Deep dive on ISK vs IT/CGT

Thanks for carrying out this exercise Duke.

I think my takeaways are:

1. The ISK treatment is unfavourable relative to CGT if you are unlucky enough to have poor returns early on.

2. The ISK treatment is unfavourable relative to CGT over really long holding periods.

3. The ISK treatment is not suited to investments with low expected returns, such as deposits.

I’m actually surprised that ISKs are so popular in Sweden - is convenience really that important to folks?
 
Sarenco said:
The ISK treatment is unfavourable relative to CGT if you are unlucky enough to have poor returns early on.
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The ISK is incredibly favourable relative to CGT if you are lucky enough to have strong returns early on. The risk isn’t symmetrical with the upside generally far outweighing downside per dukes scenarios.
Sarenco said:
The ISK treatment is unfavourable relative to CGT over really long holding periods.
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This is true, but the breakeven point is like 35 years on a best estimate view. How many people have an investment horizon more than this?
Sarenco said:
The ISK treatment is not suited to investments with low expected returns, such as deposits.
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Agreed and this is by design.

Add in that diversified equity exposure is so hard to get in Ireland under CGT without taking higher fees and active management risk with investment trusts - it would seem ISKs will be far more appropriate for most investors except those wealthy enough to never expect to sell their assets. The convenience is just an added bonus. Of course there will be exceptions but Dukes analysis clearly shows for median outcomes. ISK is phenomenal.

That assumes the ISK admin/platform fee drag is equivalent to what people get with CGT (I.e. close to zero)
 
Brendan Burgess said:
So should it not be omitted from the tables?
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This is a correct spreadsheet dealing with DD at any duration. I am unable to edit an earlier post in another thread which has the old spreadsheet which could only handle DD at the 8 year point.
 

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Wolframius said:
Why artificial? You don't expect that low-cost accumulating index fund can be purchased on the future Irish ISK?
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It's artificial becuase it is very difficult to get one of these under CGT. If it's an ETF it likely falls under DD.
 
Brendan Burgess said:
Why is the ISK's advantage peak at 28 years and then decline before turning negative?
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The ISK advantage will always peak and turn negative, because the CGT gets to compound the tax that it didn't pay. Eventually the compounding gets large enough to overtake the ISK advantage.
 
AJAM said:
The ISK advantage will always peak
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I suppose the question is why does the ISK advantage rise at all, after all we are comparing 1% each year with a steady 33%. The reason is because my exhibit was expressing the difference between them as a proportion of the initial €1k investment. Or put another way it is a steadily lessening advantage but the advantage is enjoyed on a growing absolute amount of gain.
Below is the same exhibit but instead of scaling by reference to the initial €1k investment I scale by reference to the gross ETF at the point of comparison. We still have that increasing feature in the early years but it steadies itself before falling.
1775403488770.webp
 
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It’s also sensitive to the CGT rate. A narrowing of the rate reduces the delta and duration also. The comparison with a 20% CGT rate for example, is stark.
 
AJAM said:
It's artificial becuase it is very difficult to get one of these under CGT. If it's an ETF it likely falls under DD.
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Yes, but I was discussing this in light of the proposed new ISK-like scheme. If you will be allowed to buy ETFs in the new scheme, a 0% dividend yield is very realistic.
 
Wolframius said:
If you will be allowed to buy ETFs in the new scheme, a 0% dividend yield is very realistic.
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Realistic but not relevant as dividends and capital gains are themselves both tax free in the ISK. But in comparing an ISK with a conventional ETF it will be important to know how accumulator ETFs will be taxed - CGT only has more or less been ruled out so possibly the current DD ET regime will be maintained but maybe at a lower rate.
 
Sarenco said:
In particular, they state that it is not possible to conclude that the ISK structure is tax-advantaged relative to conventional (CGT) taxation (over any tax-free allowance).
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I think the "over any tax free allowance" piece is critical. In its early years the ISK structure benefitted from low interest rates (therefore a low tax rate) and significant equity market returns. Recently the tax free allowance basically gives a guaranteed tax advantage to a fair limit.

Ireland's €170bn of deposits is about €37k per adult, but the median is obviously going to be a lot lower. The median ISK account size is around €7-8k and I wouldn't be surprised if Ireland's ended up being similar. Thus a scheme with a c.€25-30k tax free allowance will be significantly tax advantaged for the majority of people. After that YMMV depending on your total account value and investment returns and sequencing, which is difficult to predict.

I'd bet that once we see the scheme emerge in detail there will be a really clear flow of logical investment advice that will go something like "Once housing secured, first maximise your pension wrapper because it's a use it or lose it allowance; then maximise your ISA tax free wrapper; then continue with it to the value of €x, because a 1% (say) tax is broadly efficient to that level; then we get back to complex spreadsheets and scenario planning and risk appetite" - at which point, you're discussing the very top few percentage of potential investors.
 
Perhaps I’ve missed it, but are we expecting any additional institutional fees for administering the ISK beyond the 1% tax? I realise this isn’t known yet, but is it too much to hope that we might get a fee free trading account, similar to Trading 212 (and others) that administer UK ISAs?
 
seam13 said:
Perhaps I’ve missed it, but are we expecting any additional institutional fees for administering the ISK beyond the 1% tax?
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It's a good question. If the SSIA is anything to go by there will be no explicit extra fees. In fact we had a perverse phenomenon with life assurance SSIAs. Such was the scramble to get a piece of the action that charges actually came down - like from 15 months no investment period to 6 months.
You probably mean holding shares and ETFs under the ISA wrapper? The Swedish experience is that there are usually no charges for the wrapper - the providers make their money in the usual way from brokerage fees etc.
 
Duke of Marmalade said:
In fact we had a perverse phenomenon with life assurance SSIAs. Such was the scramble to get a piece of the action that charges actually came down.
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They were still 1% or more.


But there are a number of low charging funds around. Quinn Life is the lowest charging - 1% annual management fee and nothing else. No initial charges, exit charges or set-up charges.

If for some reason you don't want to go with Quinn Life, the next best value is the EBS Summit Funds which charge 1.5% a year.
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Some companies still tried to flog their rip-off flexi whole life policies. Although they emphasised that these were not 5 year savings plans but open ended plans. Nonetheless they had to cut the 15 months initial no investment period to 6 months.
 
It’s important to note that in Sweden, ISK providers are not required to collect the tax. They merely advise Swedish Revenue how much tax the account holder owes, and it’s added to their annual tax bill. This makes it easy for low-cost stockbrokers.

From what I understand, at this time, the government here will require SIA providers to collect the tax, and IMHO this will almost certainly rule out online low-cost stockbrokers participation.

If this is the case, you can expect to be paying a select few SIA providers such as Zurich and Standard Life etc a ~1% extra p.a. fee with penalties for early withdrawals.

I hope I’m proven wrong.
 
@Mez! You make and interesting point. I think we will follow the Swedish approach. The Revenue are fairly good at this pre filling tax and PAYE forms once they have the info.
 
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