Is the 41% Exit Tax Soon to be Scrapped? Michael McGrath to Review

[GSheehy]

@Duke of Marmalade

What if your choice is 100% /0.75% with company A or 101% / 0.75% with Company B?

You wouldn't buy a 100% allocation with 0.75% AMC if a 101% allocation with 0.75% AMC was available.

Government introduce levy. Providers don't increase their 0.75% AMC. Take the 1% from the punter and pay it to Government.

Time passes and provider says we'll still keep the 0.75% AMC but we'll give you 101% to cover the cost of the levy. That's a hit on the provider bottom line and a benefit to the punter, no?

How would you explain the negative provider costs in year one on the actuarial disclosure of a 101% contract as opposed to a +'ve figure on a 100% contract? All other assumptions on premium/AMC being equal.

If the levy was removed by Government, the Life Assurers would have very little argument against reducing their AMCs by circa 0.15% if they're now giving 101% on a product. I wouldn't mind being able to offer a lump sum life assurance investment with 100% allocation and 0.5% AMC (for €5K/€10k +).

 

[Duke of Marmalade]

@Duke of Marmalade

What if your choice is 100% /0.75% with company A or 101% / 0.75% with Company B?

You wouldn't buy a 100% allocation with 0.75% AMC if a 101% allocation with 0.75% AMC was available.

Government introduce levy. Providers don't increase their 0.75% AMC. Take the 1% from the punter and pay it to Government.

Time passes and provider says we'll still keep the 0.75% AMC but we'll give you 101% to cover the cost of the levy. That's a hit on the provider bottom line and a benefit to the punter, no?

How would you explain the negative provider costs in year one on the actuarial disclosure of a 101% contract as opposed to a +'ve figure on a 100% contract? All other assumptions on premium/AMC being equal.

If the levy was removed by Government, the Life Assurers would have very little argument against reducing their AMCs by circa 0.15% if they're now giving 101% on a product. I wouldn't mind being able to offer a lump sum life assurance investment with 100% allocation and 0.5% AMC (for €5K/€10k +).

Gerard, this is a bit of a rabbit hole. In your example, Company B is clearly offering a better deal than Company A. Historically this may have arisen as you describe it and Company B might see it as it paying the levy. The illusion is for the punter to think the levy therefore doesn't apply to them, but if the levy wasn't there Company B could obviously continue to give a 101% allocation with no change to its bottom line but 1% more to the punter.
As a marketing message it is fine but should not create the impression that the levy does not impact Company B's product offering.

I am surprised at the negative costs after 1 year in the KID, can you attach an example.

Didn't understand your last paragraph.

 

[GSheehy]

It's not a rabbit hole at all.

The punter knows the Levy applies to them.

It's deducted from their premium and paid to Government. Meaning that, with a 100% allocation contract, only 99% of their premium is invested to buy units at the ruling bid price. And, with a 101% allocation contract that 100% of their premium is invested to buy units at the ruling bid price.

Where's the illusion in that?

Now, if the levy was removed in the future and say the punter had a 101% regular savings contract, 101% of their premium would be used to buy units at the ruling bid price.

Not sure if you're confusing this with the illusion (on say pension products) where punter has the choice of( or is being sold) a 103% allocation with 0.75% AMC or a 100% allocation with 0.60% and he may think the 103% is better because the 'extra' is being added upfront but doesn't understand the way it's clawed back. Punter pay here in the long term.

Never said the negative costs came from a generic KID. All savings/investment products get a full actuarially calculated disclosure document on total costs and taxes based on a predefined growth rate, specific to their premiums. The negative costs (to the provider) in year one are there in black and white. Surely the actuaries aren't wrong.

 

[GSheehy]

Ah yes, from deposit accounts to start ups. The logical next move, and nothing could possibly go wrong

He's not alone in the general EU thinking/direction on this.

