In less than a decade, the maximum UK annual pension contribution has plummeted from £255,000 to £40,000, and as savers across Britain seek the most efficient way to save for later life, for many experienced investors, traditional pensions alone won't suffice.
In 2014/15 the maximum allowance for HMRC contributions was reduced to £40,000 for most savers (or as little as £10,000 for the highest earners), just four years after the allowance hit its peak of £255,000 in 2010/11.
These consistently dwindling contribution limits have meant that many on the route to retirement have been forced to consider alternatives when saving for later life.
But where government policies have restricted the capital saving abilities of traditional routes, experienced investors have been fast to identify a host of tax-efficient methods ideally suited to supplement retirement planning - with arguably one of the most talked about being the Enterprise Investment Scheme (EIS).
The many benefits of saving for later life using the EIS
Introduced in 1994 as a means of stimulating the UK’s most promising early stage business landscape, for over two and a half decades the EIS has helped facilitate over £17 billion of private investment, in part due to its host of generous tax benefits - a trait that makes it particularly attractive to investors looking to save for later life.
The scheme’s income tax relief benefit is an aspect which can be singled out as especially useful for investors looking to maximise their long term financial plan.
Offering up to 30% income tax relief on EIS investments of up to £1 million per annum, the scheme’s evident ability to minimise tax bills is an aspect which can be especially useful for retirement planners set on utilising their pension pot to the best of their ability.
Not only does the EIS’s income tax efficiencies make it a particularly appropriate route for experienced investors set on maximising long term savings, but so too do its tax efficient capital shielding abilities.
Any growth on EIS investments is tax-free providing the shares have been held for three years, offering investors full capital gains tax (CGT) exemption.
This means that should a liquidity event occur and investors are able to sell shares, providing they fulfil the holding period, any increase in value is completely tax free - an element particularly useful for experienced investors with long term growth in mind.
For high net worth investors stifled by the £10,000 annual pension contribution, this rule can be especially beneficial.
For example: capital gains made from the Enterprise Investment Scheme exceeding £50,000 could see the money saved via capital gains tax alone (currently at 20% in the UK) exceed the maximum pension contribution allowance.
Furthermore, with investors now able to pledge up to a maximum of £1 million per year via EIS (or as much as £2 million into knowledge intensive companies) this tax benefit alone can play a hugely influential role for those with pension top-ups in mind.
Though for many, these two tax benefits in particular are outlined as some of the most advantageous for sustained investing, the EIS does offer a host of other tax efficiencies well suited to investors searching for alternative ways of bolstering their investments.
From 100% inheritance tax relief that ensures EIS-qualifying investments are not eroded upon passing, to capital gains deferral that can facilitate the push-back of external CGT payments, to loss relief that can significantly minimise the losses made on an EIS investment should it fail, the many additional tax benefits offered by the Enterprise Investment Scheme are inherently favourable for long term investors.
Offering this combined mix of generous tax advantages that aim to minimise downside risk, and an early-stage, innovation-led format that’s primed to maximise growth it’s unsurprising that so many experienced investors look towards the EIS as a means of supplementing their diminishing retirement options effectively.
Identifying EIS investments best suited to your portfolio
Another factor that makes the Enterprise Investment Scheme so popular for investors looking to bolster and secure their retirement savings is its aptness for portfolio diversification - the scheme allowing investment into early stage startups in a wide variety of qualifying trades and industries.
From investments into early stage tech companies on the cutting edge of threat intelligence like Intelligence Fusion to innovative employee engagement platforms like Hive HR championing voice and engagement, EIS-eligible investments have the possibility to be considerably interchangeable in sector and mission.
This breadth of choice the Enterprise Investment scheme can cover not only makes identifying companies best aligned with your portfolio straightforward, but it can make portfolio risk distribution extremely accessible via considered portfolio diversification - a key factor when mapping out later life savings and investment.
Whilst the broad range of tax advantages and portfolio diversifying qualities the EIS possesses make the scheme’s recent popularity unsurprising - the EIS raising over £1.9 billion in private investment in 2019/20 alone - it’s equally important to acknowledge the risks early stage investments can bring.
Widely identified as having a high risk profile due to the perceived uncertainty surrounding unestablished, young businesses, any investment into early stage venture capital - whether via risk-limiting schemes like the EIS or not - should be analysed with adequate scrutiny.
When identifying the best route to supplement future finances and bolster pensions off the back of rapidly diminishing state-decided allowances - EIS or otherwise - it’s crucial you select the strategy not just best aligned with your capital growth goals, but with an adequate level of risk you’re comfortable accepting.
And whilst pension contributions may have decreased, that doesn’t mean your pension planning has to suffer. For investors at a loss deciding where their newfound savings will come from, the host of tax efficient now at their disposal should prove a promising light at the end of the tunnel.