Should I add to PEP at 20% exit tax or a low cost fund at 41%?

I am retired and have a longstanding PEP which I intend to keep for a few years. I understand that the Tax on gain will be only 20%. I have the option now to add €12000 to this fund. The additional funds added would attract
a Premium Charge of 4.5% and a monthly policy value charge of 1.25%.
In view of the low Tax rate would this be a wise course of action?

a monthly policy value charge of 1.25%.

Click to expand...

Presumably this is an annual charge, charged monthly.


Let's say you invest it in an ordinary fund for 10 years and it grows by 5% a year before charges, or 4% a year after charges.

So you should probably add to the PEP, if you think that these assumptions are reasonable.

There are other reasons for adding to the PEP.

1) If you invest in a new fund and it goes down in value, you can't use the losses. If you invest in the PEP, the losses of the new money are set against the existing gains in the PEP.
2) You might be able to negotiate a reduction in the 4.5% initial charge
3) I have assumed no initial charge for the new ordinary fund, but there could well be early exit penalties.

Thank you very much Brendan, I can see the low tax advantage now.

Thanks again.

Hi Rayn

There was an error in my underlying spreadsheet which I have corrected now.

The PEP is still ahead, but by less.

Brendan

Hi rayn

I made certain assumptions about the tax treatment of the PEP. Can you check with your product provider that this is how they actually work? Which company is it and what is the status of the product.

For example, on a new fund, you invest €12,000 - the profit if €5,000, they tax this at 41%.

With an old fund, you gave them €12,000 and they might have deducted the €540 initial charge, and then invested the net result. The impact of this is that when calculating the profit for tax purposes, the cost is €11,460 and not €12,000.

If this was the way it was done, the advantage remains, but it's around €116 less, which brings the return very close together.

Of course, if you can get the initial fee of 4.5% waived or reduced, then the PEP would be superior.

Brendan

Thanks Brendan,
Yes I asked the local BoI investment man re reduction of fees as the policy says that the "appointed actuary" can vary both the Premium charge and the annual charge and he says the answer was no.
The policy is a Lifetime PEP taken out in 1998. I believe there are not many left,

Obviously if the level of growth was higher the PEP would win hands down.

I have not reworked Brendan's calculations but I would be confident that if the return assumption was lowerthe PEP would not win out.

If the fund is invested conservatively, growth for the next number of years might be negligible(how much lower can bond yields go?) in which case the substantial tax advantage wil be more than off-set by the higher charges

One other thing to watch out for - many of those older policies had Initial and Accumulating units and if this is the case do not invest any more money in the PEP.

Hi Monksfield

Good points there.

Assume a growth rate of 2%



It's unlikely that it has Initial units if there is an initial charge of 4.55%.