If you have a read of the latest publication from The European Insurance and Occupational Pensions Authority (EIOPA) you'll see reference to taking money off deposit accounts to "....supply vital capital to finance the long-term growth of the EU’s real economy, as well as the green and digital transitions." via the Pan European Pension Product (PEPP), or savings scheme by another name.

 

[Duke of Marmalade]

It's not a rabbit hole at all.

The punter knows the Levy applies to them.

It's deducted from their premium and paid to Government. Meaning that, with a 100% allocation contract, only 99% of their premium is invested to buy units at the ruling bid price. And, with a 101% allocation contract that 100% of their premium is invested to buy units at the ruling bid price.

Where's the illusion in that?

Now, if the levy was removed in the future and say the punter had a 101% regular savings contract, 101% of their premium would be used to buy units at the ruling bid price.

Not sure if you're confusing this with the illusion (on say pension products) where punter has the choice of( or is being sold) a 103% allocation with 0.75% AMC or a 100% allocation with 0.60% and he may think the 103% is better because the 'extra' is being added upfront but doesn't understand the way it's clawed back. Punter pay here in the long term.

Never said the negative costs came from a generic KID. All savings/investment products get a full actuarially calculated disclosure document on total costs and taxes based on a predefined growth rate, specific to their premiums. The negative costs (to the provider) in year one are there in black and white. Surely the actuaries aren't wrong.

Oh dear! The illusion is that the punter thinks the levy hasn't affected their deal. It has. If there was no levy they would have 101% allocation all to themselves. The 101% allocation should be seen in the context of overall charges when comparing products and punters should avoid the "illusion" that they suffer a levy with Company A but they do not with Company B. Let's leave it at that. I am responsible for the rabbit hole.
The reason that I am surprised with the negative costs is that it suggests there is no deduction on early encashment, but let's drop that as well.

 

[GSheehy]

Sigh!!.

Faced with the dilemma of having 99% or 100% of my money invested from day one I'd choose 100% every time. And, I wouldn't be under any illusion about it.

If there was no Govermnent Levy, I doubt very much that you'd be getting 101% allocation from a provider unless it was accompanied by a higher AMC, probably exit charges, and used by some to veil initial commission.

Shocker!! Investment/Savings product pricing has moved on since the old days. Many providers have offerings without early exits. Some better value than others because 100% of all monies are invested to buy units in the fund, not 99%.

 

[Gordon Gekko]

The reason people moan about it, is because it is a stupid tax. Stupidly designed and Stupidly implemented.
The difference in tax take for the Revenue is tiny but the difference for the punter is massive.

If you invest 100K for 20 years (Assuming 0% dividends a year and 7% capital gains - net of all charges) the Revenue collects an extra €2,498 in tax for the 41% Exit Tax fund over the 33% CGT Fund.
But the Investor will end up with €52,399 less.

Is that good tax policy? Is that smart?

If you invest 100K for 20 years (Assuming 0% dividends a year and 7% capital gains - net of all charges)
Fund Balance (after Tax) at 20 years:

1. Exit Tax Fund – €239,870
2. CGT fund – €292,269

Total Tax Paid After 20 years:

1. Exit Tax Fund – €97,198 (at 41% at 3 occasions, year 8, 16 and 20)
2. CGT fund – €94,700 (at 33% once at year 20).

My main issue with the above example is that it’s completely skewed by the entire return being in the form of capital gains.

41% is usually better than 52% income tax for investors, and dividends leak tax every year versus on the 8th anniversary.

 

[Duke of Marmalade]

Why so tetchy?

Faced with the dilemma of having 99% or 100% of my money invested from day one I'd choose 100% every time. And, I wouldn't be under any illusion about it.

Yes I would prefer that charging structure myself and if, as you say, there are no exit charges, well yes that is a genuine and non illusory differentiation over conventional charging structures. But, I repeat the 1% levy has not disappeared and remains an effective charge on the punter, just as the almost invisible 2% betting levy is a charge on punters' bets.

