Is it mad to pay off a cheap tracker?

Brendan Burgess

Founder
Messages
45,213
You are quite happy to "gamble" on the other thread, but you need more than 20 companies to invest in?????

You would be paying only 20% income tax + USC/PRSI on the dividends so it should be a lot less than the 41% exit tax.

Brendan
 

Fella

Registered User
Messages
524
You are quite happy to "gamble" on the other thread, but you need more than 20 companies to invest in?????

You would be paying only 20% income tax + USC/PRSI on the dividends so it should be a lot less than the 41% exit tax.

Brendan

My gambling is very considered , I bet a % of my bank roll depending on the expected value of the bet.There are times I have can bet an unlimited amount of money on 20% expected value , I have to take a view on how much I want to bet, obviously you can bet the max float you have but if it losses you are done and opportuinity cost of not been able to take more bets in future. I take the same view with the stock market there was a link posted here showing I think it was that only 40% of companies make up the net gains of the stock market , I don't want to chance my luck that I pick one of them companies , I can't find the link but after reading that link that was posted in a thread I decided that it was too risky to just invest in 10 or 20 companies.

I know from your posting that you post a lot of factually correct things but it neglects the variance , I have lower variance investing in an index tracker as compared to investing in 10 or 20 shares but I am happy with that compromise.

When you sell individual shares eventually to realise a gain you will pay Capital gains tax at 33%
When I sell my accumulating fund eventually that had dividends reinvested i will pay 41% exit tax ,there is not that much in it , given the fact that I have the benefit of accumulating dividends for 8 years without paying tax on them.

The sucker punch with funds is no loss relief
 

ClubMan

Registered User
Messages
44,340
theres not that much in it 33% CGT v 41% exit tax ... but with the dividends reinvested you are not paying tax on this yearly so you are gaining this dividend compounding tax free till 8 years so it has to be worth something .
41% versus 33% is 8% which is hardly peanuts!
Plus the first €1270 of a capital gain is exempt and previously incurred losses can also be offset.
Also I don't think you avoid tax by reinvesting dividends - you still need to declare and pay tax on them as far as I know.
You have twice talked about reinvesting dividends tax free - this is wrong as far as I know.
 
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Fella

Registered User
Messages
524
41% versus 33% is 8% which is hardly peanuts!
Plus the first €1270 of a capital gain is exempt and previously incurred losses can also be offset.
Also I don't think you avoid tax by reinvesting dividends - you still need to declare and pay tax on them as far as I know.
You have twice talked about reinvesting dividends tax free - this is wrong as far as I know.

There is very little in the difference I found a spreadsheet from 3cc posted here , he has accumulating ETF's been more tax advantageous than holding shares directly , I've played around with the figures and adjusted the tax as its changed on Exit tax since his sheet , it is very close now , like 100k invested in shares after 16 years compared to an accumulating ETF is 250,*** v 250,*** so your looking at a few 100 difference over 16 years , there are many things not taken into consideration like the actual cost of reinvesting the dividends manually , transactions fees and the 1% stamp duty on Irish shares , and the lack of diversification I would say it is not conclusive that holding shares directly is advantageous over holding an ETF , you can't just look at the tax 33 v 41 as you are neglecting the fact you are allowed to let the dividends compound before paying tax , I am not saying you are avoiding tax on dividends but you get the compounding effect of delaying the tax payment.

There is so great wealth of knowledge on this forum this spreadsheet by 3CC is brillaint and saved me making my own
https://docs.google.com/spreadsheets/d/1fmQL4a4MoaKXEQPi_lCrJVcaWqeEZ_3deGnr94QoSq4/edit#gid=2
 

Sarenco

Registered User
Messages
6,952
There is so great wealth of knowledge on this forum this spreadsheet by 3CC is brillaint and saved me making my own
https://docs.google.com/spreadsheets/d/1fmQL4a4MoaKXEQPi_lCrJVcaWqeEZ_3deGnr94QoSq4/edit#gid=2

Hi Fella

3CC's spreadsheet is excellent but I think the calculations are based off an exit tax of 36% (it's now 41%) and a marginal income tax rate of 52% (on the basis of what you have written elsewhere, I suspect you have a significantly lower marginal income tax rate). If you adjust these rates (but otherwise make the same assumptions), you will arrive at a materially different result over a 16-year holding period.

