Using VCTs as a complement to pension planning

The Challenge

From a wealth management perspective, pensions are clearly the first place to start when it comes to retirement planning. Although the annual pension allowance was raised to £60,000 in 2023, the standard annual allowance is reduced by £1 for every £2 of adjusted income an individual has over £260,000. For those earning more than £360,000 the standard annual allowance for the 2024/25 tax year is just £10,000. Clients in this position therefore might need a tax-efficient investment alternative to complement their pension arrangements.

For example, Nylah is a director of a pharmaceutical company with an annual salary of £255,000. However, Nylah’s total income chargeable to tax exceeds £360,000 when she
includes:

• Employer contributions into her company pension
• Dividend income from her share portfolio
• Rental income from a buy-to-let property
• Income from a trust
• Interest from savings

As a result, instead of taking advantage of the £60,000 annual allowance, Nylah’s adjusted income means she is only able to make an annual pension contribution of £10,000.

The Solution

Nylah discusses her situation with her financial adviser, who suggests she may be interested in looking at the tax-efficient options offered by a Venture Capital Trust (VCT). Nylah’s adviser talks through the benefits and the risks of investing in a VCT, and tells her that if she made an investment of £50,000 into a VCT, she would be able to claim 30% income tax relief on her investment, which equates to £15,000, provided she holds her VCT shares for the minimum five-year holding period.

While pensions have strict rules and limitations on when and how much money can be accessed, Nylah is able to access her VCT investment, subject to liquidity, after the minimum five-year holding period. Also, as well as reducing her income tax bill, most VCTs will target an annual dividend, meaning Nylah can expect to receive an annual tax-free income from her VCT investment, and there’s no HMRC requirement to declare VCT dividends on her tax returns.

Investor’s capital is at risk.
For simplicity, this illustration does not take into account investment growth or charges for the investment. It is based on the current tax rules and personal allowances as at September 2024, which could be subject to change and depend on individual circumstances. Tax reliefs depend on a VCT maintaining its qualifying status and target returns may not be guaranteed.

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