Switching from a high cost Summit Fund?

[Brendan Burgess]

A friend of mine asked me this question.

They have money in a Summit Fund and were shocked to find that the annual charge is 1.6%

They have invested other money via a discount broker with an annual charge of 0.5%

Should they cash the Summit Fund and reinvest in a 0.5% fund?

I am not sure. But here are the considerations:

1) A saving of 1% a year is huge - if the fund returns 4% gross, it is reduced by 25% with EBS.
2) They will pay Exit tax immediately though. But they would probably pay it anyway within the next 8 years. (Unless the fund predates the introduction of Exit Tax and it's a gross fund.)
3) If they switch to, say Zurich Life, and the fund subsequently falls in value, they will have paid tax unnecessarily.

I don't think that they will need the money for many years so even if they switch and it falls in value, they can wait for it to recover.

So my conclusion as I write this
1) If it's a gross roll-up fund, then leave it where it is.
2) If it's subject to the 8 year regime, and they might need it in the next 5 years, leave it where it is.
3) If it's subject to the 8 year regime, and they won't need it for at least 5 years, switch.

Brendan

 

[ClubMan]

(Unless the fund predates the introduction of Exit Tax and it's a gross fund.)

I still have a gross roll-up Summit Fund (Summit Mutual Fund) and they told me recently that it's subject to 41% exit tax on encashment but not 8-yearly deemed disposal due to some "special admin arrangement" with Revenue since 2012.

 

[GSheehy]

Every time I see one of these I think 'What would I write in the suitability/reasons why letter that would cover all the eventualities of the taxation permutations on increases/decreases in value, after the switch, that I could stand over as good advice?' No easy task, so I tend to just leave them be.

Life Assurance Exit Tax is a barrier to switching/competition. There are just too many moving parts (including the current review) to the taxation to give solid advice on the AMC quandry.


Gerard

www.bond.ie

 

[ClubMan]

Every time I see one of these I think 'What would I write in the suitability/reasons why letter that would cover all the eventualities of the taxation permutations on increases/decreases in value, after the switch, that I could stand over as good advice?' No easy task, so I tend to just leave them be.

Are you referring specifically to investments subject to 8 yearly deemed disposal or also funds such as the one mentioned here which is gross roll-up and only subject to tax on encashment?

Surely it's possible to formulate some general rules of thumb on if/when/how to encash such funds with a view to reinvesting in a lower charges option?

(Of course there's an argument for reinvesting the money directly in shares, but that's another discussion).

 

[AJAM]

Before running the numbers here are my general rules on investing

1. The number 1 thing you have control over, also happens to be the number 1 thing to predict returns, and that is the fee level. Always look to minimize fees, especially if investing for the long term
2. Unless you have insider knowledge, invest in a diversified passively managed fund
3. Exit tax sucks, avoid it if you can. But if you are investing via the exit tax regime, you should only invest in one broadly diversified ETF OR via one financial provider policy. The reason for this is that you can't offset losses! By having all your eggs in one diversified ETF or one Policy you at least benefit from offsetting losses within the ETF/Policy

I did a few quick calculations and on an after tax basis (assuming you pay exit tax and then reinvest in a similar exit tax regime but with 1% lower fees), you would be better off after 1 year, no matter which year (in the 8 year cycle) you are currently in.
However the difference is not big, about 100 euro per 10,000 invested.

 

[ClubMan]

I did a few quick calculations and on an after tax basis (assuming you pay exit tax and then reinvest in a similar exit tax regime but with 1% lower fees), you would be better off after 1 year

Do you mean that you'd have made up the exit tax reduction in that time?

 

[AJAM]

I still have a gross roll-up Summit Fund (Summit Mutual Fund) and they told me recently that it's subject to 41% exit tax on encashment but not 8-yearly deemed disposal due to some "special admin arrangement" with Revenue since 2012.

If this is true, it changes the maths. It means you can benefit from the compounding effect, which over the long term, outweighs everything else.
So if this is true, stick with the Summit (assuming your investing >8 years).

 

[AJAM]

Do you mean that you'd have made up the exit tax reduction in that time?

No, of course not. Just that when you encash the policy after x years, you have more money if you switched.

 

[ClubMan]

If this is true

Not sure why you don't believe me and what EBS themselves told me recently?

 

[ClubMan]

No, of course not. Just that when you encash the policy after x years, you have more money if you switched.

Sorry, that's not much clearer to me.

 

[AJAM]

To further clarify, on a pre tax basis, you have less money. But after tax is what matters.
But even pre tax you eventually catch up, it takes 3 to 6 years depending on what year in the 8 year cycle you are.

 

[AJAM]

Not sure why you don't believe me and what EBS themselves told me recently?

I certainty believe you ClubMan. But I'd need convincing that EBS were telling the truth.

 

[RedOnion]

But I'd need convincing that EBS were telling the truth.

It depends on when the policy was originally taken out. The deemed disposal rules, first introduced in the Finance Act 2006, didn't apply retrospectively, so older policies continue on a gross roll-up basis without taxation every 8 years (which is why the 2012 date makes sense - it was before the 8 year anniversary of the new tax).
Key to @Brendan Burgess question is to find out if deemed disposal applies or not.

 

[ClubMan]

I certainty believe you ClubMan. But I'd need convincing that EBS were telling the truth.

The comment about the "special arrangement with Revenue" resulting in no deemed disposal was via a phone call if I recall correctly.
But as the letter says "exit tax is not deducted until you make an encashment".

 

[AJAM]

Sorry, that's not much clearer to me.

If you invest 10K and earn 5% with summit after 3 years you have 11,576. If you cash that out, after Exit tax you have 10,930
If you take that 10,930 and invest it at 6% after 1 year you have 11,586 which if you cash out, after exit tax will be 11,317

If instead you had left the money in Summit (at 5%), you would have had 12,155 which after Exit tax would be 11,271
So you're 46 Euro better off, after Tax.

And it's similar for every other year in the 8 year cycle.

 

[ClubMan]

If you invest 10K and earn 5% with summit after 3 years you have 11,576. If you cash that out, after Exit tax you have 10,930
If you take that 10,930 and invest it at 6% after 1 year you have 11,586 which if you cash out, after exit tax will be 11,317

If instead you had left the money in Summit (at 5%), you would have had 12,155 which after Exit tax would be 11,271
So you're 46 Euro better off, after Tax.

And it's similar for every other year in the 8 year cycle.

Thanks - that's much clearer to me.

 

[ginslia]

Interesting that the Summit Investment funds are quoted net v the Mutual funds.
way back in the SSIA time, I put some in these mutual funds, and when the product matured there was an exit tax on the obverall gain (interest and investment gain). I closed the deposit account, but left the Mutual funds invested. Whenever I encash the funds, will the SSIA exit tax be allowed against any final roll up exit tax, same as the 8 year deemed disposal tax is supposed to work?

 

[ClubMan]

Whenever I encash the funds, will the SSIA exit tax be allowed against any final roll up exit tax, same as the 8 year deemed disposal tax is supposed to work?

I doubt it - they're different taxes as far as I know so unrelated.

 

[SPC100]

I think the are a few major elements here

A) active vs passive (I assume summit is active and discount broker is passive). Historically, Statistically, passive is expected to outperform active.
B) fees. Everything else equal, lower fees our better.
C) taxation regime effect.

How long before your friend would need these funds?

 

[SPC100]

I think taxation regime is the only reason that would support deferring a change.

I think we need need more details on investment tax regime and historic performance before deciding.

E.g. if exit tax based and if the fund had tripled in value. The additional return, from the money that would be lost on exit, would probably (?) compensate for the higher fees.