# Invest in Low Cost Funds Or A Pension



## Minnow2 (12 Jan 2020)

Hi,
My wife has a lump sum to invest and currently has a very small pension and will have no claim to state pension. She recently received redundancy and has a lump sum of ~€100k. She is not working in 2020 so cannot invest in pension or AVCs through payroll tax-free this year. Age 44. 

I always assumed that it makes no sense to invest after-tax income in a pension as you don't receive any tax benefit now, and that ETFs would be the way to go. 

However, the Informed Decisions podcast (https://www.informeddecisions.ie/podcast103-real-returns-invest-in-low-cost-funds-or-a-pension/) suggests that the taxation of ETFs (deemed disposal every 8 years etc, 41% exit tax etc) means that investing in a pension makes more sense even with after-tax income.

Any other take on this would be much appreciated.


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## Techhead (12 Jan 2020)

Unfortunately the Irish tax system is quite penal when it comes to investing outside of a pension. It’s why so many go into property speculation. The 8 year etf tax role up is a farce! I would do a bit of everything. What’s your investment horizon for the 100k? Personally I’d wall off a little of it and invest in a few well known companies with good balance sheets and growth potential using a low cost broker like degiro


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## llgon (12 Jan 2020)

If she expects to have sufficient income in the next few years she could keep the lump sum on deposit and drip feed it with tax relief into a pension  over time. Has she maxed her 2019 relief?


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## irbx (12 Jan 2020)

llgon said:


> If she expects to have sufficient income in the next few years she could keep the lump sum on deposit and drip feed it with tax relief into a pension  over time. Has she maxed her 2019 relief?



Was going to say the same has she maxed her pension relief for 2019 which is 25% of earned income. You can put whole 100k into a pension now and carry forward any unused  relief into future years of income. The money  since in pension wrapper grows tax free.

Just if you have mortgage charging an interest rate of 4%plus might be better paying it down.


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## Minnow2 (12 Jan 2020)

Thanks for replies.



irbx said:


> Was going to say the same has she maxed her pension relief for 2019 which is 25% of earned income.


She is currently not working so has no pension relief. She is going to go back to with part-time only, so unlikely to be earning more than 20k, allowing her to put only 5k per year into the pension.

We have no mortgage or debt.

I wasn't aware of option to carry forward unused tax relief. I'll look further into that.


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## Minnow2 (12 Jan 2020)

Techhead said:


> Personally I’d wall off a little of it and invest in a few well known companies with good balance sheets and growth potential using a low cost broker like degiro



Thanks for reply Techhead. What's your reason for investing directly in shares? Is this due to application of CGT rather than marginal rate tax on ETFs and 8 year rule?


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## Techhead (15 Jan 2020)

Less fees and BS and if you see an upswing in a price you can sell quickly and lock in a gain. Works the other way too though. People like indexes for diversify but in Ireland it’s very hard to invest in broad portfolio of stocks outside of a pension without knowledge. Ireland is very backwards around tax on shares and on investing outside of pension. Very different in the US


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## Younginvestor93 (22 Jan 2021)

Why is everyone so negative towards Etfs on this forum?

A lumpsum invested in an all world etf at a dirt cheap expense ratio of like 0.2, and just leave it there. 41% tax is not the best but you are going to be making some nice returns and you don't have to do a thing, just pay some tax after year 8. Leave the money there for 20/30 years, what is going to be better than that?  Investments trusts with high fees that may or may not outperform the etf? Individual stock picking? Life insurance funds charging you a 1% levy and high fees just do do your taxes? 

I don't think so.
Do it yourself in degiro and pay yourself the bonus 50k or more you save for your efforts!


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## RedOnion (22 Jan 2021)

Younginvestor93 said:


> Do it yourself in degiro and pay yourself the bonus 50k or more you save for your efforts!


Save 50k??!
How big is this lump sum that you're investing?


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## Younginvestor93 (22 Jan 2021)

RedOnion said:


> Save 50k??!
> How big is this lump sum that you're investing?


Investing in etfs through degiro yourself for 30 years vs investing through a life insurance company, there should easily be a 50k or more diff in favour of the etfs after 30 years.


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## Protocol (22 Jan 2021)

Minnow2 said:


> Hi,
> My wife has a lump sum to invest and currently has a very small pension and will have no claim to state pension. She recently received redundancy and has a lump sum of ~€100k. She is not working in 2020 so cannot invest in pension or AVCs through payroll tax-free this year. Age 44.



If she has been working, and will work, why won't she get a State Pension?


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## NoRegretsCoyote (23 Jan 2021)

Edit: hadn't read subsequent posts.


