David Prosser: Tax-efficient plans could provide an alternative to pensions savings

Small Talk

Savers who are no longer able to put so much into their pensions plans may look to other tax-efficient investment schemes (Getty Images)

Could pension providers’ loss be small businesses’ gain? Savers who are no longer able to put so much into their pension plans may look instead to other tax-efficient investment schemes, and initiatives to attract funding for small businesses could be a prime target.

One of the ways the Chancellor plans to raise money next year is a reduction in the lifetime allowance that applies to money invested in a private pension plan. Currently you can have a fund worth £1.25m and continue to enjoy the generous tax breaks on offer from private pensions, but from next month the figure drops to £1m.

Budget 2015: Higher tax threshold rises above inflation

Changing Isa rules make them even more attractive

While these sums sound huge, they don’t generate as much pension income as you might expect. A £1m fund, say, might be expected to deliver between £20,000 and £30,000 a year to someone retiring at age 65, depending on their circumstances. And while most people will struggle to imagine saving as much as £1m, your pension planning takes place over a working life of 40 years or more, plus your contributions are invested. Many more people will be affected by the lower allowance than are currently aware of the problem.

In which case, they’re going to need other tax-efficient vehicles for saving for retirement. Individual savings accounts (Isas) will be a popular option, but these offer only £15,000 a year of extra tax-free investment allowance. By contrast, the annual limit for investment in venture capital trusts (VCTs) is £200,000. The limit on annual investment in the enterprise investment scheme (EIS) is £1m. And there’s another £100,000 allowance on offer each year courtesy of the seed enterprise investment scheme (SEIS).

Each of these schemes raises funding for small businesses – those worth below £15m in the case of VCTs and the EIS, and very small firms worth less than £200,000 with the SEIS. Investors get some attractive benefits: 30 per cent upfront tax relief in VCTs and the EIS, rising to 50 per cent with the SEIS, plus tax-free income and capital gains.

For many investors – particularly those with specialist independent financial advisers – these schemes are going to be attractive alternatives to private pension saving. They will allow people to more than make up for the lower lifetime allowance, albeit with a much narrower choice of investment possibilities.

VCTs and the EIS are already popular. VCTs raised £440m from investors last year, according to HM Revenue & Customs. Statistics aren’t available on the EIS, but Radius Equity, one adviser in the sector, thinks the figure was as high as £1bn last year and is expecting this to be surpassed during the 2014-15 tax year.

This is good news for small companies, for whom funding has often been in short supply recently. However, VCTs and EISs cater to larger firms with more of a track record, so won’t necessarily provide more funding for less mature enterprises. This is where the SEIS is supposed to come in, though its record on fundraising is less impressive. One reason for that may be limited awareness of the SEIS among small businesses themselves. Recent research suggested that fewer than 40 per cent of business owners whose firms would be eligible know about it.

That’s unfortunate, particularly now these tax-efficient schemes look set for a fresh influx of money from pension savers in need of alternative places to invest their contributions. The Chancellor launched the SEIS three years ago precisely because the smallest businesses were finding it particularly hard to raise money. Now he has given pension savers more reason to consider investing in schemes such as the SEIS it would be good to see the Treasury work harder to promote the idea.

Special day for local businesses takes off

Chuka Umunna is behind Small Business Day, based on an American model (Getty) (Getty Images)

Small Business Saturday is becoming established. Launched in 2013 following an initiative by the shadow Business Secretary, Chuka Umunna, who’d seen the idea work in the US, the annual celebration of small businesses will be held for a third time on 5 December. The idea is to encourage people to support local businesses for the day – not just small retailers on the high street but any independent firm providing products and services, whether to consumers or other businesses. Last year’s day was a success, with research suggesting that 16.5 million showed their support, while two-thirds of Britons were aware of the campaign.

Organisers are planning a series of events to build up to the day itself, beginning with free workshops around the country on 1 April at which experts and entrepreneurs will offer advice and tips. The sessions will also be streamed online. See www.smallbusinesssaturday.co.uk for details.

Britain still lags in research and development spending

British businesses still aren’t spending enough on research and development despite initiatives designed to incentivise them. Figures from the consultancy Rousseau Associates show that businesses are spending the equivalent of 1.05 per cent of GDP on R&D, compared with a European Union average of 1.29 per cent.

While tax changes such as the launch of the patent box, which protects R&D-generated revenues from tax, were supposed to promote investment, spending has actually fallen marginally in the UK – 10 years ago, the equivalent figure was 1.06 per cent. In Germany and Denmark, R&D spending as a proportion of GDP has now reached 1.99 per cent.