Case study Long Term Investment Options

[Steve00]

I have a number of open ended investment products in multi asset funds in Life/investment Companies which generally have worked well for me.

I have no debt or money worries thankfully. I have not insignificant non-mortgaged Irish property assets which are largely conservatively managed to benefit family members & a few of their friends as short term tenants on a college year basis. Fully tax compliant & works well with a minimum of fuss.

I have no interest in being a landlord +/-buying more property either here or abroad ( a previous post some years ago might explain why). I do intend funding a substantial deposit to each of my kids when the time comes for them to buy a home.

I have a good income & am building a substantial pension fund. I am self employed. I intend to keep working to my early 60’s at least. I want for nothing; have a moderate lifestyle; money is not my god. I have no interest in complex inheritance or financial planning.

I now actively focus on keeping my financial life simple & straightforward. Lessons have been learned from previous poor investment strategy & an over reliance on financial advisors who were barely disguised snake oil salesmen. The Celtic Tiger has a lot to answer for !. I have no interest in chasing ‘an extra 1%’ if you know what I mean. I have no interest in direct share investment. I invest annually in a repeat high end bespoke de-risked EII mechanism which has & continues to work well for me.

I have a mid range 6 figure sum that I am now wishing to invest. This is long term money which I am most unlikely to require access to in the next 10 years (if ever personally). I have a high 6 figure sum invested in the already mentioned funds.

My question is, with my profile as outlined above, whether it make more sense generally from a charging structure to invest the monies in the existing products or to place the money in 2-3 new fund products as I am being advised to after sone initial discussions.

I am all in favour of spreading investments aa a general risk mitigation strategy. My amateur but informed view is that a) neither I nor anyone can predict future performance so more individual investment products may not necessarily benefit if all are in some form of multi asset funds b) the inescapable 41% 8 year exit tax & 1% initial charge means that significant long term upside performance is unlikely anyway & I have always invested before now with an overall strategy to match or very slightly beat inflation. c) with a) & b) above attempting to minimise initial & ongoing charges becomes fundamental in assessing such investment options.

Anyway I am all ears to any sensible advice or opinion.

 

[Marc]

When you say you are self employed do you trade as a sole trader or a limited company?

 

[ClubMan]

With the amounts of money that you seem to have already invested and yet to invest and with a c. 10 year timeframe it seems odd to me to invest indirectly in funds which I presume are subject to 40% tax, deemed disposal every 8 years and potentially significant charges - rather than investing a good chunk directly in shares with lower charges and better tax treatment.

 

[Steve00]

When you say you are self employed do you trade as a sole trader or a limited company?

I work in a (non-financial) professional services partnership environment.

 

[Steve00]

With the amounts of money that you seem to have already invested and yet to invest and with a c. 10 year timeframe it seems odd to me to invest indirectly in funds which I presume are subject to 40% tax, deemed disposal every 8 years and potentially significant charges - rather than investing a good chunk directly in shares with lower charges and better tax treatment.

Could you expand on this & how it might be done practically ?. I have a significant distrust of financial advisors from previous bad experience. I would partially blame myself for this in taking my eye off the ball despite well having had the skills/ability to avoid it. I will not make those mistakes again. I have an advisor/broker who oversees pension/life company investments on my behalf. He knows me well & my preferences; he has, in my opinion, served me well in the last 10 years. I both trust & like him which is hugely important to me. He is a friend.

He has recommended the approach above based on discussions we have had & knowing my approach. Perhaps I have been too limited in my request of him on this ?. I don’t involve him in EII as sourced elsewhere and has worked well for 10+ years in mitigating tax bills and delivering as promised with the ability to re-invest on a cyclical basis.

I’d be interested in knowing how you or others might approach bearing in mind my original post & that I really have no interest of financial sales people trying to sell my products.

I am very happy with how the rest of my portfolio is managed, overseen & performing. I have no intention of re-inventing the wheel here. It’s probable that I will have further amounts to invest in the coming years as annual EII investments become fully funded from returns rather than partially so as at present. Thanks

 

[ClubMan]

Sorry I don't know what "EII" is.
If your already invested money is in a unit linked style fund then it's almost certainly less attractive than direct share investments for the reasons that I mentioned above.
If you wanted to buy shares you just buy them! It's perfectly simple. And there are loads of low cost brokers available these days.
In your case buying a basket of shares that replicates the mix of a common market index should be feasible.
This is like rolling your own ETF.
(Unfortunately, like unit linked funds, most ETFs are also unattractive due to their tax treatment).
Alternatively you could do that I did and just buy the likes of Berkshire Hathaway, Markel, Fairfax Financial Holdings, Allegheny etc. which are arguably like diversified market index trackers in a single share.
Please note that I am not tipping these stocks here but just citing them as examples.
There are loads of existing threads about investing in shares directly that you should search for and study.
Disclaimer: I am not a finance professional/advisor.
Other posters may have different opinions but I feel that with the amount of money that you're talking about you should probably have at least some of it invested directly in shares.

