Should people cash unit linked funds before the end of the year

[Brendan Burgess]

Exit Taxes on Life Assurance Policies and Investment Funds The... rates of exit tax that apply to life assurance policies and investment funds, is being increased and will now be 41% ...

The increased rates will apply to payments, including deemed payments, made on or after 1 January 2014.

If you have gains in an investment policy, you should cash it in before the end of the year and pay 36% instead of 41%.

Of course, if there are charges for reinvesting your money, you should not do so.

 

[DerKaiser]

Of course, if there are charges for reinvesting your money, you should not do so.

The most significant of which is the 1% levy on life insurance premiums.

Encash and re-entry makes sense if you are sitting on a gain of above 25% i.e. fund exceeds 125% of premiums.

It might also make sense if you use it as an opportunity to shop around for better charges/allocations.

Example:
Invested €80,000, Current fund €100,000.

Encash and re-entry ahead of December 31st generates exit tax of €7,200 and re-entry premium tax of €928 i.e. a fund of €91,872 with no tax liability on 1st Jan 2014

No action leaves you with a fund of €100,000 but a tax liability on encashment reduces this to €91,800.

The one caveat is that any fall in fund values ahead of ultimate encashment will not reduce your tax payable in the encash and re-entry scenario.

 

[Brendan Burgess]

The downside would be if the investment fund falls in value from here on, you would have paid taxes on gains which subseqently disappear.

( post crossed with DK's)

 

[Brendan Burgess]

OK,

So 125% is breakeven, which is not worth doing.

I think that the gain would have to be at least 50% to account for the risk of falls.

Of course, if you are thinking of cashing a fund anyway and not reinvesting, you should cash before the year end.

 

[Duke of Marmalade]

I agree with comments so far. On a slightly different tack it seems that this is a sort of retrospective tax. I suppose the same could be said for CGT. The lapse and re-entry option could be argued to make it not retro but as has already been remarked this is not really efficient unless quite substantially in the money. What about people who are coming up to their 8 year deemed disposal in early next year, seems particularly retro for them.

Noonan heralded this move as a great boost for investment. Anybody buy that?

 

[Marc]

The 125% calculation assumes that a reinvestment incurs the 1% levy.

If you buy mutual funds directly as we do there is no levy so the issue here is instead one of dealing costs.

Equally, if you switch from a fund subject to exit tax to one subject to CGT then you would go from a fund liable to 36% tax on gains which would have risen to 41% to a tax on gains of 33%.

A significant factor in this calculation is the income would be subject to marginal rate tax and USC and PRSI.

So, anyone with a fund investment and a low taxable income should certainly consider the benefits of switching tax regimes from exit tax to CGT.