Should I close my investment fund and lose units built to switch to a lower cost fund?

[david_]

For the last 3 years I have put money into the Zurich Dynamic savings fund via monthly direct debit. I currently have €30,000 in the fund. I plan on continuing to save at least €500 per month for the next 15 years.

I am paying an AMC of 1.5% which I only recently found out is very high. I discovered that I can get an AMC of 1% for the same fund through a different broker. Both offer 101% allocation and no exit charges.

Will it be worth my while to cash out this policy with a 1.5% AMC and lose the units I have built so that I can open the same fund with a 1% AMC and gain more from my investment in the future?

I am aware that I can buy ETFs directly as a cheaper investment option, however I am happy to pay the 1% AMC for the Zurich fund so that I will never have to worry about deemed disposable.

 

[ceannt]

Have you tried to negotiate with your current broker to get the lower rate?

 

[Duke of Marmalade]

If there are no exit charges I can't see any downside in cashing out and reinvesting with the 1% broker.

 

[AJAM]

Agreed, there are no downsides, just less fees for you.

 

[david_]

Have you tried to negotiate with your current broker to get the lower rate?

Hadn’t even thought of trying this, thanks

 

[Steven Barrett]

Have you tried to negotiate with your current broker to get the lower rate?

You can't. The amc is fixed under each contract and cannot be changed. The issue is the tax liability that will be incurred. He would have to cash in the existing plan and transfer the funds to the new plan. You have to work out the tax liability and how long it will take for the savings in amc to pay for that.

 

[GSheehy]

In addition to the potential tax implications that Steven mentioned ( assume OP paid in €25K - exit tax liability €2,050. Reinvest €27,950 and value grows to €30,000 - another €840.50 liability. If value of the €27,950 dropped on the new plan then the exit tax paid on the old plan won't be added back). Granted, these may be only short-term downsides but they're there if OP couldn't go the full term to wash out the cost by the 0.5% pa saving.

Also, if OP was receiving 101% allocation on original plan it's very likely that the €27,950 would not receive that on a new plan, from the same provider. The 1% isn't a provider cost, but a Government one, and the providers cover it on some plans. That reduces margin so it would be unreasonable to expect that they would pay it again on a value that they've already added it to. There's a note about this on the product profile that intermediaries would have access to but a customer would not see that.


Gerard

www.prsa.ie

 

[Steven Barrett]

And adding onto Ger's post, if you did cash it in, you'd be better investing it as a single premium not connected to the regular premium plan as single premium contracts have better pricing than regular premium ones. You could get an even lower amc on the lump sum payment.

You'd want to do your sums and see when the break even point is on crystallising the fund now and taking the tax hit.

 

[GSheehy]

You could get an even lower amc on the lump sum payment.

...whilst also bearing in mind that if you chose different funds on two separate contracts you couldn't offset losses/gains on individual funds against each other. Whereas you can if it's within the same contract.

 

[Duke of Marmalade]

In addition to the potential tax implications that Steven mentioned ( assume OP paid in €25K - exit tax liability €2,050. Reinvest €27,950 and value grows to €30,000 - another €840.50 liability.

That is a net payment of €29,160.
If you stay invested then your fund will grow to 30k x 30/27.95 = €32,200 and after tax you will receive €29,248 so that the tax cost of encashing early would be €88.

If value of the €27,950 dropped on the new plan then the exit tax paid on the old plan won't be added back).

That is true.

A further complication is that I expect that the 41% emergency exit tax will be reduced this year possibly all the way down to the DIRT rate of 33%

 

[Corola]

This year, really?

 

[Sarenco]

A further complication is that I expect that the 41% emergency exit tax will be reduced this year possibly all the way down to the DIRT rate of 33%

That would make euro money market funds look very attractive.

Can’t see our banks liking that!

 

[Steven Barrett]

That is a net payment of €29,160.
If you stay invested then your fund will grow to 30k x 30/27.95 = €32,200 and after tax you will receive €29,248 so that the tax cost of encashing early would be €88.

