Pick holes in this ETF strategy

S

spondulix

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From another thread -

Cormac said:
For an Irish tax-payer, ETFs should come with something of a caveat; the tax implications could be seen as onerous (there is a good deal of information on AAM about this).
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I'm in a situation where I think it's reasonable for me to purchase an ETF (my pension contribs are maxed, no mortgage or upcoming big expenses and (fingers crossed) a couple of decades left in me. I've made a couple of purchases to date.

I buy just one ETF - iShares MSCI Core World UCITS, which is an accumulating fund. So no dividends coming back to me: they roll up into the fund. This means no exit tax to pay on dividends. I don't care about offsetting losses as there's nothing to offset against.

I do not trade, I have been buying chunks annually: just buys so far.

I need to log my purchases, report them to revenue for the tax year (pretty easy as there's just one purchase a year) and I am subject to 41% exit tax when I sell and a gross roll up every 8 years. The 41% tax is punitive but I would rather do this than expose myself to individual shares and CGT, as I don't trust myself to pick winners and diversify effectively (I really don't want to manage a basket of shares - no interest or time).

Anyway - all this to say, the accounting doesn't seem so onerous here, aside from a possible tax bill in 8 years with gross roll-up. Is there anything obvious I'm missing? Is this somehow trickier than managing individual shares? Just looking for feedback as AAM has made me pretty paranoid about my chosen strategy!
 
How is your pension invested?

When you say you have no mortgage, is that because you own your home free and clear and you have no plans to move?

Also, when you say you have a couple of decades left in you, do you mean that literally or do you have a couple of decades to your normal retirement age?
 
I know nothing about ETF's but your strategy seems reasonable. I gather that the dividends received by the ETF roll up tax-free but you have to pay 41% tax on the unrealised gain every eight years.
I know I'm unusual in wanting to have direct sight of the companies in which I'm invested and that this isn't everyone's cup of tea, but is it possible for you to get some of the tax benefits of my approach? For example, could you buy an investment trust that accumulates dividend receipts within the trust? That way, you would only have to pay CGT (at 33%, not 41%) and you would only have to pay the tax on selling shares, not every eight years? Alternatively, pick an investment trust that is biased towards low-dividend shares. That means that a relatively small proportion of your return is taxed as income each year at your marginal tax rate, with the bulk of the return being taxed at 33%, and only when you eventually sell shares. There's the other consideration of the tax-free exemption for CGT, which doesn't apply (I think) for the 41% exit tax.
Sarenco said:
when you say you have a couple of decades left in you, do you mean that literally or do you have a couple of decades to your normal retirement age?
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That's hilarious! I'm well over retirement age. Do I have less than nothing left in me? :)
(Subsequent editing: Sorry @Sarenco! I mis-read it the first time. You're still giving me a few years - I think!)
 
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you could put more than max in pension, where it can grow tax free. (And potentially claim future relief on it). over decades tax free growth would be significant, and less paperwork/tax returning.
 
Hey guys, thanks for the advice above and apologies for missing out on responses - the thread didn't show in my browser for some crazy reason - I thought it was deleted!

Answering your questions:

* I own a house outright and happy with it. Some upcoming renovations but that is budgeted for. No plans to move. No kids, no plans for kids etc.
* By a couple of decades left in me I mean on the order of 30-40 years I guess! Not literally!
* I have a pension funded up to about twice my salary at this point. My pension contribs are maxed, as I stated. The pension is invested in equities, mostly in what is basically the same fund as my ETF (iShares Core World). I imagine it'll stay this way for at least another decade.

@Colm Fagan the investment trust idea has piqued my interest. I'll do some snooping and see what I can dig up. An accumulating trust sounds like my bag, if such a thing exists. I do not really want the hassle of dividend income but I don't mind some minor tax duties.

@SPC100 that is an interesting option and I'll look into it, thanks. I'd never considered it.
 
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FireDuck said:
I'm also curious if you have found any good accumulating trusts that track a broad index.
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Hey - couldn't find any such thing as "accumulating trusts" when I googled, at least none in the UK. Not sure where else to look. I kinda gave up in a hurry. I may look into it later in the year when I have $ to invest.
 
To my understanding, Investment Trusts are similar to REITs, in that they must distribute the majority of their income. Otherwise they'd just become tax shelters. So I doubt there's any such thing as an accumulating trust.
 
There is one, the name of which I cannot for the life of me remember, apologies; it’s an Investment Trust with two companies under the bonnet, an ‘Income Company’ and a ‘Capital Gains Company’. The income from the Capital Gains Company gets shifted over to the Income Company. From memory it’s a sort of aggregate of multiple managers and the TER isn’t great, but as a structure it seems pretty neat. Sarenco might have the name of it to hand.
 
RedOnion said:
To my understanding, Investment Trusts are similar to REITs, in that they must distribute the majority of their income. Otherwise they'd just become tax shelters. So I doubt there's any such thing as an accumulating trust.
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That's a shame.
Even with the taxation on the distributions I'm guessing an investment trust (like F&C IT) is still more tax efficient than an ETF though?
 
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