If there was no Govermnent Levy, I doubt very much that you'd be getting 101% allocation from a provider unless it was accompanied by a higher AMC, probably exit charges, and used by some to veil initial commission.

And I doubt it even if there is a Government Levy. This is all about relativity between charging structures and they all suffer from the fact that there is a 1% levy. The first sod that I dug in this rabbit hole was "101% allocation paying for the levy is meaningless unless seen in the entirety of the charging structure".

Shocker!! Investment/Savings product pricing has moved on since the old days. Many providers have offerings without early exits. Some better value than others because 100% of all monies are invested to buy units in the fund, not 99%.

Ah, the good old days Yes, like Thomas before me, I would like to see a generic KID or even a life assurance disclosure which shows this.

 

[AJAM]

My main issue with the above example is that it’s completely skewed by the entire return being in the form of capital gains.

41% is usually better than 52% income tax for investors, and dividends leak tax every year versus on the 8th anniversary.

You can easily choose your investments to match your tax preferences.
Here are 3 example of 0% dividend investments
Stock: BRK.B
ETF: iShares Core S&P 500 UCITS ETF USD (Acc)
Fund: Edinburgh Worldwide Investment Trust

The 52% income tax for dividends is actually outrageous, and is the reason that all of my personal investment picks, avoid dividends like the plague.

This is another example of the government being really stupid on how they have setup the taxation system for investments. People follow incentives. If you tax dividends higher than Capital Gains, people will avoid dividends.
One of the arguments for deemed disposal is that it taxes ETF that don't pay a dividend. But if you want a steady stream of tax income from investments the correct way to do it, IMO, would be to tax dividends at a lower rate than capital gains. Then people have an incentive to take dividends and avoid accumulating ETF Funds.

 

[GSheehy]

and if, as you say, there are no exit charges, well yes that is a genuine and non illusory differentiation over conventional charging structures.

You're choosing not to believe me even though you've no reason to do so.

It's not about relativity between charging structures. It about being faced with the dilemma of having 99% or 100% of your money invested.

I would like to see a generic KID or even a life assurance disclosure which shows this

I won't be posting a client disclosure schedule here. If you choose not to believe me that it's not there (a negative on total costs in year one because of the levy), and that the industry actuaries are incorrect, I can't really help you with that.

 

[Gordon Gekko]

You can easily choose your investments to match your tax preferences.
Here are 3 example of 0% dividend investments
Stock: BRK.B
ETF: iShares Core S&P 500 UCITS ETF USD (Acc)
Fund: Edinburgh Worldwide Investment Trust

The 52% income tax for dividends is actually outrageous, and is the reason that all of my personal investment picks, avoid dividends like the plague.

This is another example of the government being really stupid on how they have setup the taxation system for investments. People follow incentives. If you tax dividends higher than Capital Gains, people will avoid dividends.
One of the arguments for deemed disposal is that it taxes ETF that don't pay a dividend. But if you want a steady stream of tax income from investments the correct way to do it, IMO, would be to tax dividends at a lower rate than capital gains. Then people have an incentive to take dividends and avoid accumulating ETF Funds.

Berkshire isn’t diversified enough, the second one is a fund, and the third one pays dividend income surely if it’s an investment trust.

The point is that a CGT portfolio that doesn’t pay any income would be very odd.

Don’t let the tax tail wag the investment dog, etc.

 

[Duke of Marmalade]

I won't be posting a client disclosure schedule here. If you choose not to believe me that it's not there (a negative on total costs in year one because of the levy), and that the industry actuaries are incorrect, I can't really help you with that.

Chill out man
I assume that a generic KID or client disclosure displaying this feature does not therefore exist. Well done you for negotiating individual cases.

 

[ClubMan]

The point is that a CGT portfolio that doesn’t pay any income would be very odd.

Why so?

Don’t let the tax tail wag the investment dog, etc.

