Roadmap for the SIA - do not discuss other issues

[Slippers]

Despite the lack of clarity and overall disappointment, that is not necessarily a bad thing; when all is said and done, getting young people to think about investing, gaining experience, and getting a tax break serves the longer-term policy goal

Agree, and I expect that I will encourage my nieces to avail of it once they hit 18.

Finer details pending, I do very much welcome this scheme and I understand it is a scheme that can be evolved in the years ahead.

Disappointed at the moment as the writhing on the wall seems to suggest that the tax free sums involved wouldn't even cover, in my opinion, the purchase of a new car or 4 years of college expenses, never mind a house deposit.

If the vehicle doesn't allow tax free compounding to a meaningful amount people will just pull money after a few years of growth (not guaranteed) and splurge on things like a big family holiday or Kitchen. Nothing necessarily wrong with that but it doesn't encourage long term planning or reward those that wish to save for 20 or 30 years down the line.

 

[nest egg]

to avoid it being criticised as being a tax cut for the rich.

Surely that's easy enough to dispel?

Tell them the state isn't losing out, given a 1% flat tax will raise at least as much as 38% LAET would have (and perhaps even more, given the tax compliance angle).

 

[Zion2022]

getting young people to think about investing, gaining experience,

Think about investing and gaining experience, only to realise when they actually have decent sums to invest, the nice easy streamlined product they're accustomed to has no wider equivalent and they’re forced into the absolute mess that is our standard retail investment world…they inevitably either give up or just buy leveraged property like their parents before them.

I’ve been thinking deeply about investing in Ireland since I was 18. My head still hurts.

A teaser/introductory SIA only works alongside genuine reform and simplification of the wider investment environment, which they’ve kicked the can on for the umpteenth time!

 

[messyleo]

I think the primary goal of this is simplifying things especially tax, and is not really about giving people much of a tax break, so the threshold will be small for that reason imo. The 20k kind of limit is enough for the small nest egg / few bob a lot of people have maybe tucked away in the credit union too and the tax free aspect encourages them to take a riskier option over the "safe" CU deposit. Getting tax free gains on 100k is not going to be politically popular at all. Whatever about increasing the threshold over time with inflation or doing it more gradually.

 

[cath]

How will the tax be collected from the account? Unless there is a cash balance I presume investments in the account will have to be sold by the provider. This won't be trivial to administer and potentially quite controversial in down markets.

 

[Zion2022]

How will the tax be collected from the account

Assume there will be an option to fund it with cash.

have to be sold by the provide

or this

quite controversial in down markets

Unlikely since it’s an absolute maximum of 1%ish (and far less for most given TFLS). You’d barely notice it amongst normal daily market movements.

 

[Fortune]

potentially quite controversial in down markets.

They've been doing it this way for 25+ years for LAET.

 

[TomEdison]

How will the tax be collected from the account?

Ashambles outlines in post 73 how they manage this in Sweden.

I presume investments in the account will have to be sold by the provider. . . . .potentially quite controversial in down markets.

You always have this problem, in one form or another, with a tax on the capital value of assets. It's up to the taxpayer how to manage it, but in this case a simple way would be to keep a sufficient proportion of the account (less than 1% of it, remember) in cash or near-cash so that assets don't have to be sold to meet the tax bill when if falls due. If you're contributing periodically you can top up the cash account from your contributions so that you don't ever have to sell assets to meet the tax bill, so the timing issue goes away.

 

[blackdog]

They've been doing it this way for 25+ years for LAET.

LAET is a tax on gains. If you have no gain it is nil.

The new tax is a tax on capital. If you have no gain you still pay.

 

[Nordkapp]

Just catching up on the days post from abroad. As I mentioned in another thread my spouse took early retirement and part of that lump sum sits in an Irish bank earning pittance.
This thread forgets two things, financial literacy and risk aversion. Why would my spouse move her lump sum out of a bank with DGS of 100k to a PIA with a 20k ICS limit? How safe are these investments, they are / will be capital at risk products.
Whatever about taking risk when you are working, it becomes consolidating what you have when you retire.
I do believe the PIA could fail to attract the very people I mentioned, only the savvy investors if they see there is a useful gain there.
I for one would load my pension AVC rather than go near this product.

