Investors are taking advantage of business funding tax breaks to switch their cash away from pensions, says a new report.
Government tinkering with pensions is leading investors to look at other potential profits, according to venture capital firm Albion Ventures.
The beneficiaries are equity stakes taken in businesses through the Seed Enterprise Investment Scheme (SEIS), the Enterprise Investment Scheme (EIS) and venture capital trusts (VCTs).
The main reason for the change is the reduction in the pension lifetime allowance from April 2014, which drops from £1.5 million to £1.25 million, writes specialist web site seis.co.uk.
The site reports pension savers are worried that their retirement savings will break the limits set by the government, leaving them open to the possibility of hefty fines imposed by HM Revenue & Customs (HMRC).
SEIS, EIS and VCTs are proving popular alternatives with investors because of the lure of high returns and tax indemnities off low risk.
Each of the three schemes offers tax breaks for equity investors. SEIS is mainly for start-ups, EIS for companies looking to grow and VCT serves both markets.
They have separate tax advantages and disadvantages for investors.
For example, SEIS investors can pick up tax reliefs of around 86% of their £100,000 investment in a new start company.
VCT fund manager Albion Ventures has released the results of a survey indicating 16% of investors are new to the market and many are young professionals.
The study points out investors say they are attracted to VCTs due to tax-free dividends (20%), ISA links (20%) and the drop in the lifetime allowance for pensions (16%).
This reflects details published in a recent report from the Association of Investment Companies (AIC), which disclosed cash in VCTs had reached £2.86 billion – the most since the scheme began in 1995.
“The findings also suggest that advisers have become more familiar with VCTs, possibly as a result of the regulatory changes, and as a result feel confident recombining them to suitable clients,”’ said Patrick Reeve, managing partner at Albion Ventures, told seis.co.uk.
“Ultimately it’s been a combination of low returns on savings products and the reduction in the pension lifetime allowance that have acted as a catalyst for VCTs.”