Zurich managed fund v State savings

H

hgf

Registered User
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Complete newbie to any kind of investing but have done a bit of reading.
Considering putting €50k away for 10 years. Have been in prize bonds for few yrs losing value.
Was about to invest in Zurich Prisma 5 bonds
Today I see State Savings are offering new 10 Year National Solidarity Bond return rates of 22% from October (tax free)
Obviously I know there is risk with Investing versus State bonds being guaranteed so I want to check I am understanding the bond investment correctly.

Prisma 5 has a level 6 risk but shows a cumulative performance 5 year return of "49.7%".

Please excuse my ignorance or innocence, but want to be sure I am not missing something:
Does this mean if I had invested €50k 5 years ago this fund would not have increased in value by 50% minus 41% tax = making it now worth €64,662 ?
(€50k + €24,850 minus €10,188 tax).
Comparitively an investment in the new 10 Year National Solidarity Bond would be worth €61,000 (€50k plus 22% tax free)

I know I am using past figures for the investment fund and these are not guaranteed but in theory am I correct in comparing my possible fund value in 10 years time being
€64K v €61K
Would really appreciate extra eyes on my basic calculations and early understandings, so can make an informed choice.
Thank you
 
hgf said:
am I correct in comparing my possible fund value in 10 years time being
€64K v €61K
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Your State Savings figure of €61k is accurate.

Your forecasted return on the Zurich Fund is not.

The 49.7% is the cumulative performance of the Zurich fund over 5 years, not 10.

If you wish to compare like-with-like (i.e. determine what the fund value of both investment options is like after 10 years), you will need to allow for another 5 years of returns on the Zurich Fund in order to compare with the total return on the 10-yr State Savings option.

The Zurich Fund has had an annualised performance of 8.4%. The cumulative performance of this rate of return over 5 years is 49.7%*.

Assuming this rate of return was to continue, the forecasted cumulative return after 10 years would be 124%**

Therefore, the fund value of the Zurich Fund after 10 years (ignoring taxes etc.) would be €112k*** approx.

So, in this scenario, the fund values (before tax) of both options after 10 years is:

State Savings €61k
Zurich Fund €112k

Tax will obviously knock a chunk off the Zurich Fund but the above is just to establish the principle of making sure returns are put on the same footing.

* (1 + 0.084)^5 - 1 = 49.7%
** (1 + 0.084)^10 - 1 = 124%
*** €50,000 x (1 + 0.084)^10 = €112,000
 
In terms of risk/reward you are really comparing apples with oranges here when comparing a unit linked fund with state savings.

If you have don't own your own home, the mortgage isn't down to a comfortable level, you have other debts or you lack adequate pension cover then you should look at these before a 10 year non pension investment.
 
ClubMan said:
In terms of risk/reward you are really comparing apples with oranges here when comparing a unit linked fund with state savings.
Click to expand...

The OP knows that:

hgf said:
Obviously I know there is risk with Investing versus State bonds being guaranteed so I want to check I am understanding the bond investment correctly.
Click to expand...

The OP is quite rightly asking the question "what am I missing here" because if their numbers were correct they would quite rightly conclude that it would be madness to invest in the risky product.
 
ClubMan said:
In terms of risk/reward you are really comparing apples with oranges here when comparing a unit linked fund with state savings.

If you have don't own your own home, the mortgage isn't down to a comfortable level, you have other debts or you lack adequate pension cover then you should look at these before a 10 year non pension investment.
Click to expand...
Mortgage free and zero debt. Pension is a good public sector pension and already have a top up AVC in place. Thank you for your reply
 
AAAContributor said:
Your State Savings figure of €61k is accurate.

Your forecasted return on the Zurich Fund is not.

The 49.7% is the cumulative performance of the Zurich fund over 5 years, not 10.

If you wish to compare like-with-like (i.e. determine what the fund value of both investment options is like after 10 years), you will need to allow for another 5 years of returns on the Zurich Fund in order to compare with the total return on the 10-yr State Savings option.