Edit: I should also have asked if you're availing of tax relief when building your pension? And you should probably post a little more detail on your open ended unit linked (I presume) investments - charges, asset allocation etc. so that people can make more informed comment.

 

[Steve00]

EII as per attachment

 

[Steve00]

Yes fully claim pension relief annually.

Open ended various multi-asset funds in Aviva, Zurich, Davy. 1-1.5% AMCs apply.

 

[ClubMan]

1-1.5% AMC isn't the most competitive.
Are there any charges on contributions and encashment?
I'll let others give their opinion but I strongly believe that significant investments directly in shares are an option that you should seriously consider as that seems appropriate for your situation.

 

[Marc]

I work in a (non-financial) professional services partnership environment.

Ok so no scope for fancy pension planning hence the EIIs.

We have consulted with several clients recently in a similar situation.

You absolutely can improve on your present position and depending on your family situation we have seen some very significant after tax improvements.

For example a client is a partner in a law firm and we restructured their personal savings into his wife’s sole name (non working spouse) to take advantage of her personal income tax allowances and exemptions.

Very simple planning but frequently overlooked.

The subject of this blog post

Should I Invest in a Fund Subject to Exit Tax? - Everlake

Examining a more tax efficient investment option.

globalwealth.ie

 

[Steve00]

Ok so no scope for fancy pension planning hence the EIIs.

We have consulted with several clients recently in a similar situation.

You absolutely can improve on your present position and depending on your family situation we have seen some very significant after tax improvements.

For example a client is a partner in a law firm and we restructured their personal savings into his wife’s sole name (non working spouse) to take advantage of her personal income tax allowances and exemptions.

Very simple planning but frequently overlooked.

The subject of this blog post

Should I Invest in a Fund Subject to Exit Tax? - Everlake

Examining a more tax efficient investment option.

globalwealth.ie

Ok so no scope for fancy pension planning hence the EIIs.

We have consulted with several clients recently in a similar situation.

You absolutely can improve on your present position and depending on your family situation we have seen some very significant after tax improvements.

For example a client is a partner in a law firm and we restructured their personal savings into his wife’s sole name (non working spouse) to take advantage of her personal income tax allowances and exemptions.

Very simple planning but frequently overlooked.

The subject of this blog post

Should I Invest in a Fund Subject to Exit Tax? - Everlake

Examining a more tax efficient investment option.

globalwealth.ie

Thanks Marc

Yes the EII & pension have complemented each other thus far very well as you say. I will likely reach the €2m limit in about 6-7 years I would imagine depending on performance obviously. I would probably reduce (not cease) work commitment in or around that time but won’t want or let financial considerations influence my retirement plans. Money not my god as per previous.

My wife works part time but a low(ish) earner. All investments incl property in joint names apart from EII obviously.

3 young adult kids. 2 still in full time education.

Any thoughts on direct share investment as a strategy here as per Clubman or would you still go with some sort of fund option ?.

I am a Davy client as per previous & via my advisor. I presume this would be a straightforward process even though I would have no desire to actively manage buying/selling etc so would probably want my broker/advisor/friend to manage on my behalf. Couldn’t see myself having anything other than a buy & hold strategy in such a scenario. Again presumably I would need to include such matters eg dividends in my annual tax return. Presumably Davy etc liaise re: this with my accountant when preparing annual return ?.

As you can see am in a very fortunate position that I am well aware & appreciative of; not interested in letting money dominate my thoughts but also keen to see it invested efficiently.

3 good kids. All making their way. All with a good work ethic. All getting educated to any level they wish/require. All with a likely substantial CAT bill hopefully many many years down the line but they should be able to well afford it. I have no intention of spoiling them at this or any stage in the future. Have deliberately stayed away from significant inheritance planning for all these reasons thus far knowing that I could mitigate some of it via life insurance policies. No doubt many would this agree with this approach.

 

[Steve00]

‘disagree’ apologies

 

[Marc]

All good background information.

My own observation, speaking as a blowin, on estate planning is that much of the wealth in Ireland has only been created in the last 50 years so there really isn’t the history of intergenerational planning that is more common in the U.K. A section 72 life policy is the classic broker solution since they are invariably almost exclusively remunerated by commissions. In reality there is a lot more to estate planning. We would generally be looking at setting up a family partnership for you.

Estate Planning

Estate planning is the process of anticipating and arranging, during a person's life, for the management and disposal of that person’s estate during the person's life and at and after death, while minimizing gift and inheritance tax

joom.ag

The €2m lifetime limit is a very manageable situation.

