Recent changes to pensions have seen them become increasingly more restrictive for people reaching the lifetime limit, or restricted by the annual contributions and in this context the demand on VCTs has continued to grow. In the last five years alone VCT fund raising has increased by more than 70 per cent.
4. Sustained dividends
VCTs are sometimes mistakenly considered as being solely focused on achieving returns through capital growth, but in reality many VCTs deliver regular income via tax-free dividend payments. It is therefore important to look for a manager who has delivered sustained dividend flow, usually most effectively combined with a mature portfolio.
VCTs can have a variety of different income profiles from those that pay a consistent and regular dividend to those that look to pay larger ad-hoc special dividends alongside a much lower regular dividend.
Finding a VCT with an income profile matched to your client’s requirements is crucial. Investors considering a VCT as a supplementary pension planning tool may be better suited to a VCT with a track record of consistent dividend payments, especially the older investor.
Younger investors who are less reliant on regular income might prefer something that offers the opportunity of some special, but less consistent, dividends. At the end of the day it is up to the client and their requirements, but looking at a dividend track record of any VCT should help.
It is a common misconception that smaller company investing is purely for growth. Chris Hutchinson, manager of the Unicorn AIM VCT comments: “Following the financial crisis and subsequent recession, many smaller companies now operate with no debt and often hold substantial cash balances, increasing their ability to grow dividends.”
Understanding how the VCT derives its income is also important to understand the risks to the future dividend stream of the VCT. Whether the VCT’s dividend is comprised of income from underlying companies, or a disposal of an underlying business locking in capital gains to be paid out in the future.
5. New offer or top up?
One last thing to consider when considering a VCT manager is whether theirs is a new offer, or a top-up offer.
A new offer will be for a new share class of an existing VCT (VCTs can have multiple share classes with different pools of assets), whilst a top-up will offer the opportunity to gain exposure to an existing portfolio of assets within a share class of a VCT.
Again it depends on the preferences of a client, but both have merits and drawbacks, according to what you are looking for.