With increasing numbers of people facing problems and questions created by the pension Lifetime Allowance and Annual Allowance limits and rules, navigating the pension and tax system that surround them has become increasingly difficult for savers.

The Lifetime Allowance currently stands at £1,055,000 and the Annual Allowance at £40,000 unless the individual is a high earner affected by the tapering rules (we explain more here).

The ability to carry forward unused annual allowance from previous tax years has potentially helped those who have been restricted by the tapered allowance up to now but with tapering now three years old, this help may no longer be available for those who have fully used carry forward.

For anyone facing or already caught by Lifetime or Annual Allowance limits on their pension savings, there are some alternative investment options offering income tax relief that can be considered for their retirement planning.

Enterprise Investment Scheme (EIS)

EIS is a tax advantaged investment for UK investors offering potential reliefs from capital gains tax, income tax and inheritance tax. It was introduced in 1994 to assist small, higher risk, unquoted trading companies to raise capital by offering tax incentives to investors.

The EIS provides a series of tax breaks to individuals who subscribe for shares in qualifying companies and holds them for at least three years.

The main tax benefits are:

• Income tax relief of 30% on up to £1m of funds invested
• Potential for 100% relief from inheritance tax once shares have been held for two years
• No capital gains tax on disposals after the investment has been held for three years
• Capital gains tax deferral relief and loss relief
• Tax efficient growth

Investments are typically made into unquoted companies, which satisfy qualifying criteria based on their size and the type of trade undertaken.

Qualifying shares must be held for a minimum of 3 years to qualify for the Capital Gains Tax exemption on their disposal.

Venture Capital Trust (VCT)

A VCT is a company which invests in, or lends to, qualifying companies seeking investment to develop their business.  VCTs were introduced in 1995 to encourage investment in early-stage UK companies by offering tax incentives to investors.

A VCT provides a series of tax breaks to individuals who subscribe for shares in qualifying companies and hold them for a period of at least five years.

The main tax benefits are:

• Income tax relief of 30% on new VCT subscriptions up to maximum annual investment of £200,000.
• No income tax on dividends paid from ordinary shares in VCTs.
• No capital gains tax payable on the disposal of ordinary shares in a VCT

Until recently, investments in VCTs could only be made as a single payment or series of payments but some VCT providers now offer the flexibility to subscribe and invest in a VCT on a monthly basis.

Risks

While tax benefits can be a compelling reason to consider an investment in either an EIS or VCT, it should never be the only reason as they do present a higher risk to investors and their capital.

Investing in unlisted shares in start up or smaller expanding businesses means that there is a risk that these companies will fail with the resulting loss of some or all of the capital invested in them.

Liquidity and access to funds is another factor to consider as shares in an such companies are difficult to sell which means that taking money out of an EIS or VCT early can be difficult or even impossible.  It is therefore important to consider the timescales for the investment and ensure that there are enough accessible funds and cash that can be accessed elsewhere before considering them as an investment option.

Other factors to consider are the experience and track record of the EIS or VCT manager and ensuring that the chosen investment vehicle will meet the qualification requirements to ensure that the expected tax relief will be granted when claimed on your tax return.

All of these factors and more should be considered as part of the decision on how and whether to invest in an EIS or VCT as an alternative to pension savings for anyone affected by pension limits.

Get in touch

If you'd like to discuss any of the options discussed in this blog, please get in touch with me at Craig.Hendry@JCWealth.co.uk.