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## RedOnion (23 Jan 2021)

Younginvestor93 said:


> Investing in etfs through degiro yourself for 30 years vs investing through a life insurance company, there should easily be a 50k or more diff in favour of the etfs after 30 years.


Sorry, you posted to do many threads yesterday about how amazing ETFs are, that I missed the fact this was a specific case.

Can you explain why investing in ETFs in a good idea for a low rate tax payer, as is the case here?

And nobody mentioned Life company investment, except you.

Both are the wrong answer in my opinion.


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## Younginvestor93 (23 Jan 2021)

RedOnion said:


> Sorry, you posted to do many threads yesterday about how amazing ETFs are, that I missed the fact this was a specific case.
> 
> Can you explain why investing in ETFs in a good idea for a low rate tax payer, as is the case here?
> 
> ...


Investing in Etfs through Degiro is going to give you low fees so you immediately are better off than any managed life company investments.

It probably when you run the figures wont beat the pension but it will get close. Pension contributions give you 20% tax relief on the way in but you are only just deferring it until later. The management charge will be bigger later on than the 20% tax savings you make at the start. What the pension does have is the tax free growth which will be a big help in growing your fund. 

The figures are complex and I have not run them perfectly but I think the pension wins slightly but the government can dip in with a levy, increase age you can take out the pension. You also don't have access until 60 where as a self directed ETF portfolio outside a pension, you do have access to and you could use some funds for a buy to let or other investment or take them out early if you want to retire at 45 for example.

Thats the case for ETF's outside a pensiom wrapper. If both are wrong, what is your suggestion?


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## RedOnion (23 Jan 2021)

Younginvestor93 said:


> The figures are complex and I have not run them perfectly but I think the pension wins slightly


It's certainly the first time I heard that tax relieved pension pot 'wins slightly' over investment outside a pension!

You've obviously run the calculations with some strange assumptions if that's where you've landed. I'd love to see your calculations whenever you're ready to share them.

Just remember EFT is not always the answer to every question. In the case of a low rate rate payer, dividends at 20% and CGT at 33% on sale makes a lot more sense than 41% on everything every 8 years.


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## Younginvestor93 (23 Jan 2021)

RedOnion said:


> Just remember EFT is not always the answer to every question. In the case of a low rate rate payer, dividends at 20% and CGT at 33% on sale makes a lot more sense than 41% on everything every 8 years.


Thanks RedOnion, that is actually a very interesting thought. So you are saying that for an investment vehicle outside a pension, investment trusts paying dividends may be more beneficial than Etfs especially if you are in the lower tax band of 20%. Although accumulating Etfs automatically reinvest the dividends which is a benefit to the money compounding. 

Then you also have active vs passive, and we know passive wins in the long run. Fees in managed funds also are crippling.

Can you elaborate on your understanding of how an investment trust with higher fees can compete with an accumulating etf with a TER of 0.15 for example?


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## RedOnion (23 Jan 2021)

Younginvestor93 said:


> Can you elaborate on your understanding of how an investment trust with higher fees can compete with an accumulating etf with a TER of 0.15 for example?


Have you run the numbers in it?

Because an IT has a small amount of gearing. Over a long investment period it should cancel out the higher charges. It's all down to how efficiently the IT is run, the premium / discount from NAV, and how well it tracks the benchmark.

My key point is that "invest it in an ETF" is not the correct answer to every question. There are other possible answers.



Younginvestor93 said:


> Although accumulating Etfs automatically reinvest the dividends which is a benefit to the money compounding


There's nothing to prevent you reinvesting the net dividends and getting a benefit of compounding.


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## Younginvestor93 (23 Jan 2021)

RedOnion said:


> Have you run the numbers in it?
> 
> Because an IT has a small amount of gearing. Over a long investment period it should cancel out the higher charges. It's all down to how efficiently the IT is run, the premium / discount from NAV, and how well it tracks the benchmark.


I have not run the numbers on it. Paddy Delaney from informeddecisions has however in one of his blogs.

informeddecisions.ie/taxation-of-investment-trusts-versus-ucits-blog-160

He says how exit tax regime will win out in the long run as the bottom line is a differential in fees of say 1% or more will erode more of the benefits of being taxed at 33% as opposed to 41% tax. Also his example refers to fees of 1% for etfs but in actual fact that can be got for as low as 0.15 percent or lower if needed.

Do you disagree with the above calculations?


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## RedOnion (23 Jan 2021)

Younginvestor93 said:


> Do you disagree with the above calculations?


I haven't bothered checking the calculations, but it's not really relevant to the scenario.

