Fund choice in managed funds for retired couple

C

Cantillon

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Scenario:
Couple aged 75-80 now, both retired, combined income is 48k gross

Zurich (Eagle Star) Matrix investment bond, managed funds, started in 2007
100k initial amount, with 101% allocation, and 3.5% commission added into fund = 104.5k
AMC = 1%

Spread evenly across eight funds, 12.5k into each, as follows:
  1. Active Fixed Income, risk = 3/7
  2. Long Bond, risk = 4/7
  3. Balanced, holds 50-75% equities, risk = 5/7
  4. Performance, holds 65-90% equities, risk = 5/7
  5. Dynamic, holds 75-100% equities, risk = 6/7
  6. Eurozone Equity, risk = 6/7
  7. Dividend Growth, risk = 6/7
  8. Eurozone Property, risk = 6/7

At the eighth year, 2015, the fund was worth 150k approx., and approx. 20k tax was paid. Next deemed disposal due this year 2023.

I am reviewing fund choice, and the policy overall.

Q1. if property prices and rents have risen so much in many European countries, how come the Eurozone Property fund has done the worst? It's peak was 13,600, now at 12,400? This is the worst preforming fund by a long way.

Q2. Unless there is some sort of disaster, these funds will never be encashed. If cash is required for long-term care, there are deposits available. Given that, should we do a fund switch? Get out of Eurozone Property, Eurozone Equity, Dividend Growth?

Q3. I realise there is overlap between these funds. The three mixed funds probably hold the same shares, but just in different weights with bonds. The three mixed funds hold eurozone equities, and bonds. Is there an argument to simply hold one mixed fund?

Q4. We considered switching broker to move to a lower AMC, but this discussion has dissuaded me

Key Post - Strategy around the 8 year deemed disposal

Thanks @GSheehy - so, if I'm cashing in a unit linked fund to invest the proceeds in shares subject to CGT then I presume that the timing is irrelevant?
www.askaboutmoney.com

Thanks for any comments.
 
Cantillon said:
Q1. if property prices and rents have risen so much in many European countries, how come the Eurozone Property fund has done the worst? It's peak was 13,600, now at 12,400? This is the worst preforming fund by a long way.
Click to expand...
Have you checked the fund's annual reports/updates?
Q2. Unless there is some sort of disaster, these funds will never be encashed. If cash is required for long-term care, there are deposits available. Given that, should we do a fund switch? Get out of Eurozone Property, Eurozone Equity, Dividend Growth?
Click to expand...
If it's the wrong fund for the investors' needs, yes.
If it's an attempt to time the market, probably no.
Q3. I realise there is overlap between these funds. The three mixed funds probably hold the same shares, but just in different weights with bonds. The three mixed funds hold eurozone equities, and bonds. Is there an argument to simply hold one mixed fund?
Click to expand...
If the investment is unlikely to be cashed in then why not simply one all/mostly equity index tracker? I'm not sure what happens on death tax wise with such a fund. Maybe direct equity investments would be better since the CGT liability disappears on death?
Q4. We considered switching broker to move to a lower AMC, but this discussion has dissuaded me

Key Post - Strategy around the 8 year deemed disposal

Thanks @GSheehy - so, if I'm cashing in a unit linked fund to invest the proceeds in shares subject to CGT then I presume that the timing is irrelevant?
www.askaboutmoney.com
Click to expand...
But the next 8 year deemed disposal is imminent anyway so I'm not sure what the downside to encashment and reinvestment is? But, maybe shares would be better as I mentioned above?
 
