Neil Martin talks to Daniel Rodwell, Managing Director at GrowthInvest, about the changes to pension allowances and how EIS & VCTs can take on an important role.
The predicted capacity crunch on VCT and EIS offers that took place in the last financial year, will mean that advisers and investors will have to start planning their tax-efficient investments even earlier this year, according to Daniel Rodwell, Managing Director of GrowthInvest. It has traditionally been in the early autumn when VCT and EIS managers tend to launch their latest offers, but Rodwell believes that a fear of lack of capacity, combined with a growing realisation that tax-efficient investments can be a very effective part of pension planning for some clients.
A realistic alternative
Daniel says that pension changes are fuelling interest in alternative investments and driving a lot of new enquiries to the platform from advisers, and direct investors: “More advisers are beginning to understand how these investments can be used within pension planning for appropriate and suitable segments of their client base. EIS and SEIS are a realistic alternative for those people that are hitting the upper limits of the lifetime value; those people that are impacted by the new rules”
Daniel and the GrowthInvest team have worked closely with the Enterprise Investment Scheme Association (EISA) to calculate examples of what happens over the 15 years to retirement, and what it can offer advisers and their clients.
He explains: “Our conclusion was that there are a significant number of advisers who now should be looking to EIS, and potentially SEIS, as an alternative investment vehicle for high-value clients; those impacted by the pension caps.
“We are talking to a number of advisers on a regular basis. We know from these conversations that even though more advisers took advantage of EIS last year, many are still not entirely comfortable. They know that they need to find an alternative, as some of their clients can only contribute £10,000 to a pension, or have clients who are already at their limits, so there has to be something else.
“There are only a few options available to wealthier clients, and it’s our view that EIS is very realistic one. We strongly believe that a diversified portfolio of EIS investments can deliver long term growth. There are not many places you can look for that alongside tax efficiency right now. The tax-efficient industry and managers have been saying for many years that advisers and investors should not leave their investments until the last minute, and now that message appears to be hitting home”
“The beauty of using EIS as an alternative to pensions is very obvious to us. There are two elements of liquidity that are enormous. Every time you exit an EIS investment you are able to draw down those funds tax-free, which is very different from a pension, and equally, with all of your EIS investments up to retirement age, you get a tax-free lump sum, there are no restrictions on that at all.”
The GrowthInvest team have tested multiple scenarios, all of which suggest that EIS can play an important part in pension planning: “If you built a hypothetical, diversified EIS portfolio achieving their target returns, and you consistently reinvested those, there is a potential significant excess return over a traditional pension, that more than outweighs the perceived added risk “
A healthy appetite
As well as the record years for EIS, there is a real growth in the wider alternative finance market, mainly driven by direct-to-consumer platforms, and it shows an appetite for earlier stage, tangible investment.
“We believe that there is a much larger demand for EIS, SEIS investments amongst both advised clients and amongst UK Investors as a whole. We think that the pensions cap angle may well prove to be the driver to a much broader investment in EIS amongst the “affluent” as well as HNW/sophisticated clients.
“Whilst the investments should certainly stand on their own two feet, and investors and advisers should always be carefully looking at the investments themselves, whether in directly in qualifying single companies, or via a managed fund or portfolio, the generous tax reliefs from the government make it an attractive proposition for a wider market.”
Director General at EISA, Mark Brownridge, agrees: “EIS do not have tax-free dividends as VCTs do. Yet they can still play a part in overall pension planning and we see them as being complementary to it. Pension freedoms have been a game-changer in how people view their savings and investments, and they are increasingly building different pots of money through different investments. EIS will certainly play a part in that.”