Standard Fund Threshold Planning V1

In 2008 the maximum Revenue approved pension fund was €5.4M today it is just €2m. This guide sets out the issues, the possible punitive tax charges and strategies for planning

joom.ag

And yes, we have developed a perfectly workable investment solution which in our professional opinion, supported by expert tax advice means that we are confident that we are using general tax principles (income tax and capital gains tax) rather than the gross roll up exit tax. Absolutely no need to gamble on picking stocks. We use non EU ETFs for our clients that are not available to brokers via Davy in Ireland.

Global Wealth Tax Guide 2022 v1.0

Tax Guide Incorporating Budget 2022 and Revenue E-Brief 164/21 ETFs

joom.ag

I recently did a similar exercise for another client and we were confidently adding around 40k pa after our costs compared to their previous solutions.

I understand that relationships are important but it really boils down to what is really in the best interests of your family.

Always happy to have a chat.

Marc Westlake
Chartered Certified and European Financial Planner
www.globalwealth.ie

 

[Steve00]

Loads of excellent advice there & much to ponder. Many thanks.

 

[Sarenco]

Following the withdrawal of Revenue's guidance at the start of this year, we can no longer be sure whether Revenue will agree that any non-EU ETFs held by an Irish resident are subject to general tax principles (income tax and CGT).

IMO this means that non-EU ETFs are no longer an appropriate investment for Irish residents but I'm sure @Marc will disagree.

 

[PebbleBeach2020]

A small suggestion, but if you children will face significant inheritance tax bills in years to come, have you considered yourself and your wife "gifting" each of the them €3,000 annually tax free? You can gift each child €6,000 per annum tax free and not reduce their thresholds for future inheritance. Perhaps instead of you invest (as you have already maxed your pension) your children could start a pension with this gift and claim tax relief on same (perhaps). They could let it accumulate annually in an account until they commence employment and can benefit from tax relief on pension contributions.

Over 14 years, it would amount to a quarter of a million euros you could "gift to them" tax free. Potentially saving them €84,000 tax bill between them. I know that I personally would prefer this option than giving the taxman a single penny if I could at all avoid it.

 

[Marc]

Following the withdrawal of Revenue's guidance at the start of this year, we can no longer be sure whether Revenue will agree that any non-EU ETFs held by an Irish resident are subject to general tax principles (income tax and CGT).

IMO this means that non-EU ETFs are no longer an appropriate investment for Irish residents but I'm sure @Marc will disagree.

Since it was my Sunday Business post article

Post in thread 'The Tax Treatment of ETFs for Irish residents'
https://www.askaboutmoney.com/threa...-etfs-for-irish-residents.188821/post-1415883

which has been attributed by tax experts as being instrumental in the original revenue e-brief being issued in the first place and since that was rescinded in September we have subsequently sought expert tax advice which simply restates the position that existed prior to the issue of that ebrief then, yes naturally I disagree because to hold a different opinion would be at odds with the facts.

 

[Gordon Gekko]

Since it was my Sunday Business post article which has been attributed by tax experts as being instrumental in the original revenue e-brief being issued in the first place

How do you post this stuff with a straight face?

You were about as instrumental in the original Revenue eBrief being issued as I was in Chelsea winning the most recent Champions League.

 

[ClubMan]

Since it was my Sunday Business post article

Post in thread 'The Tax Treatment of ETFs for Irish residents'
https://www.askaboutmoney.com/threa...-etfs-for-irish-residents.188821/post-1415883

which has been attributed by tax experts as being instrumental in the original revenue e-brief being issued in the first place and since that was rescinded in September we have subsequently sought expert tax advice which simply restates the position that existed prior to the issue of that ebrief then, yes naturally I disagree because to hold a different opinion would be at odds with the facts.

I'm confused - is it not a fact that, right now, most or all ETFs do not qualify for taxation under CGT rules and that there is nothing to indicate that Revenue is going to change this any time soon? Or am I missing something? If anybody responds can they please keep it as simple, jargon free and speculation free as possible. Thanks

 

[Marc]

We have simply reverted to the position that existed prior to the Revenue ebrief

UCITs are gross roll up

Some, but not all, non EU ETFs are general tax principles and some are gross roll up. It depends on how the fund is structured. If it’s materially the same as an Irish fund then it’s gross roll up. This was the reason why the Sunday Business post led to the ebrief being issued in the first place - read the quote from the revenue spokesperson in the link above

If it’s not materially the same as an Irish fund, then Revenue previously accepted that general tax principles apply. That is the case now.

Take for example the massive SPDR S&P 500 ETF. That is structured as a trust on the lives of a number of people. When the last of these dies, the trust winds up. Not materially the same as an Irish fund. Not remotely the same as an Irish fund. A Non EU ETF previously accepted by Revenue under general tax principles prior to the Ebrief. QED

The confusion arises when people claim this isn’t the position - when in fact it is