I'm finding it hard to find a clear explanation of the mechanics of the above. As an exercise I did up a simple spreadsheat to figure out the effect of this measure on investment returns.
My assumptions are as follows:
If the fund has gained since the deemed disposal event, then there won't be any adjustment according to the information above supplied by Quinn. However, the 23% deducted at the 8 year point will damage your overall returns. The more your fund gains subsequent to the deemed disposal, the more you are disadvantaged by this deduction. There are a number of parameters but for reasonable initial growth (5-10% per/annum), the equivalent rate of exit tax (had the new rule not been introduced) ranges from around 26% if your fund subsequently gains 20%, to 30% if your fund subsequently gains 90%. These are approximate as they vary according to the growth during the initial 8 year period.
If the fund loses value subsequent to the deemed disposal, then things become more interesting. In this case, you will be due a refund from revenue if my understanding of Quinn's statement is correct. The worse the fund does, the bigger the refund. For example if the fund tanks (again assuming 10% growth for the first 8 years) by 40% subsequent to the deemed disposal, then the refund will mean you will actually have more money than you would have even if the exit tax was 0% under the previous regime. However this will be only a small consolation given your investment has tanked.
However, the really interesting question is the effect on long terms savings. The news here is not good at all. For example, if you invest for 20 years and the fund grows on average 10% a year, the effective exit tax under the new rules is 34%.
Before I get carried away with indignation, are my assumptions correct here?
If they are, then this is a serious change in general taxation policy which up to now has encouraged saving and investing (low CGT and related taxes) at the expense of consumption (high VAT). Now I recognise the attraction for the government in sneaking in incomprehensible taxes but surely this is indefensible. Given that ETFs or UCITS, for example, seem to fall under the same regulations, the effect will be to force savers to put their money into more expensive (in terms of trading costs and paperwork) and riskier less diversified individual shares in order to avoid these punitive taxes. For long term savers (20 years), except for the top 3% earners in the country, a 34% exit tax is more punishing than income tax. This means saving using life company funds or UCITS is effectively waste of time.
Until the removal of inflation indexation for CTG calculations (which effectively doubled the rate of CTG for typical returns and periods), it made sense to put your money into shares. After that change, you were generally better off buying units in life company funds. Now it looks like you're better off shifting your money into shares again. These changes make life difficult and expensive for savers. Could we not expect some sort of rationality in the approach to taxing savings? Is there anything which can be done to challenge the capricious nature of these changes?
To make things worse, this change is retrospective and affects any savings going back to 2001. How are people supposed to rationally make decisions regarding savings with the background fear that retrospective taxes can be whimsically introduced by the government at any stage? This new regulation establishes a terrible precedent in this regard by creating uncertainty.
Finally, how should savers respond to this change? My instinct is to move my long term savings out of Quinn, Rabo and Irish Life funds and buy non-UCIT shares through an offshore broker. However, some of my savings are in the likes of with-profits funds which cannot be cashed in without suffering punative penalities. Also, I'll be facing a lot of paperwork and calculations each year to declare my savings to revenue. Personally, I'm not taking about huge sums here; it's about two years of after-tax income and given that I don't own my own home, I need a rainy day fund.
My assumptions are as follows:
- A deemed disposal event occurs on the year 8 anniversary of the policy. The effect of this event is the same as if you had cashed in your policy and immediately bought back in. Thus on year 8, the value of the exit tax which would have applied had you disposed of your policy is deducted from your policy and handed over to revenue.
- Subsequent to the deemed disposal, the taxable gain will be based on the value of the fund just after the deemed disposal event.
- In addition, Quinn-life informs me that
If the fund has gained since the deemed disposal event, then there won't be any adjustment according to the information above supplied by Quinn. However, the 23% deducted at the 8 year point will damage your overall returns. The more your fund gains subsequent to the deemed disposal, the more you are disadvantaged by this deduction. There are a number of parameters but for reasonable initial growth (5-10% per/annum), the equivalent rate of exit tax (had the new rule not been introduced) ranges from around 26% if your fund subsequently gains 20%, to 30% if your fund subsequently gains 90%. These are approximate as they vary according to the growth during the initial 8 year period.
If the fund loses value subsequent to the deemed disposal, then things become more interesting. In this case, you will be due a refund from revenue if my understanding of Quinn's statement is correct. The worse the fund does, the bigger the refund. For example if the fund tanks (again assuming 10% growth for the first 8 years) by 40% subsequent to the deemed disposal, then the refund will mean you will actually have more money than you would have even if the exit tax was 0% under the previous regime. However this will be only a small consolation given your investment has tanked.
However, the really interesting question is the effect on long terms savings. The news here is not good at all. For example, if you invest for 20 years and the fund grows on average 10% a year, the effective exit tax under the new rules is 34%.
Before I get carried away with indignation, are my assumptions correct here?
If they are, then this is a serious change in general taxation policy which up to now has encouraged saving and investing (low CGT and related taxes) at the expense of consumption (high VAT). Now I recognise the attraction for the government in sneaking in incomprehensible taxes but surely this is indefensible. Given that ETFs or UCITS, for example, seem to fall under the same regulations, the effect will be to force savers to put their money into more expensive (in terms of trading costs and paperwork) and riskier less diversified individual shares in order to avoid these punitive taxes. For long term savers (20 years), except for the top 3% earners in the country, a 34% exit tax is more punishing than income tax. This means saving using life company funds or UCITS is effectively waste of time.
Until the removal of inflation indexation for CTG calculations (which effectively doubled the rate of CTG for typical returns and periods), it made sense to put your money into shares. After that change, you were generally better off buying units in life company funds. Now it looks like you're better off shifting your money into shares again. These changes make life difficult and expensive for savers. Could we not expect some sort of rationality in the approach to taxing savings? Is there anything which can be done to challenge the capricious nature of these changes?
To make things worse, this change is retrospective and affects any savings going back to 2001. How are people supposed to rationally make decisions regarding savings with the background fear that retrospective taxes can be whimsically introduced by the government at any stage? This new regulation establishes a terrible precedent in this regard by creating uncertainty.
Finally, how should savers respond to this change? My instinct is to move my long term savings out of Quinn, Rabo and Irish Life funds and buy non-UCIT shares through an offshore broker. However, some of my savings are in the likes of with-profits funds which cannot be cashed in without suffering punative penalities. Also, I'll be facing a lot of paperwork and calculations each year to declare my savings to revenue. Personally, I'm not taking about huge sums here; it's about two years of after-tax income and given that I don't own my own home, I need a rainy day fund.