My preference for equity investment outside a pension wrapper is a widely diversified investment trust (or, ideally, a dozen or so different ITs). That seems to me to be the best compromise between achieving a significant degree of diversification at a reasonable cost and (relative) tax efficiency.

I agree that investing in a concentrated portfolio of 10-20 individual stocks makes no sense unless you are prepared to put in a very significant amount of research to arrive at a conviction that your portfolio will beat (or even match) the return of the wider market - and even then you have to accept that you could be wrong.

Incidentally, if I was in your position I would still prioritise paying off your mortgage, notwithstanding the fact that you are on a cheap tracker, before investing anything in equities outside a tax-deferred pension wrapper. Totally risk-free return with zero tax complications or investment costs.

Edit: apologies, I've re-read your post and I see that you have re-run the calculations to allow for the change to the exit tax rate. Did you adjust the "dividend tax" rate for your own circumstances?
 
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ClubMan

Registered User
Messages
44,340
let the dividends compound before paying tax , I am not saying you are avoiding tax on dividends but you get the compounding effect of delaying the tax payment.
I don't understand.
You have to pay tax on dividends when they are paid - even if they are reinvested as far as I know.
 

Fella

Registered User
Messages
524
Hi Fella

3CC's spreadsheet is excellent but I think the calculations are based off an exit tax of 36% (it's now 41%) and a marginal income tax rate of 52% (on the basis of what you have written elsewhere, I suspect you have a significantly lower marginal income tax rate). If you adjust these rates (but otherwise make the same assumptions), you will arrive at a materially different result over a 16-year holding period.

My preference for equity investment outside a pension wrapper is a widely diversified investment trust (or, ideally, a dozen or so different ITs). That seems to me to be the best compromise between achieving a significant degree of diversification at a reasonable cost and (relative) tax efficiency.

I agree that investing in a concentrated portfolio of 10-20 individual stocks makes no sense unless you are prepared to put in a very significant amount of research to arrive at a conviction that your portfolio will beat (or even match) the return of the wider market - and even then you have to accept that you could be wrong.

Incidentally, if I was in your position I would still prioritise paying off your mortgage, notwithstanding the fact that you are on a cheap tracker, before investing anything in equities outside a tax-deferred pension wrapper. Totally risk-free return with zero tax complications or investment costs.

Edit: apologies, I've re-read your post and I see that you have re-run the calculations to allow for the change to the exit tax rate. Did you adjust the "dividend tax" rate for your own circumstances?


Hi Sarenco

Thanks for your reply you have been a wealth of knowledge on this forum and I have learned a lot from you.

The reply I made was to this post

41% versus 33% is 8% which is hardly peanuts!.............

So i was saying it more or less is peanuts, i used the higher tax rate in my calculations , It is often stated categorically on this site that "investing directly in a basket shares is the most tax efficient way to invest" I don't think its clear cut as I feel people don't take into consideration the fact that your dividends are allowed to grow before you pay tax.

Practically though to reinvest the dividends manually would be expensive most people would not receive a huge amount of dividends and to pay the fees to reinvest and the cost of the spread each time would add up to a lot over time which isin't factored in , lets say you get 100 dividend reinvesting is pointless , you could save it up and do it in one batch but your missing time in the market.

Re paying off the mortgage , I am going to try save for and pay that off in a defined period of like 2 years I have to contact the bank and find out what way to go about it , but it will motivate me to work hard and pay it off .

I decided to just make a lump sum investment in ETF's the price they where lately was not far off the prices i bought at last year so I invested a bit more to leave it at a nice round lump sum as they are not a good dollar cost averaging mechanism IMO . I am going to forget about these for 8 years minimum.