There's no mention of dividends in that blog post. Go factor those in for a low rate tax payer, which was the scenario I mentioned, come back with the calculations, and then we can have an intelligent conversation.

By the way, if there's a lower TER in the ETF, then the lower the CAGR, the better chance of exit tax winning out. A higher return, and the IT wins.

A large, efficient IT doesn't have a TER anywhere near 2.1%.

You still haven't done back on your assertion that a pension "wins slightly" over an ETF. Don't pick and choose which parts you want to answer if you want an intelligent discussion.


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## Younginvestor93 (23 Jan 2021)

RedOnion said:


> I haven't bothered checking the calculations, but it's not really relevant to the scenario.
> 
> By the way, if there's a lower TER in the ETF, then the lower the CAGR, the better chance of exit tax winning out. A higher return, and the IT wins.
> 
> ...


I wouldn't be an expert on the calculations and breaking it down exactly.

The management fees of the IT's are high though vs ETFs and we also know that passive investing beats active investing over the long run.

Pension definitely wins over outside pension investments at 40% tax rate and I think at 20% tax considering we are talking about a good pension with total fees of 1% or less but its tighter than at 40%. If pension fees are much higher and you get like 95% allocation rate it can change things.

But it may not be only about the total. If you want to be FI by 45, some people may like having access to their money instead of it being locked away even if locking it away means a larger amount when you can access it.


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## RedOnion (23 Jan 2021)

Younginvestor93 said:


> But it may not be only about the total. If you want to be FI by 45,


We're talking about a lower rate tax payer here. How many will be 'FI' by 45? Plus, you can access pension early once you've left employment.



Younginvestor93 said:


> Pension definitely wins over outside pension investments at 40% tax rate and I think at 20% tax considering we are talking about a good pension with total fees of 1% or less but its tighter than at 40%. If pension fees are much higher and you get like 95% allocation rate it can change things.


Repeating the same thing over and over doesn't make it true.
Do the maths and show the numbers.


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## Gordon Gekko (23 Jan 2021)

Younginvestor93 said:


> I have not run the numbers on it. Paddy Delaney from informeddecisions has however in one of his blogs.
> 
> informeddecisions.ie/taxation-of-investment-trusts-versus-ucits-blog-160
> 
> ...



What wonderful analysis...he just makes up a fee differential to support his argument 

And, as has been pointed out a couple of times, Investment Trusts often apply a small amount of leverage which reduces the impact of the fee.

I’m pretty disappointed with the Investment Trust that I hold to be honest. They charge a whopping 0.3% per annum and it only increased in value by circa 95% last year.


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## Younginvestor93 (23 Jan 2021)

Gordon Gekko said:


> What wonderful analysis...he just makes up a fee differential to support his argument
> 
> And, as has been pointed out a couple of times, Investment Trusts often apply a small amount of leverage which reduces the impact of the fee.
> 
> I’m pretty disappointed with the Investment Trust that I hold to be honest. They charge a whopping 0.3% per annum and it only increased in value by circa 95% last year.


What investment trust is that?

0.3% is the absolute total charge of all fees of the investment trust? 
Now thats comparable to say a 0.2% Degiro for an IWDA accumulating ETF?

I thought it is common investing knowledge that managed funds don't beat the market over the long run?

Also, I thought investment trusts have high fees, managing fees, ongoing costs fees and maybe more?

Maybe unlike the rest of Europe and US, there is another option to compete with the passive ETF way!


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## RedOnion (23 Jan 2021)

Younginvestor93 said:


> Do you disagree with the above calculations?


By the way, I reran the calculations, and in my opinion they are slightly misleading.

Apart from the fee differential, there is an assumption that the exit tax at year 8 is paid without selling any units of the ETF. On a 1m investment, that might not be realistic.

Let's say it is.  Then for a 'like for like' comparison, the 293k cashflow in the ETF scenario to pay tax should also be included as being invested at the same time in the Investment Trust scenario. 

Using fees of 1% for IT, and 0.2% for ETF, and a smooth 6% gross annual return, the IT wins out over longer holding periods, because of the impacts of exit tax.


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## Younginvestor93 (23 Jan 2021)

RedOnion said:


> By the way, I reran the calculations, and in my opinion they are slightly misleading.
> 
> Apart from the fee differential, there is an assumption that the exit tax at year 8 is paid without selling any units of the ETF. On a 1m investment, that might not be realistic.
> 
> ...


Ok, sounds like you have looked at the figures.
Maybe they are a competitor to Etfs or even better than etfs. But isnt there no guarantee which trust will beat the markets or return the same as the index and because they are actively managed, they wont beat the markets over the long term?


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