Retirement planning is main use of VCTs, 56% of users

jamesd

A recent Association of Investment Companies survey might be interesting: "The goal of most VCT investors is saving for retirement (56%), whilst 44% use them for saving for their families".

Not really surprising given the changes to pension limits that have made VCTs a relatively better investment than before and they seem to be becoming more popular in recent years. Probably some nod to early retirement access there as well, since VCTs don't have a 55-57 minimum access age.

AIC is the trade body representing collective investments in venture capital trusts, investment trusts and a range of other closed-ended investment types. Closed-ended normally means shares where you can buy or sell but the investment manager doesn't have to buy or sell at the same time, unlike unit trusts and similar types. This makes them more suitable for illiquid investments that could be hard to sell quickly.

deltrotter

Thanks jamesd. Just started investing in VCTs in November.

I am in the pension investing camp.

Alexland

Whenever I have looked into VCTs it seems the attractive initial tax refund only really compensates for the high charges, eventually selling at a discount and lack of growth when compared to other similar high risk investment options. If a couple have plenty of ISA or pension allowances available then it seems easier and better to use that than go down the VCT route?

The other downside of VCTs is the money is in your estate, unlike pensions, and at least with ISAs you have the option of transferring some/all to an AIM portfolio still within an ISA wrapper to reduce/avoid inheritance tax.

What am I missing that makes VCTs attractive enough to make the 5 year commitment or do all the extra paperwork?

jamesd

In My use of VCTs as part of retirement planning I gave the 5 and 6 (two purchase years) performance of my initial VCT buys. 92% gain on after tax relief purchase cost as of September this year. This isn't a star performer, I chose it for being asset-backed and near the bottom of the risk range. 92% over 5-6 years looks quite respectable to me, being 12.6% annual compounded over 5.5 years.

The performance is after charges, money arriving in my bank account except for the current share price. The charges are higher than some investments but not unreasonable given the work involved in dealing with and helping lots of small companies.

Many VCTs look to not grow their capital price much but instead deliver their profits via their tax exempt dividends. That also means that the effect of selling at a discount is reduced because it's a discount on a lower price after the dividends.

At the moment my expected dividends are something over 6.7% of the current share price total, equivalent to around 7.6% of the after tax relief purchase cost. Not guaranteed but that's quite decent income expectation whether you prefer to calculate it on actual price paid or current share prices.

If there's plenty of room in pensions and ISAs the VCT choice looks less useful but the performance looks fine and the tax saving and extra tax exempt income is still useful IMO. There were some years when I didn't do maximum ISA use and did do VCT buying so the trade off looks reasonable to me in my specific situation. At the moment I'm anticipating using all three up to the limits applicable to my situation.

There are other reasons, though, as the survey found:

"Almost nine in ten respondents (88%) said it was important to them that VCTs help support the UK economy and more than four-fifths (84%) believe that by using VCTs they’re helping UK entrepreneurs.

81% of VCT investors feel that by using VCTs they’re supporting cutting-edge science such as healthcare and technology innovations. 74% invest in VCTs for the growth potential of backing young companies early and two thirds (67%) appreciate they can support green technologies by using VCTs."

Among other things my investment in the biggest one built three new care homes and supported a couple of independent schools, as well as providing some renewable power.

I find the combination of decent returns, nice tax treatment and helping small businesses to be quite interesting. Up to you whether you do or not, though.

jamesd

VCTs are part of the estate. I'm not much of a fan of waiting to give until dead, though, preferring giving while alive. Since many retirees won't be doing VCT buying or will be recycling the same money every five years, that's investments which can potentially be sold to be given away while alive.

In one of the current discussions a person quite likely to exceed the LTA is looking at FIRE and with little more use of pensions looking likely soon, the ISA allowance is still around but VCTs have potential as well, in part because of the early access age compared to pensions that makes it particularly suitable for the FIRE cases where the target age is well below 55.

deltrotter

Being in the incredibly fortunate position of pension tapered influenced my decision to start to invest in VCTs.

I am further justifying it as diversifying my investments. The rest of my investments being in S&P 500 or global trackers.

Time will tell, but if I get anywhere near the performance Jamesd has in 5 years time i will be happy.