Cantillon said:
Scenario:
Couple aged 75-80 now, both retired, combined income is 48k gross

Zurich (Eagle Star) Matrix investment bond, managed funds, started in 2007
100k initial amount, with 101% allocation, and 3.5% commission added into fund = 104.5k
AMC = 1%

Spread evenly across eight funds, 12.5k into each, as follows:
  1. Active Fixed Income, risk = 3/7
  2. Long Bond, risk = 4/7
  3. Balanced, holds 50-75% equities, risk = 5/7
  4. Performance, holds 65-90% equities, risk = 5/7
  5. Dynamic, holds 75-100% equities, risk = 6/7
  6. Eurozone Equity, risk = 6/7
  7. Dividend Growth, risk = 6/7
  8. Eurozone Property, risk = 6/7

At the eighth year, 2015, the fund was worth 150k approx., and approx. 20k tax was paid. Next deemed disposal due this year 2023.
Click to expand...
What's the total fund worth now and if possible the value of each of the eight funds??
 
May 2022 = 166k, that's after 15 years, including the effects of 20k tax in 2015.


Active Fixed Income18,676
Long Bond20,067
Balanced 50-75% equities23,114
Performance 65-90% equities24,281
Dynamic 75-100% equities25,277
Dividend Growth21,153
Eurozone Equity21,180
Eurozone Property, risk = 6/712,370
 
This is like the old joke about how to get to Limerick, you wouldn’t want to start from here.

You hit the nail on the head with Q3

The original broker simply didn’t understand how to construct a portfolio.
So you shouldn’t anchor your investment decisions now to what you currently hold at all but rather consider what you should be invested in now.

For example you have three distinct multi asset strategies, balanced. Performance and dynamic each with its own risk rated asset allocation.

These are designed as a single fund selection either balanced or performance or dynamic with the asset allocation decisions being made by Zurich.

You could do a lot worse than picking the most suitable one of those options and tidying things up that way. You would also avoid having to start over with a new contract.

There would be no point whatsoever in starting a new life insurance contract with another company which would also be subject to exit tax.

However, the “textbook” answer for your circumstances would have been to have invested in a more bespoke portfolio subject to general tax principles rather than an off the shelf retail investment fund.

This would have allowed income to be taxed at your marginal income tax rates (you are not paying PRSI now and each have a USC exemption) rather than a flat rate of 41% and capital gains would be taxed at CGT rate of 33% with no 8 year deemed distribution and no CGT on death.

When I set up in Ireland in 2008 almost nobody was thinking that way and that is partially because up until the end of 2008 the exit tax rate was only 23% and has increased over the years to the now stubbornly high rate of 41%.

everlake.ie

Everlake Guide to Investing in Ireland - Everlake

Our Guide to Investing in Ireland aims to help you understand the relatively complex Irish tax and investment landscape.
everlake.ie everlake.ie
 
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Cantillon said:
May 2022 = 166k, that's after 15 years, including the effects of 20k tax in 2015.


Active Fixed Income18,676
Long Bond20,067
Balanced 50-75% equities23,114
Performance 65-90% equities24,281
Dynamic 75-100% equities25,277
Dividend Growth21,153
Eurozone Equity21,180
Eurozone Property, risk = 6/712,370
Click to expand...
Are you able to log into your account and get a current valuation as a lot has happened since May 22 ??
 
@Marc
Thank you very much.
I can't blame the original broker, it was execution-only, I choose the funds, I didn't know as much back then as I do now.

Yes, I understand what you mean about just one fund.

I will keep thinking about this.
 
Cantillon said:
@Marc
Thank you very much.
I can't blame the original broker, it was execution-only, I choose the funds, I didn't know as much back then as I do now.

Yes, I understand what you mean about just one fund.

I will keep thinking about this.
Click to expand...
You’re welcome. It just occurred to me that I’ve been giving financial advice for 30 years and I’ve never arranged anything execution only and I’ve never been asked to do so
 
Marc said:
You’re welcome. It just occurred to me that I’ve been giving financial advice for 30 years and I’ve never arranged anything execution only and I’ve never been asked to do so
Click to expand...
Maybe because you don't advertise an execution only service?
everlake.ie

Pricing - Everlake

Our aim is to always do the right thing for you and your finances. Our policy is total transparency about all the fees that you will pay.
everlake.ie everlake.ie
 
Thanks to all contributors.

