This article first appeared in FT Adviser.
One of the more encouraging aspects of the UK financial services industry is that it never stays static for too long. There are always regulatory changes and behavioural shifts that threaten to shake away complacency and unlock new areas of potential. Take retirement planning as an example. Back in April, the reduction in the lifetime allowance for pension contributions (down from £1.25 million to just £1 million) as well as the tapered annual contribution limit for additional rate tax payers, was always going to have a dramatic impact. If an individual’s pension pot ever exceeds the lifetime limit, they face a tax charge of up to 55% on the excess. Limiting the ability for landlords to deduct the cost of mortgage interest from their rental income, coupled with the higher rate of stamp duty for buy-to-let properties, is making more individuals think about the higher tax implications that now come with using property as a pension proxy.
The response from advisers and clients has been an upsurge in demand for Venture Capital Trusts (VCTs). According to the Association of Investment Companies (AIC), VCTs raised £458 million for the 2015/16 tax year, making it the biggest fundraising year in over a decade (Source: AIC at 07/04/2016). Yet while demand soared, the number of VCTs open to new investment was reduced following further changes to VCT legislation this year. Although VCTs are higher risk investments, they have been embraced as an appropriate part of retirement planning, benefitting those investors at risk of breaching upper annual and lifetime limits. Of course, given their different risk/return profiles, a VCT shouldn’t be considered a like-for-like replacement for pension investments. But as we know from conversations with advisers, VCTs are increasingly viewed as a viable and mainstream option for those clients comfortable with the risks of investing in smaller companies and who are looking for a tax-efficient way to complement and diversify existing retirement arrangements.
‘Peer-to-peer’ (P2P) lending has also seen an upsurge in mainstream recognition, which the Government is starting to accommodate. The introduction of the Innovative Finance ISA back in April, bringing P2P within the ISA family (and giving it an unsurprising popularity boost as a result), is another step in the right direction. In 2015, some £2.7 billion was invested into the regulated P2P industry and crowdfunding platforms, according to the Financial Conduct Authority (Source: FCA at 08/07/2016). This year, with P2P gaining more mainstream acceptance, the investment inflows are likely to be considerably higher. Although P2P is very much still a new asset class for advisers, the fact that some well-known entrants are gaining a foothold in the P2P market is helping many to overcome their concerns.
At a time when the UK population is ageing, and amid growing concerns that the next two decades could see significantly lower returns from traditional investments, the need to secure a comfortable retirement and a sustainable level of income in later years hasn’t changed. Perhaps the most significant shift taking place right now is that people are much more willing to seize on innovative opportunities in a bid to achieve their aims.
Simon Rogerson is Chief Executive Officer at Octopus Investments
For journalists in their professional capacity only. The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Tax treatment depends on individual circumstances and may change in the future. . The availability of tax reliefs also depends on the VCT maintaining qualifying status. VCT shares could fall or rise in value more than other shares listed on the main market of the London Stock Exchange. They may also be harder to sell. Past performance is not a reliable indicator of future results and may not be repeated. Personal opinions may change and should not be seen as advice or a recommendation. We do not offer investment or tax advice. We recommend investors seek professional advice before deciding to invest. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: December 2016