The Zurich Fund has had an annualised performance of 8.4%. The cumulative performance of this rate of return over 5 years is 49.7%*.

Assuming this rate of return was to continue, the forecasted cumulative return after 10 years would be 124%**

Therefore, the fund value of the Zurich Fund after 10 years (ignoring taxes etc.) would be €112k*** approx.

So, in this scenario, the fund values (before tax) of both options after 10 years is:

State Savings €61k
Zurich Fund €112k

Tax will obviously knock a chunk off the Zurich Fund but the above is just to establish the principle of making sure returns are put on the same footing.

* (1 + 0.084)^5 - 1 = 49.7%
** (1 + 0.084)^10 - 1 = 124%
*** €50,000 x (1 + 0.084)^10 = €112,000
Click to expand...
I don't know how I didn't notice that ! (Long week haha)
Thank you so much....this makes is PLAINLY obvious to me what I need to do
 
Forget entirely what this fund or any fund did in the past. What it will achieve in the future is a "gamble" which Irish Life well illustrates below. (Irish Life, Zurich Life...they're all the same ex ante except for maybe their charges.)
They illustrate for their MAP 4 that "very bad" would be 5% p.a. loss over 7 years and "very good" would be 11% p.a. gain. Knocking off extra product charges that is a range from c.6% p.a. loss to 10% p.a. gain. Now 41% tax applies to the gain but there is no tax relief for the loss. So a bit of math shows this is an almost symmetrical range from 6% p.a. loss to 6.5% p.a. gain. Personally, I can't understand why anybody wants to roll those dice. State Savings are a disgraceful rip off versus their UK counterparts but they are a "no brainer" superior to your typical unit linked investment.
1693751297104.png
 
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Duke of Marmalade said:
Forget entirely what this fund or any fund did in the past. What it will achieve in the future is a "gamble" which Irish Life well illustrates below. (Irish Life, Zurich Life...they're all the same ex ante except for maybe their charges.)
They illustrate for their MAP 4 that "very bad" would be 5% p.a. loss over 7 years and "very good" would be 11% p.a. gain. Knocking off extra product charges that is a range from c.6% p.a. loss to 10% p.a. gain. Now 41% tax applies to the gain but there is no tax relief for the loss. So a bit of math shows this is an almost symmetrical range from 6% p.a. loss to 6.5% p.a. gain. Personally, I can't understand why anybody wants to roll those dice. State Savings are a disgraceful rip off versus their UK counterparts but they are a "no brainer" superior to your typical unit linked investment.
View attachment 7863
Click to expand...
What is ending of the story on the example Maps 4 3% ?
 
Duke of Marmalade said:
Forget entirely what this fund or any fund did in the past. What it will achieve in the future is a "gamble" which Irish Life well illustrates below. (Irish Life, Zurich Life...they're all the same ex ante except for maybe their charges.)
They illustrate for their MAP 4 that "very bad" would be 5% p.a. loss over 7 years and "very good" would be 11% p.a. gain. Knocking off extra product charges that is a range from c.6% p.a. loss to 10% p.a. gain. Now 41% tax applies to the gain but there is no tax relief for the loss. So a bit of math shows this is an almost symmetrical range from 6% p.a. loss to 6.5% p.a. gain. Personally, I can't understand why anybody wants to roll those dice. State Savings are a disgraceful rip off versus their UK counterparts but they are a "no brainer" superior to your typical unit linked investment.
View attachment 7863
Click to expand...

Speculating is a gamble but investing really isn’t.

If people didn’t reliably earn a return from capital markets over time the whole system would have collapsed.

In the short term investment returns are highly variable but longer term returns are more predictable.Focusing too much on the short term variability is what prevents many people from investing in the first place and earning the additional return which is theirs for the taking as compensation for taking risk and from putting their money to work in capital markets rather than leaving it to rot in cash.

Working out expected returns

The yield to maturity predicts over 90% of the expected return of a bond fund over the subsequent 10 years.

