Tax Saving Investment Options Outside Of A Pension

By Arnab Dey

November 9, 2023


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Pensions have long been the primary tax-efficient investing wrapper. But reduced lifetime allowances and restrictions have diminished pensions’ appeal, especially for high net-worth investors. The good news is strong alternatives exist to help you grow and protect wealth in a tax-savvy way. 

This guide explores key options beyond pensions for minimizing taxes while meeting your financial aims. We’ll take an in-depth look at one of the most powerful choices – Enterprise Investment Schemes. 

The Declining Role Of Pensions 

In 2011/12, the lifetime allowance (LTA) for pension contributions stood at £1.8 million. This is the maximum amount an individual can have in their pension without facing a tax penalty. It now stands at £1,073,100. 

Since pensions are the traditional tax-efficient home of our spare cash once we’ve exhausted our youthful spending sprees, bought a house and realized that life is short and retirement is expensive, this is not an ideal scenario. Especially against the backdrop of the rising cost of living. 

Huge Penalties 

It’s even worse if you’re slapped with what amounts to a huge fine for breaching the rules – up to 55% – depending on whether the excess is taken as a pension or a lump sum. 

Figures reported this week show that these additional tax charges are actually increasing, with tax collected by HMRC due to people contributing more to their pensions than the rules allow, doubling in three years; 2,410 individuals were caught by the LTA tax rule in 2016/17 compared with 1,020 in 2014/15 (Financial Times). The additional charges totalled £110 million.

This tells us two things; there is a lack of awareness of these pension changes that are not going away and, as we suspected, the restrictions are leaving individuals with excess funds that they want to safeguard for later life. 

What Limits Apply? 

Pensions still offer noteworthy tax advantages. Contributions receive tax relief and gains within the pension go untaxed. However, limitations apply: 

  • Lifetime allowance caps pension savings at £1.07 million before penalties
  • Accessing funds early can generate tax bills 
  • Restricted flexibility on withdrawals and beneficiaries beyond spouse 
  • Assets held in pension still subject to inheritance tax 

For higher earners and those with substantial capital, pensions may no longer provide the ideal tax-efficient wrapper. This is where alternative investments can help. 

Main Alternatives To Pensions 

Several options exist to complement or replace pensions for tax-efficient investing: 

  • Stocks & Shares ISAs – Tax-free growth up to £20,000 annual allowance
  • Enterprise Investment Schemes – 30% income tax relief plus CGT relief
  • Venture Capital Trusts – 30% income tax relief up to £200,000 annually 
  • Business Relief Schemes – 100% inheritance tax relief after 2 years 
  • Property – Tax-free capital gains up to £12,300 plus IHT exemptions 
  • Offshore Bonds – Tax deferral on gains for 30 years 

Each vehicle has trade-offs to weigh based on your investing aims and needs. 

Alternatives To Pensions 

The Benefits Of Enterprise Investment Schemes 

One alternative warranting special attention is Enterprise Investment Schemes (EIS). The EIS offers: 

  • 30% income tax relief on investments up to £1 million annually 
  • 100% tax-free capital gains on disposals after 3+ years 
  • Capital gains tax deferral by reinvesting gains into EIS
  • Loss relief if investments underperform 
  • 100% inheritance tax exemption after 2 years 
  • Access to fast-growing private companies before they are listed publicly 

For high-net-worth investors in particular, the EIS can maximise tax savings while unlocking the return potential of dynamic private firms. 

How Do Enterprise Investment Schemes Work? 

EIS investments involve taking equity stakes in small, early-stage companies not listed on stock exchanges. To qualify, companies must: 

  • Be based in the UK 
  • Have gross assets under £15 million 
  • Have fewer than 250 employees 
  • Be independent and not part of a corporate group 
  • Carry on a qualifying trade 

Investors can access EIS opportunities through an approved EIS fund or by investing directly in individual businesses. Shares are typically held for 3-5 years before being sold. 

For those meeting eligibility criteria, the substantial tax incentives make EIS investments highly appealing:

  • 30% income tax relief reduces cost by nearly one-third 
  • Tax-free capital gains boost overall return 
  • IHT exemption takes future estate planning costs down 

Assessing Your Best Options 

With a myriad of choices, the key is matching options to your personal financial situation and goals through:

  • Evaluating Income needs and Risk appetite 
  • Weighing timeframe and liquidity requirements 
  • Considering estate planning and inheritance tax needs 
  • Reviewing existing pension and overall capital
  • Diversifying across solutions tailored to your aims 

EIS can play an instrumental role in portfolios for high-net-worth investors due to its unparalleled tax advantages. 

Achieve Your Goals Tax-Efficiently 

Pensions alone no longer corner the market on tax-efficient investing. With alternatives like EIS, you can keep more of your hard-earned money working for you. Learn more about using an eis investment platform, or discuss options with your adviser to put the right solutions in place to achieve your financial goals.

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Arnab Dey

Arnab is a passionate blogger. He shares sentient blogs on topics like current affairs, business, lifestyle, health, etc. To get more of his contributions, follow Smart Business Daily.

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