True, but that doesn't mean ignoring the tax issues altogether.

 

[Duke of Marmalade]

@GSheehy
Below is a generic KID for a Zurich bond. It is 100% allocation and its costs after one year are between 6.46% and 9.52%, I presume 101% allocation would reduce these costs to 5.46% and 8.25%. So yes I would be very interested, purely from an academic point of view you understand, to see an example with negative costs.
I also looked at Irish Life and New Ireland KIDs. Exit charges alive and well, so things haven't moved on that much from the "old days". Can you point me to a company to which your statement applies.

 

[GSheehy]

@Duke of Marmalade That's a KID that illustrates the worst possible charging structure product you could buy from the provider. That's how KIDs roll.

AMC used is probably 1.75% pa, not sure what funds transaction costs are used, and there's definitely early exit charges (years 1 -5 I'd say) on the example.

The Government Levy is represented in the KID as the 'Entry Cost' - 1% divided by circa 7 years.

If you buy a 101% allocation product, that entry cost is reduced to zero.

Now, let's assume you invest €100,000 on a 101% allocation (meaning 100% of your €100K is buying units) and 0.75% AMC with no exit charges. What does that do to the Generic KID figures?

 

[Duke of Marmalade]

@GSheehy Good, we are talking civilly to each other. For avoidance of doubt I am a great admirer of your execution only service. I note that your own version (below) of the Zurich Bonds is 101% allocation/0.75% AMC/No Exit Charge which is a heck of a lot better than the standard 100%/1.6%/Exit Charge.
I suppose I can see a (rare) possibility for negative costs in year 1, so apologies. The costs in the first year for the standard KID (post #334) range from 6.46% to 9.52%. So if we have an AMC of 0.75% instead of 1.6% and 101% allocation and no 5% Exit Charge that would make this range [1% + 1.6% - 0.75% + 5%] = 6.85% lower i.e. -0.39% to 2.67%

 

[GSheehy]

I'm almost surprised to see precisely the trade off I was referring to. Zurich offer a choice of 101%/0.75% or 100%/0.6%.

Where are you pulling the 100%/0.6% from?

The exact negative costs figure in year one, for €100k with 101%/0.75% and no exits (with an assumed return of 4.6%pa) on a client disclosure document is -224.20.

 

[Duke of Marmalade]

Where are you pulling the 100%/0.6% from?

The exact negative costs figure in year one, for €100k with 101%/0.75% and no exits (with an assumed return of 4.6%pa) on a client disclosure document is -224.20.

Gerard, I got that all wrong and changed that post considerably but obviously not quick enough

 

[GSheehy]

-0.39% to 2.67%

Maybe I'm reading this wrong but how can the Annual Cost Impact (If you exit in year 1) be to 2.76% with the specify charging structure we're talking about?

I don't know any actuary/manager who puts any credibility at all in KIDs. If you wanted to try and do a competitor comparison you'd not be looking at KIDs. They are really misleading.

 

[AJAM]

Berkshire isn’t diversified enough, the second one is a fund, and the third one pays dividend income surely if it’s an investment trust.

The point is that a CGT portfolio that doesn’t pay any income would be very odd.

Don’t let the tax tail wag the investment dog, etc.

My portfolio is a CGT portfolio that pays approx. 0.3% yield. I've posted it somewhere on AAM before.
Yes, if Exit Tax and dividend tax were (what I consider reasonable) lower, my portfolio would be vastly different and (to your point) probably better (in terms of Risk/Reward profile. But it is diversified and I'm happy with it's performance.

"Don’t let the tax tail wag the investment dog, etc." I agree, except when the tax is 52%.

Berkshire isn’t diversified enough: Yes it is, but that wasn't the point
the second one is a fund: Yes it is and that was the point. ETF = Exchange Traded Fund
and the third one pays dividend income surely if it’s an investment trust. Yes it is an investment trust and no it doesn't pay a dividend.