Bond yields are around 3% for Irish bonds (see other posts) but around 5% from “dull” global bonds (about the same return net of tax) and 7 to 8% from Emerging Market and high yield bonds currently.

in equity markets the inverse of a price earnings ratio is the earnings yield and the expected return on equities into the future. So a price earnings ratio of 14 implies an earnings yield of over 7%pa for example.

The price earnings ratio of the FTSE all world is currently around 17 which isn’t dirt cheap but not really expensive either.

So, starting valuations do matter for future expected returns.

The asset allocation between stocks and bonds determines your expected gross return so a “balanced” 50 50 portfolio will be an equally weighted average of your bond and stock return.

So let’s assume your expected return now is about 6%pa from a balanced portfolio.

Knock off costs of circa 1%pa from your gross return and you get 5%pa gross. Net of exit tax that’s 2.95%pa or 3.3%pa for capital gains tax and the best state savings rate is currently 2.05% for the 10 year.

So that’s about a 1%pa expected premium over the highest state savings rate currently over the next decade.

Weekly, monthly and even year to year volatility isn’t risk over a 10 year period. Risk over that time period is that inflation averages 3%pa and you lose money in state savings but keep your head at least on the waterline if not above it from an investment.

Dial up the risk you have a higher expected return dial it down your expectations should be lower.

So the most important part of this puzzle is actually picking the right asset allocation for YOU. Not picking some off the shelf interpretation of the right asset allocation.

These expectations hold true under all conditions and for all time periods you are just more likely to meet the expectation the longer the period of investment.
 
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Marc said:
Speculating is a gamble but investing really isn’t..
Click to expand...
You're missing my point.:(
Irish Life highlighted their MAP 4 over its recommended 7 year investment period.
It showed a range from 5% p.a. loss to 11% p.a. gain (before product charges and tax). This is indeed what characterises an investment over a gamble - the infamous Equity Risk Premium. The ERP is determined in the wholesale markets where tax acts symmetrically.
But, here is the crucial point. the Exit Tax regime is totally asymmetrical. After product charges and Exit Tax the range becomes 6% p.a. loss to 6.5% p.a. gain. There are very few for whom this would be a satisfactory ERP, ergo it is pure gamble.
The Central Bank are currently banging on about people languishing in Cash Funds but don't see the elephant in the room which is that unit linked investment with 41% exit tax makes no sense to anybody.
 
Duke of Marmalade said:
You're missing my point.
Irish Life highlighted their MAP 4 over its recommended 7 year investment period.
It showed a range from 5% p.a. loss to 11% p.a. gain (before product charges and tax). This is indeed what characterises an investment over a gamble - the infamous Equity Risk Premium. The ERP is determined in the wholesale markets where tax acts symmetrically.
But, here is the crucial point. the Exit Tax regime is totally asymmetrical. After product charges and Exit Tax the range becomes 6% p.a. loss to 6.5% p.a. gain. There are very few for whom this would be a satisfactory ERP, ergo it is pure gamble.
The Central Bank are currently banging on about people languishing in Cash Funds but don't see the elephant in the room which is that unit linked investment with 41% exit tax makes no sense to anybody.
Click to expand...
Ok .I did miss your point.

We are in agreement that exit tax is a disincentive to invest.

That’s why we generally recommend portfolios which are subject to general tax principles (income tax and CGT) rather than exit tax as income is taxed at typically marginal rates of low 20s and CGT at 33% or zero on death.
 
Sorry so what your saying is that where an individual has shares /investment trusts, when they die these are not subject to CGT etc, whereas if they have investment funds with life companies these are subject to 41per cent exit tax when they die, prior to any inheritance taxes for the beneficiaries?
 
@dublinwoman72

This (page 6) might answer the question you're asking?

Credit against Inheritance Tax

Where Exit Tax is payable as a result of a claim on the death of a life assured, the amount of Exit Tax may be offset againstany Inheritance Tax liability arising for the beneficiary of the plan on the plan proceeds.

It is important to note that the beneficiaries Inheritance Tax liability is calculated based on the value of the plan before ExitTax was deducted.


Gerard

www.bond.ie
 
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