Alexland

92% overall gain over 5-6 years is impressive. Am I correct in assuming that's at least in part because you happened to be investing during a good period?
The ones I previously looked at tend to be the steady plodders (that still seem to have a risk way above the FTSE250) that give most of their returns by dividends. So on a risk adjusted return basis seem less attractive.
I am kinda interested to put £20k of my 'age 50-55' bridging pot into a VCT this tax year to get £6k of basic rate tax back but just haven't found one that seems to make sense compared to just keeping the money in a S&S ISA.
Are VCT dividends considered as income towards the child benefit cap?

Gary1984

You could probably split your £20k between 4 funds, say 2 generalists and 2 AIM funds. Perhaps Albion, Pembroke, Amati and Octopus AIM. Pembroke is mainly consumer good which gives another layer of diversification with the others which tend to be more into tech and healthcare. Overall you'd be spreading your cash between at least 100 companies. They all also offer share buybacks at 5% discount to NAV I think.

michaels

Could one use VCTs to mitigate the tax charged on pension income rather than simply in the accumulation phase?

jamesd

michaels said:

Could one use VCTs to mitigate the tax charged on pension income rather than simply in the accumulation phase?

One could and I am. As someone unlikely to exceed the LTA, I largely avoid the ongoing income tax problem with a combination of VCT and ISA investing. VCT gets relief from the tax cost of withdrawing and ties up the VCT part in a tax wrapper for at least five years while the ISA uses much of the rest:

£50270 + £3600 out in basic rate band = £53870 of basic rate band to use
- £2880 in net pension contributions that produces the £3600 extra out basic rate band leaves £50990
- £12570 personal allowance leaves £38420
- £25000 VCT buying before relief (38420 * 0.2 / 0.3 = 25613 but you can normally only buy in 1k increments) leaves £613 taxable in effect. Leaves £13420
- £13420 and another £6580 needed from PCLS to cover the ISA 20k allowance
- the unwrapped money also has to pay for the living expenses, though probably topped up by some VCT dividends and of course the personal allowance money

That leaves the very gradual moving of £6580 a year into the ISA from the tax free lump sum and further reduction by the income actually being used. Might be a bit more VCT buying if there are any taxed gains on the unwrapped investments.

What I'm looking to do is get most of the taxable money out of the pension and into ISA or other tax wrappers (VCT) to the point where I can expect that the remaining pension money will be within my personal allowance when withdrawn. I'm far enough for the LTA for that to be viable since I'm not just struggling to withdraw enough at basic rate to keep up with growth.

It's pretty easy just to look at the tax relief of VCTs but the investment returns don't have to be bad and haven't been for me.

jamesd

deltrotter said:

Time will tell, but if I get anywhere near the performance Jamesd has in 5 years time i will be happy.

I deliberately chose a relatively low expected return one at the bottom of the risk range to get started so the odds of doing better are pretty high. Not guaranteed, of course.

Alexland said:

92% overall gain over 5-6 years is impressive. Am I correct in assuming that's at least in part because you happened to be investing during a good period?
The ones I previously looked at tend to be the steady plodders (that still seem to have a risk way above the FTSE250) that give most of their returns by dividends. So on a risk adjusted return basis seem less attractive.
I am kinda interested to put £20k of my 'age 50-55' bridging pot into a VCT this tax year to get £6k of basic rate tax back but just haven't found one that seems to make sense compared to just keeping the money in a S&S ISA.
Are VCT dividends considered as income towards the child benefit cap?

Initially a good period but those care homes that were sold for a lot of profit were sold while Covid was going on. Given all the care home and covid issues that couldn't really be considered to be a favourable time. The care homes did extremely well during the first bit of covid and that plus them being at the luxury end may well have helped.

Best I can suggest is to start with several and see how you get on with them. The amounts are probably not that large in relation to your total assets at this point so there's only limited potential for suffering. It's a lot easier to understand just how little paperwork there is once you've done it yourself for a few years - there's a bit at the start, nothing to get the ongoing dividends paid into your bank and a bit when you want  to sell.

Adjusted net income used for the child benefit income level is taxable income, perhaps with the odd exception. ISA income is definitely excluded and since VCT dividends are tax exempt I expect them to be excluded as well.