EIS portfolios benefit top earners’ pensions

Major changes to the taxation of personal pensions make Enterprise Investment Schemes (EIS) an attractive alternative or complement to traditional retirement savings for high earners, according to Oxford Capital.

Ted Mott, the investment manager's chief executive, says EIS portfolios offer more attractive tax advantages for long-term investors compared with traditional pensions, which are set to suffer from significant tax reforms in the next 18 months.

From April 2011, the maximum amount that can be invested in a pension and benefit from income tax relief will be reduced from £255,000 to £50,000.

Moreover, a year later the lifetime allowance for tax-advantaged pension savings will be reduced from £1.8m to £1.5m, after which a recovery charge of 55 per cent will apply.

In comparison, EIS portfolios offer 20 per cent income tax relief on contributions up to £500,000, and have no inheritance tax charges or capital gains tax after two and three years respectively.

In addition, investors can defer an unlimited amount of capital gains tax already incurred.

Mott acknowledges the role played by regular pensions, but thinks EIS portfolios should be used to complement these products.

"Saving in pensions for the first £50k each year is a highly tax-efficient way to save and must be encouraged to ensure that people take responsibility for planning their income in retirement," he said.

"However, for high net worth investors who save over £50k a year, there are now alternatives which offer far lower taxation and greater flexibility."

"Investors also have the potential to realise significant capital gains from EIS investments in growth companies."

There are definite draw-backs, however. Risk-conscious investors tend to be wary of EIS portfolios as they invest in relatively small start-up companies, which are more prone to default than the average stock.

While Enterprise Investment Schemes are quoted on the stock exchange, much of their capital is invested in unquoted securities, which may lead to problems with liquidity.