I am not going to do any more investing for the moment when/if I pay off the mortgage (assuming life runs smoothly) I plan to revisit the stockmarket , I will probably just buy Investment trusts every month or so with whatever I earn as I believe they are the best for me outside a pension wrapper.
 

RichInSpirit

Registered User
Messages
952
Hi Fella, I haven't read the complete thread but here's an angle that mightn't have been brought up.
Your were talking about buying shares and holding them for a period of time maybe 16 years.
Why sell them at all in 16 years time? Sell a few if you need the money at the time but you could just hang on to the shares indefinitely and you wouldn't have to pay capital gains tax.
 

Sarenco

Registered User
Messages
6,952
Hi Sarenco

It is often stated categorically on this site that "investing directly in a basket shares is the most tax efficient way to invest" I don't think its clear cut as I feel people don't take into consideration the fact that your dividends are allowed to grow before you pay tax.

Practically though to reinvest the dividends manually would be expensive most people would not receive a huge amount of dividends and to pay the fees to reinvest and the cost of the spread each time would add up to a lot over time which isin't factored in , lets say you get 100 dividend reinvesting is pointless , you could save it up and do it in one batch but your missing time in the market.

Absolutely agree but the calculation is very sensitive to the assumptions used and, in particular, to the applicable marginal tax rate, which can be anywhere from 0% to 55% depending on an individual's personal circumstances.

It is certainly true that investment costs (broker commissions, spreads, stamp duty, currency conversion costs) represent a significant drag on performance over time. To be fair, collectives also have portfolio trading costs (in addition to management fees) but these are likely to benefit from economies of scale.

It sounds like you have a very solid medium term financial plan - best of luck.
 

ClubMan

Registered User
Messages
44,340
Sorry - my mistake earlier about dividend reinvestment.
I thought that you were talking about direct share investment and receiving dividends (albeit reinvested) directly and not within a fund.
 

Buddyboy

Registered User
Messages
719
Just had a conversation with SWMBO regarding paying off the mortgage next year. I was thinking of this thread, and comparing the rate on deposit V our low (.75%) tracker. Then I realised I had forgotten the cost of life (mortgage) insurance. So if I take that into account, and owe 100k on a mortgage, current mortgage rate of .75%, rate of 1.24% on State 5 yr bond, cost of life assurance is €450 pa

Cost of mortgage = 100,000 * ((1.24 - .75)/100)) - 450 = 40. So we are saving 40 PA by not paying off the mortgage. Looks like it makes sense to pay it off next year. This also frees up the mortgage payments to invest/squander.
 

Sarenco

Registered User
Messages
6,952
It's not really appropriate to compare a floating rate (such as the rate on a tracker mortgage) with a fixed rate (such as the annual coupon on a five year bond).

The apples-to-apples comparison is your tracker rate (less any available MIR) and the rate on the best available instantly accessible deposit account (less DIRT and PRSI, if applicable) for the same sum.

You should also leave mortgage protection premiums out of the equation as many would argue that it makes sense to maintain the relatively cheap life cover provided by the policy, even if you are no longer required to do so.
 

Fella

Registered User
Messages
524
Still haven't paid this mortgage off I'm unsure if it's the right move or not. I put the money into an account earning nothing and the mortgage just comes out of this money each month.

Currently
Mortgage -188k tracker 1.1% above ecb
Savings not even in savings account - 200k
Investments - 240k

Every couple of months I transfer out some savings into saxobank and buy more investment trusts.

I get mortgage interest relief of 57€ a month and I've 23 years left on mortgage.

One thing that struck me in this thread is
Brendan's comment if I got a loan of 200k at 1% I'd take it and buy shares , that's the only other option for the money I feel , my own opinion is even if I got a loan at 0% now I wouldn't take it , am I wrong and missing out on the value of free money ? A guy I know who buys buy to lets in Northern Ireland says I'm mad and I'm not understanding the power to leveraging your money , his opinion is I should more mortgages and leverage up to the max.
 
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