Question: I have a lot of money sitting in deposit accounts – but am concerned at the low rate of interest I am earning, as well as the high-tax rate on savings interest. What should I be aware of before moving any money from my deposit accounts into an investment fund?
Tom, Clonmel, Co Tipperary
EAMON SAYS: The artificially-high deposit rates offered by Irish banks to keep money in Ireland during the banking crisis meant that a lot of money has remained in deposit accounts, and continued to sit there even though interest rates are now very low. We are seeing a gradual movement out of deposit accounts, into investment funds.
Deposit accounts are generally used for short-term needs and rainy day funds. Investment funds should be considered for anything being set aside for long-term growth or income purposes. Second, the tax rate on the returns of both deposit accounts and invest- ment funds is the same.
However, PRSI can apply to deposits accounts. Deposit returns are taxed every year, returns on collective investment funds are taxed on encashment or every eighth anniversary.
Deposits will only go up in value but the real return may be negative if inflation outstrips the return. Investment funds will generally go up and down, but for an increased level of short-term risk, an investor should generally beat inflation in the long term.
Everyone sits somewhere on the risk scale of 1-7, with 1 being "nothing but deposit accounts" and 7 being "nothing but the stock market". In reality, very few will sit at either extreme, meaning that some element of investing is appropriate for the vast majority. You need to assess your capacity for risk, which is how much risk you should actually take – regardless of whether you're a thrill-seeker or not!
Q My parents have given me gifts of €3,000 a year over the last 10 years. I haven't had to pay tax on these gifts because they fell within the annual small gift tax exemption. My parents also plan to leave me a property when they pass away. Are the annual gifts of €3,000 which I have already received taken into account when I get my final inheritance – that is, will they eat into the tax-free threshold of €225,000 that I would normally be entitled to when I inherit something from my parents?
Adrian, Drumcondra, Dublin 9
EAMON SAYS: You will still be able to inherit the €225,000 without paying inheritance tax. That, in many ways, summarises the significant benefit of the annual small gift exemption of €3,000.
It is an excellent way for assets to be gradually transferred from one generation to the next, without eating into the overall exemption. There are some other points to be made in relation to that annual gift. It is an exemption which can be utilised by any two people – so a friend could make a gift to another friend of €3,000 and no tax would be due. Similarly, two parents could each give a son or daughter €3,000 from each – €6,000 each year.
A final point, and one where tax planning can be very advantageous again, concerns the gifting of €3,000 per year to grandchildren (usually in trust). This can create a large transfer each year, particularly where you have a big family, with many grandchildren.
Whilst inheriting money can be quite penal in Ireland now, significant savings can be made through simple use of the existing exemptions.
Eamon Dwyer is managing director of Cork wealth advisers, City Life