VCTs as a retirement vehicle

BeatTheSystem

Hi

In projecting to exceed the LTA I am considering using VCT's as a means of quickly building a fund that I can draw on in 5 years time when I would like to retire (age 50). By living off my wifes salary I could in theory invest all of my salary into a VCT each year for the next 5 years.

Has anyone here used VCT's in a similar way or perhaps even as an alternative to pensions?

My brief investigation of VCT's suggests that if you pick good managers and spread your investments over a number of managers the risk of losing capital is reduced to a statistically acceptable level. It seems that after a year or 2 of holding a fund most VCTs start paying out dividends which are completlely tax free, so you get the benefit of 30% tax relief on purchase as well as an ongoing income stream.

I wonder of VCT's might be better than pensions even if you have not reached the LTA?

Comments anyone?

Cheers

BTS

Annisele

BeatTheSystem wrote: »

My brief investigation of VCT's suggests that if you pick good managers and spread your investments over a number of managers the risk of losing capital is reduced to a statistically acceptable level.

That all depends on what you think a statistically acceptable level is - in other words, on your attitude to investment risk.

My own opinion is that if the VCT is being managed according to both the letter and the spirit of the regulations, it has to be pretty high risk. If the VCT manager has come up with some wheeze to reduce the investment risk, you then introduce a new risk - that HMRC will decide the VCT isn't really a VCT at all.

Of course the more of them you invest in, the more you diversify the risk away. It might be an appropriate home for some of your money, but unless you have a large amount put away elsewhere I think you should be extremely careful about VCTs.

BeatTheSystem

Annisele wrote: »

That all depends on what you think a statistically acceptable level is - in other words, on your attitude to investment risk.

My own opinion is that if the VCT is being managed according to both the letter and the spirit of the regulations, it has to be pretty high risk. If the VCT manager has come up with some wheeze to reduce the investment risk, you then introduce a new risk - that HMRC will decide the VCT isn't really a VCT at all.

Of course the more of them you invest in, the more you diversify the risk away. It might be an appropriate home for some of your money, but unless you have a large amount put away elsewhere I think you should be extremely careful about VCTs.

Fair comments, I suppose I am guilty of looking for a reason to rather than not. A browse of the performance tables on trustnet shows that there are many poor performers over 5 years. I need to find out what the performance will be over longer time periods.

If they were terrible they would not exist one would think?

Most people in a diversifed portfolio would have some exposure to smaller companies, if this is the case it might be sensible to use VCTs for this asset class. Further research required.

Annisele

BeatTheSystem wrote: »

A browse of the performance tables on trustnet shows that there are many poor performers over 5 years. I need to find out what the performance will be over longer time periods.

So far as I know, Trustnet doesn't correct for survivorship bias. So, if 100 VCTs set up 5 years ago, 2 did very well, 3 did OK, 5 did badly, and 90 did so badly they didn't even survive their first five years - the stats you look at now will only show the 10 that are still with us.

If they were terrible they would not exist one would think?

As a counterexample, consider the expected return on lottery tickets...

jamesd

I tend to look at the tax free income aspect of VCTs and am interested in those that pay regular dividends. Same retirement income purpose but so far I haven't gone far enough beyond the ISA and pension sensible levels to need to use VCTs.

Pensions will beat them initially but you can do things like recycling pension income into more pension contributions at sufficiently high income levels that can take you to the annual pension contribution or lifetime limits and that can force use of other approaches.

VCTs don't have the horrendous 9 out of 10 failure rate implied in the previous post. Particularly note the ones that have been running long term for income generation, rather than the highly speculative types.

You'd probably want to avoid the early exit type of VCT. While they do return money after five years they seem to not do much better than returning the original capital or that plus a little. That's handy for some people but not great if you want tax free retirement income.

So: pensions first for at least the 40% tax band part of income. If you have a salary sacrifice pension available the basic rate band might also be useful, due to the saved employee and possibly employer NI. Next stop S&S ISA. Then consider VCT as part of income tax mitigation, along with S&S ISA. Consider even the best of the VCTs to be of comparable risk level to a smaller companies fund, and the more specialist ones to be higher. Maybe a bit of mixed VCT and ISA use.

Using your whole income for VCT investing wouldn't make sense for most people because the 30% tax relief you get is limited to the actual tax paid in the year. For most people that'll be just their basic rate band and no more than 20% tax on perhaps £32k a year, so a maximum of around £21k of VCT to eliminate almost all basic rate tax liability. For those with lots of higher or top rate income a higher use level might be appropriate, though, subject to the need to remain sensibly diversified over all investment types, including company size and country and such.

