Mix and Match Investments to Spread the Risk of Funding Retirement; Trevor Law Concludes His Two-Part Examination of Venture Capital Trusts
Byline: Trevor Law
Many commentators view venture capital trusts as a serious alternative to using personal pensions to provide funding and income for retirement.
Last week's article looked at VCTs and how an individual can benefit from a range of tax benefits available when investing in a new issue.
To recap, 30 per cent tax relief is available on investments up to pounds 200,000 (as long as the investment is held for five years) and all capital gains made and all dividends distributed by the VCT will be free of tax.
These tax breaks make VCTs especially attractive if the investor is a higher rate taxpayer and requires a regular income.
People have become increasingly concerned about investing for retirement through a personal pension.
Income tax relief at up to 40 per cent makes an attractive incentive to put money in a pension.
However, this comes at a price.
Your capital is tied up until retirement and then only 25 per cent can be accessed as a lump sum.
Any income paid from a pension is taxable and, although there are other options, in most cases an annuity will have to be purchased.
Current annuity rates are on average six per cent per annum before tax - not especially attractive.
In contrast, VCTs can distribute dividends free of tax and all the capital can be realised, free of tax, after just five years.
However, VCTs must be viewed as a high risk investment - it would be foolish to put all one's retirement eggs in the VCT basket.
There are no guarantees that your capital will be preserved or that the VCT you invest in will distribute enough in dividends to fund retirement.
Personal pensions, especially SIPPs, allow investment in a huge range of asset classes from the risk-free to the highly speculative.
The pension investor can build a portfolio to suit his particular risk profile and alter it over time to meet changing circumstances.
Perhaps the best strategy would be to mix and match pension contributions with investments in VCTs.
This also opens up further opportunities to combine the tax reliefs available on both pension and VCT investments.
Five years after the purchase of a shares in a VCT, the shares can be purchased by the investor's Sipp, returning the capital to the investor.
Because of the double tax relief available, a higher rate taxpayer could end up with a pounds 10,000 VCT holding in their Sipp at a net cost of pounds 3,000, assuming the VCT value remains the same. …