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The recent FT Adviser article “Are Pensions Still Tax Efficient Amid IHT Changes?” raises a critical question – are pensions still the gold standard for long-term wealth planning? While pensions have long been a staple of tax-efficient investing, from April 2027 onwards, increasing restrictions, taxation at multiple points, and inheritance tax (IHT) complications mean that investors, particularly high earners, should be actively considering alternative strategies.
Enter the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) – two government-backed initiatives offering compelling tax reliefs and strategic advantages in tax planning like Income Tax Relief, Capital Gains Tax Exemption and Deferral, inheritance tax mitigation, and portfolio growth. If pensions are becoming more of a tax trap than a tax shelter, isn’t it time we took these alternatives more seriously?
The Future Pension Problem: Over-Taxed and Over-Restricted
For high earners, pensions are no longer as tax-efficient as they once were. Those earning over £150,000 face a tapered annual pension allowance, which reduces by £1 for every £2 of income above this threshold. By the time earnings reach £210,000, the annual pension allowance is slashed to just £10,000.
This means that if a high earner contributes beyond this reduced allowance, they receive no tax relief on the excess amount and are instead hit with an annual allowance charge. So much for pensions being a tax-efficient strategy…
But the problems don’t stop there:
• Triple Taxation Risks: Contributions may be tax-free, but withdrawals are taxed as income. Many will lose their tax-free allowances if the value of their estate is over £ 2 million, and from 5 April 2027, IHT can apply, too.
• Government Moving the Goalposts: The rules on pension taxation change frequently, making long-term planning harder. Whereas for S/EIS, the Labour government has recently extended the S/EIS under its current regulations.
EIS & SEIS: A Smarter Alternative to Pensions?
EIS and SEIS offer high tax rate payers and business owners an additional way to invest tax-efficiently while supporting high-growth UK businesses. Unlike pensions, they allow for;
- Upfront Income Tax Relief—EIS investments offer 30% income tax relief (SEIS: 50%) on the amount invested. If clients have low-income tax bills in the current tax year, they can claim in both the current and previous tax year to maximise the relief claimed. High earners struggling with pension contribution limits can use this to offset tax liabilities in a way that pensions will not allow from 5th April 2027.
- Capital Gains Tax-Free Growth – Returns/ Gains from EIS investments are tax-free (no capital gains are paid on disposal) if held for at least three years – something pensions don’t offer.
- Inheritance Tax (IHT) Relief – Investments in qualifying S/EIS companies apply for Business Relief and, therefore, can be passed on free from inheritance tax after just two years (provided they’re still held at the time of death). However, from 6th April 2026 onwards, if the investor holds more than £1million in Business Relief assets, IHT is reduced to 50% of the amount invested. Given that certain pensions will be subject to IHT, even the 50% relief for clients with large Business Relief assets still provides a strategic advantage for estate planning.
Estate Planning Without the Gifting Headache
One of the biggest concerns large estate owners face when passing on wealth is not knowing how their beneficiaries will handle the money. Previous studies have found that a key reason people hesitate to gift wealth early is the fear that beneficiaries will misuse or squander the funds.
S/EIS solves this problem. Instead of gifting cash with no designated purpose, the cash can be invested in an expertly managed S/EIS portfolio, like the Haatch EIS or SEIS Funds. This keeps assets in a structured, growth-focused vehicle, allowing the beneficiary investment experience and time to decide where to spend potential returns. This allows wealth to be passed down with a purpose without the same loss of control that comes with outright gifting.
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Countering Key Objections
A reason investors may object to S/EIS investing in conjunction with pensions is the level of risk associated with early-stage investments. To help reduce risk, the UK government offers Share Loss Relief, allowing investors to claim some relief on companies that have sold at a partial or total loss (which you can claim against either your income tax or capital gains tax bill). *Please note full capital is still at risk. This can be an attractive offer for investors typically contributing 100% of capital for a potential full loss.
The Haatch SEIS and EIS investment approach aims to reduce risk as a result of the following;
- Haatch is founded by serial entrepreneurs who have successfully scaled and exited multi-million-pound businesses. This experience provides the companies we invest in with invaluable expertise and guidance.
- The companies we invest in are solving a deep pain for wider, more established organisations. Ultimately, we are looking for companies providing a service that other organisations come to rely on.
- Some of our EIS companies are already revenue-generating (allowing long-term predictable contracts to maximise exit opportunities).
- British Business Bank invests alongside our funds in every deal (£10 million), demonstrating confidence in investment decisions at an institutional level.
The Verdict: Should We Be Investing in EIS & SEIS Alongside Pensions?
The reality is that pensions are becoming increasingly restrictive, and for high earners, they may no longer be the most efficient way to grow and protect wealth. While EIS and SEIS do carry higher risk, they also come with substantial taxation and potential growth rewards. So, rather than treating pensions as the only tax-efficient investment vehicle, investors and advisers should start viewing EIS and SEIS as complementary tools for long-term tax planning.
For those frustrated with pension restrictions and looking for alternative ways to invest tax-efficiently while supporting high-growth UK businesses, the question shouldn’t be “why consider S/EIS?” but rather “why wouldn’t you?”
Disclaimer:
This document has been prepared for and is intended for the sole use of the person or firm to whom it is addressed. Any reproduction or distribution, in whole or in part, or the disclosure of the content of this document without prior written consent is prohibited. The tax benefit of EIS & SEIS depends on the individual circumstances of each client and may be subject to change in future. While every effort has been made to ensure the accuracy of the information, recipients are advised to consult the official records and guidance published by HMRC (Her Majesty’s Revenue and Customs) at [https://www.gov.uk/government/organisations/hm-revenue-customs] for the most accurate and up-to-date information regarding tax and related matters. Relying solely on this document may not provide a comprehensive understanding of your obligations.
The material set out in this document should not be construed as solicitation, offer, or recommendation to acquire or dispose of any investment, engage in any transaction or make use of the services of Haatch. There can be no assurance that targeted returns will be realised. An estimate of the potential return from an investment is not a guarantee as to the quality of the investment or a representation as to the adequacy of the methodology for estimating returns. Nothing in this document constitutes investment, account, legal, regulatory, tax or other advice. Recipients should consult their own legal, tax, accounting and financial advisors regarding the economic benefits and risks of the investments or transactions described in this document, and the potential legal, regulatory, credit, tax and account impact of such investments or transactions based upon their individual circumstances.