing low-interest environment, you may wish to consider VCTs. The tax-free dividends continue to look attractive, with yields around 5% available. Obviously, dividends are variable and not guaranteed, and it should be remembered that unlike cash, the value of VCTs will fluctuate and investors could lose money.

VCTs can be a very useful financial planning tool, both leading up to and in retirement. Once ISA and pension allowances have been used, VCTs could be considered.

However, you need to understand the risks involved and should get financial advice first, so contact Kellands to discuss tax-efficient investing and how to generate income in retirement.

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