What is the best mix of cash, equities, or annuities in retirement?

And to slightly modify the example again, what if the value drops after deemed disposal exit tax is paid? How does the edit tax rebate feed into the CAT tax calculation?

Page 5 of the document I attached.

Is the “deemed” charge on each 8th plan anniversary an additional charge?

No, it is not; it is simply a prepayment of tax. For example if you cash in your plan on the 9th anniversary, the tax you pay at that stage will be reduced by the amount of tax you paid on the 8th anniversary. Also, where the tax payable on a subsequent encashment is lower than the tax deducted on the 8th anniversary, Irish Life will refund you the ‘overpaid’ tax. Either way there is little change to the overall tax you will pay on your investment.
 
It makes no mention of interactions with CAT.
 
Most people won't have share portfolios that they intend holding until after they die.
Is this so? I downloaded this from the CSO here on all financial assets excluding pension assets.

Key takeaways for me for people over 65:
  • About a sixth of people hold bonds or mutual funds
  • About a tenth hold shares directly
  • Portfolios are generally pretty small, only €3,600 for median share portfolio
  • Bonds and mutual funds make up about a fifth, and shares make up about one fourteenth, of total financial assets.
I don't show it in the table but more than half of over-65 financial assets lie rotting in deposit accounts.

To sum up: yes, a non-trivial share of older people hold financial assets directly and any CGT liability is extinguished on death. For most of these people the sums involved are pretty small. Their heirs aren't gaining much and the taxman aren't losing much by CGT expiring on death.


StatisticYearAge of Reference PersonType of Financial AssetUnitValue
Participation in total financial assets202065 years and overBonds or Mutual Funds%16.5
Participation in total financial assets202065 years and overShares%10.1
Median values of financial assets202065 years and overBonds or Mutual FundsEuro18,400
Median values of financial assets202065 years and overSharesEuro3,600
Distribution of total financial assets202065 years and overBonds or Mutual Funds%21.8
Distribution of total financial assets202065 years and overShares%6.7
 

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You should not plan your own finances based on averages or based on the government's take from a particular tax.

If you are aged 65 and planning your finances, you should not have investments in a life fund under current rules. Your gains will be subject to exit tax.

If you have the same amount directly in a portfolio of shares, the capital gains will disappear on death.

This strategy may change if the government changes the rules but for now, this is the correct strategy.

Brendan
 
You should not plan your own finances based on averages or based on the government's take from a particular tax.
Isn't this slightly contradicted by this?
Aren't you arguing that people should do that very thing - i.e. choose the investment option that minimises the tax take?

Edit: or maybe you're distinguishing between the government's tax take overall under a particular heading and specific individual's tax liabilities? I.e. how much the government takes overall in CGT, CAT, exit tax is irrelevant to me as an individual. What matters is that holding capital assets directly is currently likely to be the most tax efficient strategy for me and my descendants?

For what it's worth I agree with you on the shares versus life fund issue but the argument above seems a bit contradictory...
 
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Dr Strangelove had a post which showed that the average size of funds was small and the tax take was small.

My point is that this is not relevant to an individual's tax and investment planning.

If the average portfolio is €3,600, then the "average advice" would be that it doesn't matter what you do.

But if you have €1m to invest, then the average advice is irrelevant to you.

Brendan
 
Thanks @Brendan Burgess - I eventually understood your point and updated my post to reflect this.
 
Here’s a scenario where holding shares directly makes sense:

You’re 65, you have >€1m in liquid wealth outside PPR and pension fund. You want your heirs to inherit as much of this as possible. You can tolerate the concentration risk as the tax benefit outweighs it.

But the above is a tiny fraction of us.
 
"Correct" is subjective to the individual.

Does the retiree have the knowledge and skills to replicate the index tracking fund in their share portfolio? Is the fee for the shares the same or lower than the equivalent fund charge? If "no" to either or both the retiree is straight away reducing their expected net return to a level which may very well eliminate any benefit of the tax advantage.

Over 20 years in retirement every percentage point difference in net return makes a big difference. A larger slice of a smaller pie may not be bigger than a smaller slice of the larger pie.

I don't have the knowledge and skills to replicate an index tracker and neither do i particularly want to acquire those skills. I'm guessing a professional would charge significantly higher fees to replicate a tracker through direct holdings as compared to just buying the tracker fund.

There's a cost to both options of holdings shares directly or investing in an index fund. Not all of the cost is financial- my preference for an index fund is partly because it's a fire and forget decision.

My "correct" is not the same as your "correct". That doesn't mean either of us is actually wrong.

Additionally, i don't have any real problem with an exit tax on the gains, whether it's payable by me or my estate when I die. Because it's on the gains. I won't have worked hard for that money, I'll have sat there and watch it grow so I'll be fine with the growth being taxed. And my dependents will have done absolutely nothing to earn it- if they consider it anything more than a bonus then frankly I'll have made much bigger mistakes than choosing one investment vehicle over another.
 
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Maybe I'm a bit slow today but how have you come to this conclusion? Does the beneficiary not end up in exactly the same position ?

CAT in both scenarios is calculated on €150k. In the CGT scenario, CGT disappears on death but the CAT at 33% leaves the beneficiary with €100.5k

With the exit tax, the beneficiary receives €129.5k and pays €29k in CAT (€49.5-€20.5) so they end up with the same €100.5k net from the inheritance
 
Maybe I'm a bit slow today but how have you come to this conclusion? Does the beneficiary not end up in exactly the same position ?

In the Irish Life artificial example, this may be the case.

But in most cases, there is very little CAT payable.

So the deceased pays Exit Tax on their Life Product and the beneficiary has no CAT liability to claim a credit for the Exit Tax.

So, if are going to invest in equities in the last 25 years of your life, do so directly in shares and not through a life company.