Life Assurance Exit Tax (LAET) - Changes?

[GSheehy]

Would be helpful to all readers of the forum if you could refrain from mixing in ETF Exit Tax comments/opinions in this post. There's an entire sub for ETFs and another post on what changes are likely to be seen on those following the funds review.

They're different products so best to have as much clarity as possible.

The main recommendations are that the tax rate be reduced, and the Government Levy and deemed disposal to be removed.

My best guess is that we'll be thrown a bone of a small reduction in the 41% tax rate later in the year. The product providers systems are set up to manage the tax so there shouldn't be any issue with adjusting values of clients policies to reflect the change.

I'd really like to see the Government Levy gone as well. If the 1% was gone it would likely lead to a reduction in the AMCs being offered, so that's pro consumer. I haven't discussed it with any product provider yet but I'm pretty sure that those that have 101% allocations of regular contributions on savings contracts would also benefit. As in, instead of 100% being allocated to buy units that 101% would be. The 101% is in the contract.

You can hold different asset classes (or funds) within the same life wrapper product so losses/gains are offset on those within the product. Not sure they need to change anything there on something like an annual exemption. A mechanism to offset losses/gains across different funds from different providers would be helpful though.

When deemed disposal goes I'd like to see them look at making it easier for clients to transfer between different savings/investment products, like you can with PRSAs. As it stands, you're consolidating a loss/gain if you encash one plan to invest in another as the encashement is a deemed disposal event. That's forcing consumers to stay in contracts that have high charges.


Gerard

www.bond.ie

 

[Corola]

I'd really like to see the Government Levy gone as well. If the 1% was gone it would likely lead to a reduction in the AMCs being offered, so that's pro consumer. I haven't discussed it with any product provider yet but I'm pretty sure that those that have 101% allocations of regular contributions on savings contracts would also benefit. As in, instead of 100% being allocated to buy units that 101% would be. The 101% is in the contract.

Why would the AMCs reduce? Wouldn't the 101% allocations be reduced to 100% since their purpose was to compensate the 1% levy?

 

[Fortune]

I'd really like to see the Government Levy gone as well

The continuation of this Levy is a disgrace.

 

[Fortune]

Wouldn't the 101% allocations would be reduced to 100% since their purpose was to compensate the 1% levy?

Existing products will likely have a 1% increase in allocations as a lot of them have allocation rates quoted gross of the Levy.

The products are generally designed with a gross allocation rate greater than 100%. That's used to cover the Levy and broker commission. As the >100% gross allocation has to be paid for by the insurer, they have to recoup it via the ongoing AMC. When the Levy is removed, existing policies would likely immediately get a 1% increase on allocation as the Levy is no longer deducted. For new policies or new products, the removal of the Levy could either give a higher net allocation, or keep the allocation the same as it was with the Levy but reduce the ongoing AMC.

The 101% allocation existed before the Levy, and wasn't there only because of the levy

 

[Corola]

For new policies or new products, the removal of the Levy could either give a higher gross allocation

You mean lower gross allocation? Or higher net allocation? If the gross allocation increased from 101% to 102% the consumer benefits twice, they'll have 2% more invested in the fund than before.

or keep the allocation the same as it was with the Levy but reduce the ongoing AMC

There is no reason to reduce the AMC if the allocation rate stays the same.

Consider €1,000 gross premium invested with 101% allocation:

With the levy
Consumer pays insurer 1,000
Insurer adds 10 for the extra allocation = 1,010
Insurer deducts 10 to pay Revenue = 1,000 in the fund

With the levy removed
Consumer pays insurer 1,000
Insurer adds 10 for the extra allocation = 1,010 in the fund

The consumer benefits by €10. The insurer's costs are the same.

 

[Fortune]

higher net allocation?

Sorry, that's what I meant. A terrible day for typos

 

[Fortune]

There is no reason to reduce the AMC if the allocation rate stays the same.

I was talking about the net allocation staying the same. Giving the customer a net 100% costs less if there's no Levy to be paid.

 

[GSheehy]

If you take the product in the link above as an example, the intermediary would probably go back to the provider and say : You don't have to cover the cost of the Government Levy anymore so that means your marging will increase. How about you pass that on to new clients via a reduction in AMC of 0.10% to 0.15% so that we can offer a product with 100% allocation, no early exit charges, and an AMC of 0.50% to 0.55%.

No guarantee that they'd do it but I would be confident of a change. They may also consider that, once some of these barriers to entry/competition are removed, there may be a greater flow of money from deposit so and that there may be greater scope for more competitive AMCs based on volume.

 

[faketales]

You don't have to cover the cost of the Government Levy anymore so that means your marging will increase. How about you pass that on to new clients via a reduction in AMC of 0.10% to 0.15% so that we can offer a product with 100% allocation, no early exit charges, and an AMC of 0.50% to 0.55%.

They is not really easy to compare are they?

I suppose an individual broker can because they know their costs in relation to the 1% and there earnings from AMC. I looked at a few situations of bypassing a broker for a better rate and it usually made sense even though you would lose the 101% allocation.

Is the point being made here that even if the 1% fee was dropped brokers would be contractually obliged to contribute 101% to the fund?

 

[Corola]

Is the point being made here that even if the 1% fee was dropped brokers would be contractually obliged to contribute 101% to the fund?

Yes, for existing policies.

The policyholder ultimately pays the levy, not the insurer. So removing the levy directly benefits the policyholder. The insurer indirectly benefits too since the AMC will be charged on a fund that is 1% bigger.

 

[GSheehy]

Is the point being made here that even if the 1% fee was dropped brokers would be contractually obliged to contribute 101% to the fund?

Brokers don't cover the cost of the Levy, product providers do.

The Levy is a charge on the policyholder but the provider makes the investment whole again (100%), to the benefit of the policyholder, by applying 101% allocation to pemium after the deduction of the Levy. If you set up a regular savings plan for €250pm with 101% allocation and no early exit charges you'd see on the Disclosure Schedule that projected expenses and charges to date (in year 1) is a minus figure, so that confirms it's a cost to the provider.

Given the choice at the moment between 99% allocation (without the provider covering the cost of the Levy) and 100% allocation (with the provider covering the cost of the Levy, I can't see anyone choosing the 99%.

If the Levy was removed by Government then the part of the policy schedule that states 101.00 % of Premiums excluding Levy Used to Purchase Units at the Ruling Bid Price would still apply to the plan. I'd say they'd have to honour that by applying 101% of (post levy removal) premiums leaving client with 101% of their money being invested as opposed to 100% now. So, given the anti-consumer resitrictions via deemed disposal on consolidating a loss/gain by moving from (say) this plan to (say) a new one with 100% allocation and a slightly less AMC it's not so bad.



Gerard

www.saveandinvest.ie