General election campaigns don’t usually emphasise savings policies as vote winners. However, it’s believed multiple parties are reportedly considering this topic in their manifestos. Latest data from the Central Bank shows that over €150 billion of domestic savings lays idle in banks, providing sound reasons to motivate some of those funds towards equity-style investments – to offer better returns for individuals and inject capital into Irish firms.
There are broadly two strategies for election manifestos to approach this situation. One approach involves dismantling the current obstacles involved in investing in an assortment of funds, primarily related to their tax status. The other – reminiscent of the 2001/2002 SSIA scheme that offered citizens state incentive to save – delivers tax benefit for individuals transferring their money from savings to equity class investments. Chambers Ireland, the representative entity for commerce chambers, proposed in its recent pre-election paper the development of “tax-incentivised investment channels that encourage these deposits to back more local business growth, infrastructure development and green energy ventures.”
The ultimate key is simplicity in whatever plans are implemented in this increasingly convoluted area for retail investors.
1. The Issue: The trend among Irish citizens leans towards depositing their savings in banks, with most individuals opting for equity markets only peripherally, through pension or life insurance funds. A recent major study by the Department of Finance on funds, emphasising the retail segment, highlighted that “the majority of Irish households’ financial assets held directly in investment funds, listed shares and securities is exceptionally lower than many other nations.”
The study championed the need for individuals to accrue savings and investments, inclusive of pensions, for unexpected “life events” along with some of these savings being utilised to boost the real economy. The EU, via its capital market strategy, is keen to motivate greater retail investment in the capital markets and member nations are urged to explore policies that will encourage this.
Long-term investments in the market have traditionally outperformed deposit accounts, despite intermittent fluctuations. Therefore, there is a policy imperative to motivate individuals to transition their funds from lower-yield savings accounts into equities, enhancing their prospects for financial stability. This process would typically carry fewer risks with mutual funds as opposed to investing directly in individual equities.
The place where individuals choose to invest their funds is partially influenced by official policies. Particularly, the tax regulations on investment funds like Exchange Traded Funds (ETFs) and life assurance-linked products present challenges. These funds track stock market indices and, despite the complex tax issues they pose, the department’s report has distilled key matters worthy of attention.
The first matter highlighted is the Revenue ruling that taxes must be paid on any profits made after eight years of holding investments in a fund, as though the shares were sold, a concept referred to as “deemed disposal”. The report suggested an abolition of this practice and proposed that taxes should be paid on profits only when sales occur.
Another taxation concern is the high income tax rate on distributions from funds such as ETFs; currently set at 41%, it exceeds the 33% capital gains tax levied on individual shares’ profits. Consequently, the Department of Finance’s report advocated for a reduction in profit tax rates from funds to 33%, bringing it in line with the standard rates. The obligation faced by ETFs investors to account for this in their tax return, coupled with the intricacy of rules, especially for offshore products, also surfaced as an issue.
The report further demanded that the existing 1% levy on life assurance products, much to the frustration of the industry since its implementation in 2009, be eliminated. Additionally, the report called for an amendment which would permit investors to offset losses on these funds against capital gains tax, a facility currently unavailable and runs contrary to individual shares’ rules. However, the Department of Finance’s personnel who drafted the report proposed these transformations to be executed gradually over time.
A persuasive argument for reforming the tax system is its potential to prompt individuals towards safer, diversified funds versus single equities. ETFs, readily accessible online, also present investors with smaller fees, an essential factor considering the substantial charges small investors often incur from investment managers.
Will these tax modifications be sufficient to draw money from savings accounts? It’s also necessary to contemplate the use of tax system incentives to transition savings into equity investments.
A prime example would be the UK’s Isa programme, which, along with initiatives from Canada, Italy, Sweden and elsewhere, was mentioned in the funds review. This programme allows for up to £20,000 worth of tax-free annual investment into savings, bonds, stocks and a myriad of other forms of investment. A similar tax-free framework appears to be the ideal incentive solution.
However, a new plan for a unique Isa offering an extra £5,000 each year for funds specifically invested in UK businesses was recently rejected in the UK’s weekly budget discussion. Alternative plans exist for those saving for home ownership or retirement, with some bonus features involved, though specific regulations apply to withdrawals. Strikingly, an exclusive savings plan for future homeowners was put forth by Fianna Fáil during the last election campaign. Nevertheless, the Isa plan has been criticised for its complexity and seemingly counterintuitive incentives for cash and equity investments, parts of which would not be included in an Irish plan.
Likely due to EU regulations, any “tax-free” perks in Ireland would have to be applicable to investments made throughout the union. However, Irish banks and brokers would be unrestricted in promoting products that funnel cash into Irish businesses, or, as the department’s review noted, fund crucial sustainability projects.
This could offer a superior method for investors to support Irish businesses compared to the previous Business Expansion Scheme which gave tax incentives for investing in a single company. Some of these investments yielded unfortunate results. Matters to be addressed revolve around the dearth of quoted Irish companies and the higher-risk and less-liquid nature of investing in non-quoted companies or specific projects. Necessary safeguards for investors are crucial to ensure they are fully informed of potential risks. High fees also pose a problem, reducing overall return.
It’s worth highlighting that the department’s evaluation recommended postponing entry into this domain of incentivised plans until taxation complications that deter investment had been resolved. Typically, policymakers would take heed. However, considering the impending general election, a few might opt to suggest a more inventive approach.