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Why you can no longer afford to ignore VCTs

17 December 2019

VCTs solve a genuine and growing HNW client problem, namely planning for a comfortable retirement in the face of pension contribution constraints, says Nick Bird, senior business development manager Octopus Investments

There was a time, not so very long ago, when a venture capital trust (VCT) case was a relatively rare thing.

A few years back, it was typical for an adviser to recommend a VCT to maybe one or two clients, with the typical case size being around £25,000 to £30,000.

Let’s be honest, that’s not a humongous amount of business. So it made sense that some advisers would conclude they couldn’t justify the time spent researching such a niche area.

But times have changed. Today, I work with advisers who will have ten, fifteen or even twenty clients invested in VCTs. These clients are high earners, and will tend to make frequent VCT investments.

As VCTs have become a more common piece of planning, they are also becoming a standard piece of research for advice firms. For the simple reason that it’s now worth an adviser’s while to do that initial piece of work.

Why VCTs are growing in popularity

Restrictions on pension contributions have left many clients looking for additional ways to plan for retirement.

Clients will typically be in their accumulation phase for twenty to thirty years. For high-earning clients, around half of this period could see them making enough in income to use up their pension and ISA allowances each year and still have funds left over that they want to put towards investments.

That’s ten to fifteen years during which such clients could benefit from making regular VCT investments, which represent another tax-efficient way to plan for retirement. Multiply that by the growing number of clients affected by the annual or lifetime allowance, and you can see why an adviser who previously didn’t consider VCTs might now decide it’s worth researching them.

Do more for high-earning clients

Advising on VCT investments is also a good way to provide some of your best clients with a full service. It may also help you win new clients. Accountants, for example, may be more inclined to refer high-earning clients to an adviser who can offer advice on a broad range of investments, including tax-efficient investments like VCTs.

Ultimately, it comes down to the type of clients you have, and the type of clients you want to have. By offering advice on VCTs, you can make yourself attractive to clients who have several decades of investing ahead of them.

Understanding the risks

Of course, the first step with any client is to make sure they understand the risks before making any investment. VCTs are considered high risk investments, and clients may not get back the full amount they invest.

Tax treatment depends on individual circumstances and may change in the future. Tax reliefs also depend on the VCT maintaining its qualifying status.

Clients will also need to be comfortable with the idea of holding the shares for five years in order to keep any income tax relief they claimed. And they should keep in mind that VCT share prices can be volatile, and the shares may be hard to sell.

Start your VCT research today

VCTs solve a genuine and growing client problem, namely the desire to plan for a comfortable retirement in the face of pension contribution constraints. Small wonder then that new players continue to enter the VCT marketplace, reflecting the growth in demand for this type of investment.

If you’re new to VCTs, you can find useful information on the website of Octopus Investments.

Professional Paraplanner