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Sunday 4 December 2016

Some savers are more equal than others when it comes to taxes

Published 13/11/2016 | 02:30

Deposit interest retention tax (Dirt) on interest earned on savings is 41pc, but is due to fall to 38pc next year, Noonan said in his Budget speech. Photo: Stock
Deposit interest retention tax (Dirt) on interest earned on savings is 41pc, but is due to fall to 38pc next year, Noonan said in his Budget speech. Photo: Stock

The Government has delivered a cruel blow to those who are using a investment plan to save. This is because Finance Minister Michael Noonan has cut the tax rate on savings held in banks and credit unions, and plans to further reduce that tax.

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However, the exit tax on savings policies bought through an investment or insurance firm has not been reduced, even though there was traditionally a correlation between the tax rates on both forms of savings.

Deposit interest retention tax (Dirt) on interest earned on savings is 41pc, but is due to fall to 38pc next year, Noonan said in his Budget speech.

The Dirt rate on interest earned on savings will then fall by two percentage points each year over the next four, until it goes to 22pc by 2020.

But the exit tax on life-insurance investments or funds sold by life insurance and investment firms remains at 41pc.

These policies are also subject to a 1pc levy on each contribution made into them. There is no levy applied to investments sold by stockbrokers and wealth managers. Insurance Ireland has called for the levy to be removed to help middle-income families invest for the college education of their children.

Savings and investment policies sold by life companies are a key element of long-term financial planning for middle-income individuals and families.

Having a higher tax rate on investment polices that applies on bank savings is discriminatory.

Many responsible people invest in funds, such as life assurance investment policies. They do this in knowledge that they are taking on more risk.

Traditional deposits pay close to zero in interest at the moment, and cannot be relied upon to produce sufficient growth to secure the money needed for a deposit for a first home, or to fund children's education, or build up a rainy-day fund.

In a Dail reply to Fianna Fail's Michael McGrath, Noonan said he decided not to cut the exit tax rate on life policies in a bid to save money.

He added that the Revenue Commissioners estimated that it would cost €14m a year to match the exit tax rate cut with the Dirt one, and about €56m a year by 2020.

"It was, therefore, too costly to the Exchequer to reduce the rates applying to these taxes in the same manner as the reduction in Dirt."

The exit tax paid on life assurance policies has spiralled from €43m in 2012 to €247m last year.

Lower Dirt tax is fine. But it is unfair and discriminatory not to reduce the 41pc exit tax on savings polices sold by life-insurance firms when cutting the Dirt rate.

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