Discussion in 'Investments' started by gnf_ireland, Jan 6, 2017.
I assume the Government's 1% levy is applied to all premiums, in addition to whatever commission your broker charges, the fund's AMC and whatever other undisclosed costs on top of the AMC are applied by Zurich.
If you do somehow manage to generate a positive return after all those costs, the Government will happily take 41% of the upside!
Can't see the attraction myself.
@Sarenco Ok, I fully accept this is not a 'cheap' option. But what are the alternatives.
Lets assume a couple have been good with their finances and are in a very decent position. The couple both have good PAYE jobs (100k plus each), no kids, mortgage paid or on very low tracker and live a very good lifestyle. They max their pension contributions, but still have 20 years to retire. Between them they are in a position to conservatively save 2k a month after all of that, including the annual shopping tip to NYC. They already carry a sizeable emergency fund on deposit (this situation is not me personally!)
Their options for saving/investing are:
1. Put the money into a multiple regular savers @3% (max) before DIRT @40% in 2017. At the end of the year they have another 24k in the pot.
2. Invest it into something that may pay a better return. There are funds out there with an annualised return over 10 years in excess of 8%. Take off the 1% AMC, and you are still left with 7%. I accept Exit Tax at 41% is a pain, but it still leaves a 4% return after all charges and taxes
3. Balance between the two, and save up the funds for 6 months/1 year and then do a once off purchase of a ETF with much reduced costs - but also have the Exit Tax issue
4. Put 1k into deposits and 1k into investments each month and offset the risk in some way
I agree though, the charges and taxation environment do not make this a 'cheap' option, but what are the genuine alternatives for people with spare cash that are looking to make it work in the medium/long term?
This is where something like an ISA would be so attractive for people in this position - but sadly I cannot see it coming in the short term. Although the payments in are after tax, at least the returns are not taxed. I think a Junior ISA would be a major step forward to getting people to save for the future, or even a Mortgage Saver ISA etc
Well, in that scenario I would apply any monies in the following order:-
Continue to max out all pension contributions (that could be as much as €57,500pa, assuming the couple are both in their 40s) and invest all contributions in global equity index funds;
Pay down any remaining mortgage debt (including any mortgage on a tracker rate); and
Purchase 5-year State Savings Certificates on a rolling basis up to the maximum allowed for a couple (€240k per issue).
The fact that some funds had a particular return in the past is not predictive of future returns.
It's important to consider your asset allocation accross all accounts (pension and otherwise) taken together.
An Irish ISA would be wonderful but I can't see it happening any time soon.
Sarenco I am with you up to a point but I would suggest the following qualifications.
Yes for the time being max out your pension contributions but keep an eye on the math. A time will come when each extra contribution is effectively funding pension which will be taxed at the marginal rate so you will be getting 41% tax relief on the way in but paying 52% tax on the way out - time to stop. (remember to allow for the OAP in determining when you cross the line to the highest marginal rate.)
5 year savings certs yield .98% p.a. tax free over 5 years but if you cash out even after 4 years this reduces to .47% p.a. I think we can expect interest rates to rise over the next few years. Prize Bonds yielding .85% tax free is the more flexible option and these can be bought up to a joint max of €500K.
This is beyond the scope of the 'exposure to equities' question but, in my opinion, a couple that is at such a good position financially might want to get some exposure in cryptocurrencies and physically owing precious metals
So in essence both @Duke of Marmalade and @Sarenco you are saying that there is no scenario where you would recommend someone holding funds or equities outside a pension structure and should be on State deposit only?
The annualised growth for the S&P 500 index over the last 40 years was 12.2%; 5 years was 14.94%; 10 years was 8.65%; 20 years was 9.27%
Even accounting for 3% in costs and divergence from the fund, this shows the capability of earning in excess of 5% in return. Factor in tax at 40%, you still have a return of 3% after tax (I appreciate State savings are 'risk free').
