A look at posts on reddit about this show how big our financial literacy problems are. I know this kind of account is a big shift but there has been loads in the media about it. People don't understand the basics of how it works and many are still thinking there is exit tax when you encash it, or not really getting that 1% on total value is different to 1% on gains etc
limits announced in Budget
- Thread starter Connard
- Start date
But it's neither in this case. It's 1% on any balance amount over €50K.
Sure, there is the tax free threshold, but the key concept to understand from a literacy perspective is that the tax is levied on the total value of the fund.
Details like tax-free allowance and caps may well change year to year, the principles likely won't.
It's not. It's on the amount over €50K.
I see it as a 1% flat tax on the value of the fund less the current tax free threshold (currently 50k, but could be 100k or 10k or 0k in the future, who knows!)
Imo this is functionally two separate products in one.
The value of every euro in the tax free portion is worth more than the value of the every euro above the threshold because of the tax free growth in the former.
Maybe you stick 40K in there and harvest the tax free growth as it approaches 50k. To go above the 50k limit you then have to make a separate call vs other investment options, like paying off debts etc.
IMO the proper order now is probably:
Reduce mortgage to comfortable level
Max Pension contributions
Max Simon Saver to 45k - harvest growth periodically once reaches 50k / top up if drops below this threshold
Pay off mortgage
Put money in Simon saver above 50k once you don’t have other outstanding debts
The value of every euro in the tax free portion is worth more than the value of the every euro above the threshold because of the tax free growth in the former.
Maybe you stick 40K in there and harvest the tax free growth as it approaches 50k. To go above the 50k limit you then have to make a separate call vs other investment options, like paying off debts etc.
IMO the proper order now is probably:
Reduce mortgage to comfortable level
Max Pension contributions
Max Simon Saver to 45k - harvest growth periodically once reaches 50k / top up if drops below this threshold
Pay off mortgage
Put money in Simon saver above 50k once you don’t have other outstanding debts
What do you mean by this, withdraw it? Then you’ll miss out on compounding so what’s the point?
You won't pay any tax if you withdraw anything over say 40-45k every year - the account is a no-brainer up to 50k. After that, it's a brainer
-)) and other potential options come more into play depending on circumstances (pay off mortgage etc).
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This illustrates well the difference between tax on value and tax on growth, although there's a 1% missing:
€100 invested
3% on bonds = 103
Tax = 1.03
Equivalent CGT = 1.03/3 = 34.3%
8% on equities = 108
Tax = 1.08
Equivalent CGT = 1.08/8 = 13.5%
CGT equivalent rate = (1%/rate of return) + 1%