This discussion has helped me clarify a few points:

(1) the couple have an average tax rate of approx 10% on their earned income, and a marginal income tax rate of 20%, but this 166k slice of their savings is now stuck in a vehicle where they face a 41% exit tax on gains. Its seems we are stuck with this situation.

(2) it seems that the consensus is not to switch broker, pay exit tax, and start a whole new policy, just to save 0.35% AMC.

(3) it was my mistake to choose three mixed funds at the start. I now see that it is a choice between A or B or C, and I was foolish to choose all three mixed funds. I plan to do fund switches.

Thanks.
 
Cantillon said:
Thanks to all contributors.

This discussion has helped me clarify a few points:

(1) the couple have an average tax rate of approx 10% on their earned income, and a marginal income tax rate of 20%, but this 166k slice of their savings is now stuck in a vehicle where they face a 41% exit tax on gains. Its seems we are stuck with this situation.

(2) it seems that the consensus is not to switch broker, pay exit tax, and start a whole new policy, just to save 0.35% AMC.

(3) it was my mistake to choose three mixed funds at the start. I now see that it is a choice between A or B or C, and I was foolish to choose all three mixed funds. I plan to do fund switches.

Thanks.
Click to expand...
I don’t get your first point.
Why do you think that nothing can be done about the tax differential between your marginal income tax rate and the flat rate of exit tax of 41%?
 
@Cantillon

I commend you on your honesty here. You could have let it slide and let someone else take responsibility for the original construct.

Everyone makes mistakes and I've yet to meet a broker who, in hindsight, didn't think that they could/would have done a transaction differently, even though they weren't party to the original transaction and have no idea of what transpired at the time.

I think it's safe to say, at this point, that the Life Assurance Exit Tax regime of today will not be the same in 8 years time and there's no way anyone would have predicted that the rate went the way it did.


Gerard.

www.bond.ie
 
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Cantillon said:
Q1. if property prices and rents have risen so much in many European countries, how come the Eurozone Property fund has done the worst? It's peak was 13,600, now at 12,400? This is the worst preforming fund by a long way.
Click to expand...
Because 2007 was a local peak of European property prices, and in many countries it hasn't recovered. Look at Spain:

fredgraph.png
 
Marc said:
I don’t get your first point.
Why do you think that nothing can be done about the tax differential between your marginal income tax rate and the flat rate of exit tax of 41%?
Click to expand...

I am trying to think of alternatives to the managed funds / 41% exit tax vehicle.

Moving to any alternative means encashing the managed funds, and paying the 41% exit tax.

If the plan is to continue to hold equities, rather than deposits, then what alternatives are there?

(1) Directly purchase shares on DeGiro?
(2) Purchase an ETF on DeGiro?

This couple, aged 75-80, want less complexity in their lives, not more, so I doubt they will go for either 1 or 2.
 
Cantillon said:
This couple, aged 75-80, want less complexity in their lives, not more, so I doubt they will go for either 1 or 2.
Click to expand...
It seems this wealth is meant for their heirs.

In this case just hold a diversified portfolio of growth stocks directly. No CGT bill if held until the end of your life and no deemed disposal rules. Also administratively a lot simpler.
 
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I dont think these elderly people should be encouraged to be involved in managed funds or shares or advised to do so after saving and working hard all their lives.Perhaps State Savings or cash so that they can sleep sound and have peace of mind.Just my humble opinion.
 
DK123 said:
I dont think these elderly people should be encouraged to be involved in managed funds or shares or advised to do so after saving and working hard all their lives.Perhaps State Savings or cash so that they can sleep sound and have peace of mind.Just my humble opinion.
Click to expand...

That’s just lazy analysis though.

Just because someone’s older, it doesn’t necessarily follow that they should be invested in perceived lower risk products.

With inflation running at X%, is cash actually ‘safe’ in any event? You’re almost guaranteed to lose money! Sounds risky to me!

The money sounds like it’s for the next generation and unlikely to be needed.

On that basis, shares etc should be fine.
 
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