Wednesday 23 October 2019

Unfair gap in savings taxes is punishing the prudent

The digital banking alternative currently serves more than 100,000 customers in Ireland (stock photo)
The digital banking alternative currently serves more than 100,000 customers in Ireland (stock photo)

Michael McKenna

You may not be aware of a savings tax change that adversely affects most small to medium-sized savers, because it was introduced only two years ago.

Exit Tax became disproportionately higher than other savings taxes such as Dirt for the first time in almost two decades.

If you and your family are saving for your children's education, life's emergencies or a deposit for your home, you may be directly affected.

You could be worse off by thousands of euro or more, depending on the investment you chose, the amount and how long you remain invested.

As a responsible savings and investment provider, Standard Life has opposed, and will continue to oppose, legislation that is unfair or damages the long-term financial wellbeing of savers. We are acutely aware many people are hard-pressed to put money aside each month.

Hence our request for a small and relatively inexpensive change in next week's Budget that will have a major benefit for savers - equalising Exit Tax with Dirt.

Exit Tax is charged at 41pc on gains made from investment funds whose overall long-term returns have historically been higher than deposits. This is especially the case for equity funds.

Investment funds can invest in all kinds of assets such as property, government bonds, green energy or equities.

Equity funds, while higher risk, have historically outperformed deposits and property over the long term.

A typical equity fund has about 200 individual shares.

Clearly this is many times less risky than owning individual shares.

Yet gains on individual shares are taxed at just 33pc versus their far less risky equity fund cousin, whose gains are charged at 41pc.

Deposits, as we know, are yielding close to zero yet the Government appears to be encouraging savers into them by reducing Dirt from 41pc to 33pc by 2020.

We don't understand why the Government would want to encourage people into woefully low-yielding deposits, virtually guaranteed to lose money over the long term once inflation is included.

People need to actively consider choosing the higher overall historical returns from investment funds.

They should not be penalised for trying to make a better return for themselves or their families - nor should people be encouraged into riskier investments because of preferential tax treatment.

The reasons why Exit Tax should be equalised with Dirt include:

■ The cost is tiny as a proportion of the national Budget (five basis points or .05pc) and would benefit a very large number of small and medium- sized savers meaningfully over time.

Standard Life and the industry have suggested that the Government reduces Exit Tax by 2pc per anum until it reaches 33pc at a cost of €15m a year. This represents 0.05pc of annual Exchequer returns of €32.42bn to August 2018.

■ Until 2016, Exit Tax and Dirt rates were identical for almost 20 years as policymakers recognised savers' and investors' behaviour needed to be based on the underlying investments' merits and not swayed by preferential tax treatment. Savings tax rates need to be equalised to avoid unintended behavioural impacts.

■ Equal tax treatment would mean better options for hundreds of thousands of people.

If Finance Minister Paschal Donohoe and his Government started equalising tax savings rates next week, more savers could seriously consider their investment options.

Savers would be better off, the Exchequer would expect to be better off as higher yielding investment funds would mean a higher tax take. It would be a win-win for everyone.

(Figures are based on a Standard Life survey, August 2018 of 1,015 adults where three-quarters have a deposit account. There are at least one million savers affected - more when retired people are included.)

Michael McKenna is managing director of Standard Life Ireland

Irish Independent

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