That is true.

A further complication is that I expect that the 41% emergency exit tax will be reduced this year possibly all the way down to the DIRT rate of 33%

I would be amazed (and delighted) if that happened. With absolutely no idea of what will happen, my guess is that it will go back to DIRT plus 2% but it will move down to 35% on a gradual basis, like DIRT did when it went from 39% to 33%.

 

[Duke of Marmalade]

That would make euro money market funds look very attractive.

Have to think about that. The way DIRT works is that if there is any guaranteed return at all it is subject to annual DIRT on the bit that is guaranteed. So following this approach the product linked to a cash fund would have to have no guarantees other than possibly that its price won't fall. So you would be tied to a ex post variable return. Not sure that would be a big winner.

 

[Duke of Marmalade]

I would be amazed (and delighted) if that happened. With absolutely no idea of what will happen, my guess is that it will go back to DIRT plus 2% but it will move down to 35% on a gradual basis, like DIRT did when it went from 39% to 33%.

I suppose the smart money would be on DIRT + 2%, consistent with the very original formula before deemed disposal which was Standard Rate + 3%.
I don't think it will be phased in, or at least not intimated that it will be as such an announcement would affect behaviour in a way that was not relevant for the annual DIRT.

 

[Sarenco]

The way DIRT works is that if there is any guaranteed return at all it is subject to annual DIRT on the bit that is guaranteed.

That’s news to me.

Are you saying no DIRT is deducted from interest paid on a demand deposit, where the rate can obviously vary from time to time (much like a MMF)?

 

[messyleo]

In addition to the potential tax implications that Steven mentioned ( assume OP paid in €25K - exit tax liability €2,050. Reinvest €27,950 and value grows to €30,000 - another €840.50 liability. If value of the €27,950 dropped on the new plan then the exit tax paid on the old plan won't be added back). Granted, these may be only short-term downsides but they're there if OP couldn't go the full term to wash out the cost by the 0.5% pa saving.

Also, if OP was receiving 101% allocation on original plan it's very likely that the €27,950 would not receive that on a new plan, from the same provider. The 1% isn't a provider cost, but a Government one, and the providers cover it on some plans. That reduces margin so it would be unreasonable to expect that they would pay it again on a value that they've already added it to. There's a note about this on the product profile that intermediaries would have access to but a customer would not see that.


Gerard

www.prsa.ie

This is very helpful thanks. I am in a similar situation but currently have 100% allocation and 1% AMC and wanted to change to a better deal with another broker (same product) for 101% allocation and 1% AMC. As I haven't already benefitted from the 1% bonus, would I get it on the new contract with the same provider?

 

[Duke of Marmalade]

This is very helpful thanks. I am in a similar situation but currently have 100% allocation and 1% AMC and wanted to change to a better deal with another broker (same product) for 101% allocation and 1% AMC. As I haven't already benefitted from the 1% bonus, would I get it on the new contract with the same provider?

1% insurance levy?

 

[messyleo]

1% insurance levy?

Yes exactly. New deals with the same product (zurich regular premium) offer 101% allocation to cover this - mine doesn't so it is temping to switch but from the above, it may not apply to "switching" even if the new broker states it in their offering

 

[Duke of Marmalade]

That’s news to me.

Are you saying no DIRT is deducted from interest paid on a demand deposit, where the rate can obviously vary from time to time (much like a MMF)?

I was more thinking of bank structured products, say 5 years. To give them parity with insurance companies they only had to pay DIRT annually on the extent of the 5 year guarantee.
I am not sure what the DIRT position is on a deposit which says "trust me, I will give you a good rate but I can't tell you in advance what it is!. but we will tell you in 5 years' time your accumulated interest."
Having said that you may have pointed to an anomaly which would need addressed in a completely level playing field. There are ways of doing this, like look through to the underlying to determine the correct tax treatment.