I appreciate the tax environment is poor here, but surely some personal exposure to equities is not a bad thing?
gnf I am wary of past performance. Not saying your facts are wrong but there is a big reason to believe as never before that the past is not a guide to the future. And that big reason is inflation. According to Rory Gillen the average house price in Ireland in 1970 was €7K.
I also remember when 10% p.a. after tax was the accepted norm for state savings. In any case in another thread it is hown that the apparent stellar growth of the S&P over the last 20 years actually translates to a very modest return after tax and charges when one does the sums for regular investment.
So to summarise your concern - it is around the impacts of regular investments rather than the funds/equities themselves, or have I missed your point ?
No, it was pointed out that the S&P had done very well 1995 to date, but on doing the sums for a reguar contribution things were not at all so rosey. Not that regular investment is bad but that the returns over the last 20 years averaged by year of investment are not at all impressive. So what it all points to is that the experience of equities in the new millenium has not been a happy one. Forget the 20th century.
@Duke of Marmalade
Ok, I get you now. I accept the return on since 2000 has been much more volatile than previously and this obviously impacts the return more
I wouldn't go that far!
I was simply suggesting the approach that I would take if I was in the fortunate position of your hypothetical couple.
Bear in mind that this couple already has a significant exposure to equities if they have been maxing out their pension contributions and have invested 100% of those contributions in global equity funds. I am suggesting that they continue with this approach as regards their (before-tax) retirement savings but start to invest their (after-tax) savings in safe, tax-free, State savings products once they have cleared their mortgage debt.
Once the State starts deducting 1% from all contributions and 41% from any positive returns from an investment product, the odds of coming out ahead with that product lengthen dramatically.
My main point, however, is that your hypothetical couple has no need to take any further equity risk with their after-tax savings (whatever about their willingness or ability to do so). Why take more risk with your money then you absolutely need to in order to reach your financial goals?
Like a lot of people, the financial position a couple like that are in is based purely on their continued income. If they wanted to retire earlier, take a sabbatical, or slow down earlier, they need financial means to do so. We have seen a few people comment on here regarding high income/high spending patterns.
If I was in the position to gain financial freedom at 55 (for example), I would serious consider having an extended 2-3 year sabbatical and enjoy the world.
I guess the point I am trying to make is should people who can afford to take risks continue to do so in order to achieve financial freedom earlier. I 100% once financial freedom has been reached that is a different matter.
Sadly I am not in the position of that hypothetical couple, but I can envisage a position relatively shortly where mortgage is effectively cleared, reasonable emergency fund exists and a level of savings exist towards the longer term. However, with two young kids we would be no where close to financial freedom, but would like to target it around the age of 60 (~20 years time). With funds available for savings/investments, the question is where should these go. The clear recommendation from here appears to be State Savings, and completely understand why you are saying this !
The allocation rate on the InvestAndSave product is 101% on all contributions over the life of the contract, provided you Invest €5,000 and Save €100pm (minimums) at outset. I just wanted to clarify that in relation to the Levy.
That's the standard rate that available to all in the market. Advisor commission of 10% is included in the charging structure.
According to the standard product guide, there are 18 commission structures available to all in the market. Of these, only 6 have an allocation on 101% and only 1 of these has an AMC of 1%.
The standard product has a minimum SP of €7,500.
But, more significantly, the standard product has early surrender penalties, varying from 5% to 1% depending on which structure is sold, and these apply to full or partial encashments. The InvestAndSave product does not have any surrender charges.
And therein lies a rather intractable contradiction at the heart of the investment decision. Those who can afford to take risk don't need to and those who need to take risk can't afford to.
Put more graphically. A choice to invest in state savings will say guarantee you lifestyle (2) in retirement. Investing in equities gives a good chance of the somewhat higher lifestyle (3) but at the risk of the lower lifestyle (1). What 1,2, and 3 are will vary by individual and indeed the utility put on the same 1,2 and 3 will also be personal. For the hypothetical couple lifestyle (2) seems eminently acceptable so why risk dropping to (1) just for the chance of (3). For the more average punter (2) is probably not very aspirational, she might prefer to risk the even worse prospects of (1) to at least have the hope (indeed expectation) of (3).
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