Financial advisors baffled by Irish discriminatory savings tax rates

Equal taxes should be applied to profits from an investment as to Dirt tax on a bank account, as it makes no sense to penalise people by charging them a higher tax rate for making a more prudent investment.

So says Gavin Gilmore, who trades as Gilmore Insurance and Financial Services.

A fully independent financial advisor, he sees no logic for the 8% differential between the 41% exit tax on investments versus the soon-to-be 33% Dirt tax.

“The Exit tax should be reduced by 2% per annum for the next four years,” he said. “That would return the investment market to where it was for the two decades up to 2016. The current tax policy is influencing people to choose one mode of saving over another.

“Irish tax policies are pushing people away from life assurance plans,” he said. “Everyone in the life assurance industry shares the same thinking on this.

“I work as an independent financial advisor, so I have no personal reason to support life assurance companies, but they’re definitely right when they say that this Government tax policy is bad for savers.

“People are leaving their money in savings accounts as a result of this policy. I always think it is a good idea for people to have savings. Pensions are good for the long term, but you also have shorter-term ‘rainy day’ savings to cover health issues or losing your job, money you can access to avoid back-sliding into poverty.

All the insurance companies are lobbying for this. Standard Life was the first to challenge the policy and all the other rode in behind them. Standard Life has all-industry support on this issue via Insurance Ireland, the Irish Association of Investment Managers and Brokers Ireland. They are not all wrong.

A change of policy would see investors benefit significantly, as long-term returns from investment funds are typically higher than deposits. Mr Gilmore notes that the Exchequer is also losing out under the current policy, as it could expect a higher tax take if people were to put some of their €97bn sitting in deposit accounts into higher-returning investment funds.

Mr Gilmore also notes that it doesn’t make sense to grant better tax treatment to people who invest in individual shares; eg. people are taxed at a 33% rate on any gains from individual shares. This compares with the 41% tax rate on those who invest in a 100% equity fund.

A typical equity fund holds 50-300 different shares, which is much safer than buying a single company’s shares. It makes sense to spread your bets. The collapse of the value of bank shares after the 2008 crash made that very clear to people in Ireland and across the globe.

The insurance sector is just one of the industries seeking a reversal of the current tax policies in relation to savings. Critics question the logic for applying different rates to different modes of saving — 35% Dirt rate for bank accounts (set to become 33%), the 33% Capital Gains Tax and the 41% Exit tax rate.

Gavin Gilmore, an independent financial advisor who trades as Gilmore Insurance and Financial Services.
Gavin Gilmore, an independent financial advisor who trades as Gilmore Insurance and Financial Services.

Other tax anomalies exist between differing modes of savings too — a life assurance investment fund incurs an additional tax of 1% of the investment amount payable at point of entry — a tax not applicable to individual share investing or money on deposit.

Furthermore, under a life assurance investment fund structure, a deemed encashment operates on each eighth-year plan anniversary, whereby the Government tax the investment return made to that date and recover the exit tax due. No deemed encashment rules apply to investments made into individual share portfolios.

“What is the logic to having differing tax rules on savings products?” asks Gavin Gilmore.

“Is the Government seeking to influence savers to remain in ultra-low yielding deposits? Do they deliberately wish to encourage savers to take on more investment risk by making investment in single shares comparatively more attractive (in tax terms) than saving via a more diversified (and therefore lower-risk) life assurance funds?

An overarching principle of good tax policy is that it should be neutral. It should not interfere with economic efficiency in a market economy.

"It should not discriminate in favour of, or against, particular forms of organisation, or particular industries or professions.

“This principle is backed by the Organisation for Economic Co-Operation and Development (OECD). The continuing differences in tax treatment applied to deposit savings, individual share portfolios, and life assurance investment funds are all the more puzzling in light of this generally-accepted principle.”

Mr Gilmore insists he is not beating a drum for insurance companies, rather he is one of many investment advisors whose goal is to maximise returns for individual investors.

Fianna Fáil finance spokesman Michael McGrath has also said it makes no sense for people saving through life assurance policies to be discriminated against versus those saving in a bank or credit union.

Fianna Fáil finance spokesman Michael McGrath.
Fianna Fáil finance spokesman Michael McGrath.

Mr Gilmore added:

“The Government may use tax policy to influence people’s behaviour, and, where there is a major social and economic goal, the guiding tax principle of neutrality may be sacrificed.

"However, current Government tax policy and the penal rate of tax applied to savings made through life assurance funds is baffling and seems to run contrary to a basic principle of good tax policy with no major social or economic goal in sight.

By equalising the tax rates that apply to gains made by deposits, individual shares and life assurance investment funds, a layer of complexity would be removed from saving/investing.

His view is that a simpler tax system would make it easier for people to understand their obligations and entitlements, helping them to make optimal decisions. An investor needs to consider possible risk versus potential reward.

“In a world of ultra-low deposit returns, people appreciate that in order to give their money a chance to achieve a real (net of inflation) return, they are required to take on a degree of investment risk,” he said.

“To be penalised further for having the foresight in attempting to grow your money in real terms by having a higher rate of tax applied to your gain than would be applicable had you left it on deposit is unfair in the extreme and does not assist people to make good financial decisions in a world of negative real interest rates.”

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