Tuesday 19 November 2019

Government must use Budget to end system that treats some savers less fairly

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Charlie Weston

Charlie Weston

The Government does not make it easy for you if you want to provide for yourself and your family and avoid being a burden on the State. Many middle-income people do not want to be a drain on other taxpayers, but it often seems that this prudence is punished rather than being rewarded.

Take the tax on savings.

Leave aside for a bit the fact that the interest paid on deposits is miserable. If you do get any return on the money you put in the bank or credit union you will be taxed at a whopper of a rate of 39pc.

That is a savage rate of tax on savings. So much for rewarding people who are sensible enough to make provisions for themselves.

You might argue that the Deposit Interest Retention Tax (Dirt) is irrelevant when banks are paying little or nothing in interest anyway. But that is not the point.

If you seek a decent return by putting money into an investment fund you probably have a better chance of making a few bob. This is because investment funds sold by life companies and banks historically have better long-term returns than deposits.

Some people may be scared by investment funds given the thousands of euro lost on Irish bank shares when the 2008 financial crash occurred.

But investment funds sold by life companies and banks are diversified and less risky than owning individual shares.

There are between 50 and 300 different company shares in a typical equity fund.

But the Government imposes a higher tax on those selling up an investment fund than on the interest earned on a deposit account.

The tax imposed on investment funds is called an exit tax and has remained at 41pc, even though Dirt was cut last year.

This is despite the fact that for decades the Dirt and the exit tax rates used to move in tandem. But that link was broken in the last Budget.

This is no minor matter, as Standard Life estimates that up to 600,000 middle-income families are saving through investment funds.

The Government needs to realise that savings and investment policies sold by life companies are a key element of long-term financial planning for middle-income individuals and families.

The life assurance exit tax needs to be reduced in line with Dirt to incentivise long-term financial planning for middle-income earners.

Government policy should not give preferential treatment to certain investment types.

Finance Minister Paschal Donohoe should use the Budget to reduce the exit tax and be fair to middle-income investors.

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