As the tax relief on pensions continues to be cut Simon Ruthers discusses where EIS may fit into clients' retirement planning
In his Autumn Statement last year, the Chancellor announced the anticipated changes to pension limits - reducing the annual allowance to £40,000 and lifetime allowance to £1.25m, from 2014-15.
As funding for retirement remains a key priority for many clients, many advisers are seeking alternative options to supplement pension savings for their clients. One option which is becoming increasingly attractive is the Enterprise Investment Scheme (EIS).
Tax efficiency with the potential for growth
When designing a successful retirement strategy, most would agree that tax efficiency, the opportunity for investment growth and a degree of flexibility are key considerations. In addition to pensions, other products that offer tax incentives are NS&I products, ISA, VCT and EIS funds.
Most cash ISAs and National Savings products are currently offering returns lower than inflation and can quickly be discounted unless the client is planning to retire in the short-term.
Similarly, stocks and shares ISAs offer an attractive solution, but many clients affected by lower pension contribution limits will already have utilised their subscription in full. This brings other planning solutions such as the EIS or venture capital trusts to the fore.
In the current environment of higher personal taxation and lower growth, many advisers have, in particular, identified the benefits of incorporating EIS as part of a client's retirement planning strategy.
Tax advantages of EIS
The government is using the tax system to support businesses which will help to deliver economic growth. It has steadily increased the tax advantages of EIS at the same time that traditional pension tax reliefs have been eroded.
The maximum amount qualifying for EIS tax relief each year is a generous £1m, with income tax, capital gains tax and IHT reliefs available.
The table above compares the tax treatment of EIS and pensions.
Incorporating EIS into a retirement strategy
Traditionally regarded as high risk, there are now a wide range of investment strategies available which make EIS increasingly attractive for many investors.
Generally single company or seed EIS investment may be seen as too high risk, however many providers now offer managed portfolios of more mature, growth stage EIS investments which offer diversification in a risk managed environment.
Increasingly EIS portfolios investing in lower risk infrastructure investments are also available, which make an attractive alternative for retirement planning.
Selecting an EIS provider:
Given the range of options available, advisers need to establish clear objectives with their clients prior to recommending an EIS investment. These include:
• Select an EIS investment that meets your client's risk profile.
• Understand the underlying business in which the EIS will be invested.
• Appoint experienced EIS managers with a strong track record.
• Ensure the proposed investment has received provisional EIS clearance from HMRC.
• Ensure that the manager is able to access high-quality investment opportunities and has a robust selection and monitoring process in place.
• Identify managers with competitive fee structures.
• Understanding the duration of the investment and exit strategy.
• Establish when the tax benefits will emerge. It is possible that a subscription may be made into an EIS in one tax year, but the money not invested until a subsequent tax year. As this may affect the timing of the tax reliefs, ensure the investment timetable will deliver tax reliefs when they are needed.
• Ensure the provider has a strong reputation for customer service.
Simon Ruthers is private clients manager at Oxford Capital Partners
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