FatherAbraham

BeatTheSystem wrote: »

Most people in a diversified portfolio would have some exposure to smaller companies, if this is the case it might be sensible to use VCTs for this asset class. Further research required.

I don't think VCT investments are quite the same kind of thing as the asset class traditionally called "smaller companies". More like "tiny companies". Some of them not even really companies, more like a business formed around a strong-willed entrepreneur.

There might be diversification benefit from adding venture-capital funds, but few asset-allocation strategies would devote significant resources to this sector. In any case, a diversified portfolio containing four distinct asset classes already has problems finding low correlation of returns with further classes. The benefits of additional diversification diminish very rapidly.

If you want reinforcement of, or support for, your bias towards VCTs, you'll have to look elsewhere.

If you want to make a good investment decision, you may be going about this the wrong way, as you clearly know. Would you invest much in venture capital if the tax treatment changed?

Warmest regards,
FA

BeatTheSystem

Annisele wrote: »

So far as I know, Trustnet doesn't correct for survivorship bias. So, if 100 VCTs set up 5 years ago, 2 did very well, 3 did OK, 5 did badly, and 90 did so badly they didn't even survive their first five years - the stats you look at now will only show the 10 that are still with us.


As a counterexample, consider the expected return on lottery tickets...

Fair point re not visbvility on failed VCTs. Not a fair point on comparing to the lottery. Yes start up companies fail in huge numbers but those setting them up dont start out with failure in mind.

Annisele

jamesd wrote: »

VCTs don't have the horrendous 9 out of 10 failure rate implied in the previous post. Particularly note the ones that have been running long term for income generation, rather than the highly speculative types.

Sorry - I appreciate I did imply that they had a horrible failure rate, but that wasn't what I meant to imply. I was just trying to explain what survivorship bias is.

BeatTheSystem

jamesd wrote: »

I tend to look at the tax free income aspect of VCTs and am interested in those that pay regular dividends. Same retirement income purpose but so far I haven't gone far enough beyond the ISA and pension sensible levels to need to use VCTs.

Pensions will beat them initially but you can do things like recycling pension income into more pension contributions at sufficiently high income levels that can take you to the annual pension contribution or lifetime limits and that can force use of other approaches.

VCTs don't have the horrendous 9 out of 10 failure rate implied in the previous post. Particularly note the ones that have been running long term for income generation, rather than the highly speculative types.

You'd probably want to avoid the early exit type of VCT. While they do return money after five years they seem to not do much better than returning the original capital or that plus a little. That's handy for some people but not great if you want tax free retirement income.

So: pensions first for at least the 40% tax band part of income. If you have a salary sacrifice pension available the basic rate band might also be useful, due to the saved employee and possibly employer NI. Next stop S&S ISA. Then consider VCT as part of income tax mitigation, along with S&S ISA. Consider even the best of the VCTs to be of comparable risk level to a smaller companies fund, and the more specialist ones to be higher. Maybe a bit of mixed VCT and ISA use.

Using your whole income for VCT investing wouldn't make sense for most people because the 30% tax relief you get is limited to the actual tax paid in the year. For most people that'll be just their basic rate band and no more than 20% tax on perhaps £32k a year, so a maximum of around £21k of VCT to eliminate almost all basic rate tax liability. For those with lots of higher or top rate income a higher use level might be appropriate, though, subject to the need to remain sensibly diversified over all investment types, including company size and country and such.

Thanks, for the reply. Have looked at the early exit type, most seem to be asset backed by property or some other fixed asset that can be realised at the end of the 5 years (I think). Seem to be designed as a tool to get the 30% tax relief, but like you point out it would be good to build a stream of income. If I can satisfy myself with the risks I could put say 50K in per year for 5 years, (10K per fund per year) which would build a pot of 250K which if I can get 4% per year I would a) save a lot of tax, b) have a baseline income on which to retire on before eligble to take benefits from my primary savings vehicle (pension).

BeatTheSystem

FatherAbraham wrote: »

I don't think VCT

If you want reinforcement of, or support for, your bias towards VCTs, you'll have to look elsewhere.

FA

I agree with all that you say, not looking for confirmation or support but a balanced view from the many wise people on here, just tell me how it is I dont mind, if after due dilligence which includes multiple sources (here, my IFA, my accountant, my own searching) etc I will make hopefully a balanced view.

Cheers

BTS

fizio

I am in a similar position in that I will max out on LTA before retirement and am alo maxing out on ISA's so looking for the next tax free savings option. VCT's sound interesting but also quite risky