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Tony Wickenden: Using VCTs and EISs in retirement planning

Tony Wickenden

Consideration of non-pensions related tax-advantaged investment is becoming more necessary

This week I want to take a look at where things stand in relation to pensions and planning using tax-advantaged investments following the Spring Statement.

With the increasing impact of the lifetime and annual allowances, consideration of non-pensions-related tax-advantaged investments is becoming ever more necessary in retirement planning conversations.

Of course, tax should not be the sole driver of investment decisions, with appropriate balance of one’s attitude to risk taking precedence. But minimising tax on income and capital gains generated by an investment can meaningfully add to the bottom line.

If there can be any front-end relief or tax incentive, the investment can look even more appealing, with serious long-term benefits to be had from the extra amount invested courtesy of HM Revenue & Customs.

Tony Wickenden: Making VCT and EIS investment fit for purpose

Front-end relief is, of course, very much a feature of pensions and although there was nothing explicitly on pensions in the Spring Statement, two important changes took place from 6 April:

1. The lifetime allowance increased from £1m to £1.03m – the first increase in eight years.

The rise in the lifetime allowance is an inflation-linked increase, which should now be a yearly feature. That said, it will take many years or some serious inflation for it to regain the £1.8m peak it reached in April 2010.

2. Minimum contributions for automatically enrolled workplace pension schemes increased sharply.

For many employees, the increase is likely to swamp the savings from the adjustments to allowances and tax/National Insurance contribution bands for tax year 2018/19.

The new limits are set out in the table below, both for the coming tax year and 2019/20, based on the assumptions the employer pays the minimum required by law and the employee is automatically enrolled.

Tax year 2017/18 2018/19 2019/20

Employer minimum contribution

 

1% of band earnings

(£5,876 – £45,000)

2% of band earnings

(£6,032- £46,350)

3% of band earnings

(£6,188- £47,500)*

Employee contribution

 

1% of band earnings

(£5,876 – £45,000)

3% of band earnings

(£6,032- £46,350)

5% of band earnings

(£6,188- £47,500)*

Total minimum

contribution

 

2% of band earnings

(£5,876 – £45,000)

5% of band earnings

(£6,032- £46,350)

8% of band earnings

(£6,188- £47,500)*

* based on a projected 2.5% increase in 2019/20

For example, thanks to the higher personal allowance and NIC starting point, an employee earning £26,000 a year will save £101.20 in tax and NICs in 2018/19 but face an extra £318.24 in net auto-enrolment contributions (assuming the employer pays their doubled minimum of 2 per cent). The result is a net income drop of about £18 a month – enough to be noticeable.

The auto-enrolment contributions increase could come as a shock to many employees, even though the level of contributions is still far too low to provide an adequate pension.

You do not need reminding that pensions represent the gold standard of tax efficiency when it comes to investing for retirement: front-end relief, tax-free income and gains, some tax-free capital and freedom from inheritance tax.

But beyond the increasingly relevant limitations on input and fund size, tax-driven thoughts should turn to venture capital trusts and enterprise investment schemes for certain clients. What recent changes do we need to consider?

Tony Wickenden: New tax year, new changes for your clients

Well, November’s Budget contained a range of measures designed to sharpen the focus of VCTs, EISs and SEISs as growth companies and away from capital protection strategies.

Promotors have been reviewing their investment approaches while they await further clarification from HMRC. As the measures were anticipated, many VCTs and EISs raised capital in early autumn, ahead of the Budget. The result was that supply in the run-up to the tax year end became restricted.

A consultation paper issued alongside the Spring Statement considers the creation of a new type of EIS fund, primarily for knowledge-intensive firms, to replace the existing and little-used HMRC-approved EIS fund structure.

The new regime could offer additional tax incentives, such as a tax exemption for dividends. EIS companies rarely pay dividends currently, as to do so is generally tax-inefficient for their investors.

That is not true for VCTs, of course. Dividends from them paid in respect of shares acquired within the permitted maximum (£200,000 for 2018/19) are income tax exempt.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn

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