The Prime Minister and Chancellor have called on UK pension funds to invest in unlisted companies to boost the UK’s economic recovery in the wake of the Covid-19 pandemic.
In an open letter to industry, the duo urged UK institutional investors to consider investing a greater proportion of their capital in long-term UK assets from pioneering firms to infrastructure.
Currently, over 80% of UK defined contribution pension funds’ investments are in listed securities, which only account for 20% of the UK’s assets.
In their letter, Boris Johnson and Rishi Sunak said: “It’s time we recognised the quality that other countries seek in the UK and back ourselves by investing more money into the companies and infrastructure that will drive growth and prosperity across our country.
“We want to see UK pension savers benefitting from the fruits of UK ingenuity and enterprise, being given the opportunity to back British success stories and secure higher returns and better retirements.”
The Government is already taking steps to remove obstacles to long-term illiquid investment within the UK by setting up the UK Infrastructure Bank and introducing flexibilities into the cap on fees that defined contribution pension schemes can charge.
However, Laith Khalaf, head of investment analysis at AJ Bell, pointed out that DIY investors can already gain access to illiquid assets including private equity, infrastructure and real estate within their SIPPs and ISAs.
Khalaf said: “Investment trusts offer investors access to these hard to reach areas of investment markets, because their closed-ended structure means they don’t have to sell underlying investments to meet investor withdrawals.
“The cost of that liquidity is reflected in the premium or discount the investment trust is trading at, which adds to the volatility of the investment. This is an area where investors do need to tread with caution and should only have a small part of their portfolio invested and be comfortable with the risks involved.”
“Investors can also invest in small unquoted companies through VCTs and EIS, while capturing valuable tax breaks. These are high risk investments only suitable for the most adventurous investors and must be held for the long term in order to qualify for the relief that is paid up front.”
These tax wrappers offer investors exposure to small, unquoted companies with VCTs offering up to 30% tax relief on their initial investment, tax-free dividends and growth if held for a minimum of five years. EIS also offers up to 30% up front tax relief with tax-free growth and the potential to defer any previous capital gains rolled into an EIS.
Investors also have the option of commercial property funds through an open-ended fund but Khalaf suggests investors consider investment trusts which offer ongoing liquidity even if that might be at a premium or discount to the value of the underlying portfolio.
