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A VCT can be a useful tool for funding retirement. This can be particularly useful if you have issues with the Lifetime Allowance or Annual Allowance. See Pension Problems for more details. 

In some ways a VCT has a number of advantages over a pension for retirement planning. Such as:

• You can contribute up to £200,000 per year
• You get tax relief at a rate of 30% on contributions (a 30p reduction in income tax for every £1 paid in). 
• After five years the entire pot can be sold and there is no income tax to pay on the proceeds – all of it is tax-free
• There is no lifetime maximum
• You don’t need to be 55 to take benefits

You might also want to do it as an income generating income in its own right, as you would hope it would generate an income in retirement. 

Here’s an example. Mr Birdsall is 55, and has a pension worth £1,050,000. He is worried about exceeding the lifetime allowance. If, when he takes benefits from his pension and his fund exceeds the lifetime allowance, he could incur income tax of 55% on some of it. He is self-employed. 

He therefore does not want to pay any more money into a pension. He estimates that he has a £15,000 income tax liability.

So, rather than pay money into a pension, he pays £60,000 into a VCT.  This reduces his income tax liability by £15,000, meaning that he has no income tax to pay.  He has an investment that in five years he can take out without income tax to pay. And, hopefully as time goes by it will generate him an income too, when the VCT pays out profits.  

(He could take his tax-free cash from his pension by moving it into drawdown at this point, meaning that he would be tested against the lifetime allowance, and at this point would be below it).  

Meanwhile he repeats the process of of paying money into VCTs at a rate of £60,000 process over the next five years, accumulating £300,000 in VCTs.  

He retires at age 60. He can now sell his first VCT as it has been invested for five years. The proceeds from this would be free of income tax. He can take his pension too. At this point he might have lifetime allowance issues, but he would not have put more into his pension potentially worsening this problem, as he has paid money into a VCT instead.

He might not want to encash the VCT as it could be providing him with a supplementary income in addition to income from his pension. 

Indeed he has two other possible options available to him with a pension fund and VCT. 

He could use start to use the VCTs as a lifetime income tax reducer. He would take income out of his pension (or buy an annuity), on which he would incur income tax. If at the same time he encashed a VCT and invested that in another VCT he could avoid income tax. Again an example might help:

He enters drawdown, and takes £40,000 as taxable income from the pension. He incurs income tax of £5,484 on this amount.  He encashes £18,280 of his VCT, and pays that into another VCT. This gives him another 30% tax-relief, in other words the VCT investment reduces his tax bill by 30p for every £1 invested. On £18,280 this works out at £5,484. So, the tax he has paid on his pension is cancelled out by the reinvestment into a different VCT.  See lifetime tax reducer for more information. 

Of course he might want to encash the first VCT and just spend it, or use it to supplement his income. 

The key point is that he can continue to invest in a way that get’s him tax-relief, and not worsen potential problems with the lifetime allowance. 

A VCT could also be used in much the same way if you have a reduced annual allowance, and want to invest more into a pension than would otherwise be worthwhile. 

A VCT does of course have its disadvantages and rules, that are completely different to pensions. For more information see Venture Capital Trusts.