 

[TomEdison]

I for one would load my pension AVC rather than go near this product.

That may be a feature rather than a bug. From a public policy point of view, there's no benefit to a new product which just cannibalises the contributions that would otherwise to into pension schemes, so this product has to be less attractive than a pension scheme, and aimed at people who either can't contribute to a pension scheme (because they have no earned income) or don't want to (because they don't want the restrictions on access etc associated with pension schemes).

 

[Duke of Marmalade]

It's up to the taxpayer how to manage it

The problem is that the taxpayer is the provider. This is a key difference from the Swedish ISK. It could be a showstopper as far as the DeGiros of this world are concerned.

 

[Djimi Traore]

This thread forgets two things, financial literacy and risk aversion. Why would my spouse move her lump sum out of a bank with DGS of 100k to a PIA with a 20k ICS limit? How safe are these investments, they are / will be capital at risk products.

While the DGS might help people sleep at night, I would say Irish bank deposits are as risky as it gets over the long term. If you're earning 0.5% per year (before DIRT!) and inflation is running at 3.5% per year then you're down nearly 27% over 10 years.

 

[TomEdison]

The problem is that the taxpayer is the provider. This is a key difference from the Swedish ISK. It could be a showstopper as far as the DeGiros of this world are concerned.

Right. I hadn't appreciated that's how it works in Sweden.

Still, in the Irish context I think it's essential that the tax is deducted within the account, with zero reporting or admin obligations for the accountholder. Otherwise it wil be a significant barrier to entry for the people who are the market at which this product is aimed.

 

[TomEdison]

While the DGS might help people sleep at night, I would say Irish bank deposits are as risky as it gets over the long term. If you're earning 0.5% per year (before DIRT!) and inflation is running at 3.5% per year then you're down nearly 27% over 10 years.

I agree. But the people currently leaving large amounts on deposit over long periods clearly do not share our perception.

 

[Duke of Marmalade]

Still, in the Irish context I think it's essential that the tax is deducted within the account, with zero reporting or admin obligations for the accountholder.

I think the Swedish providers populate the Revenue accounts of the investors. The Irish Revenue seem to be able to accommodate that, for example in the way that they automatically populate people's tax accounts with the OAP. A positive of populating accounts is that there is no issue with making encashments.

 

[TomEdison]

Yeah, it;s perfectly doable, once the systems are in place. It's just that we don't do it, so it's unfamiliar to taxpayers. DIRT is just paid by the deposit-taking institution; likewise tax on deemed disposal. So nobody is accustomed to having their tax-free allowances adusted to collect the tax liability arising on their savings or investments. If these new products do work that way, that will be unfamiliar and a bit of a barrier.

There's another dimension to this, which is that DIRT and DD can work the way they do because they are flat rate taxes, which are not affected by the taxpayer's marginal rate of tax. But if tax on investment earnins is collected by adjusting allwances in the PAYE system, while you can still maintain flat rate taxes on investment earnings, you've no particular reason to. It become very straightforward to tax investment earings at the marginal rate, and there are good arguments for doing so, particularly from the perspective of taxpayers whose marginal rate is low (or nil.)

 

[Itchy]

Yeah, it;s perfectly doable, once the systems are in place. It's just that we don't do it, so it's unfamiliar to taxpayers. DIRT is just paid by the deposit-taking institution; likewise tax on deemed disposal. So nobody is accustomed to having their tax-free allowances adusted to collect the tax liability arising on their savings or investments. If these new products do work that way, that will be unfamiliar and a bit of a barrier.

I take your point, but there is a financial literacy element to this exercise too. Citizens should be perfectly capable of interacting with the tax agency - a no-touch service is not good either. Particularly if you are entering the investment world.

There's another dimension to this, which is that DIRT and DD can work the way they do because they are flat rate taxes, which are not affected by the taxpayer's marginal rate of tax.

The only element that complicates the taxing of these accounts is the tax free element, otherwise it can be a flat tax. In my opinion, it would be far simpler for the providers to just deduct 1% from every account they have on their books (no complication, simple calculation, no worrying about how many accounts are held by the individual). The tax is then paid to revenue with the PPS number of the account holder. The tax is reported on your return and Revenue refund you 1% of the TFA (e.g. up to €20k, refund of €200).

Minimal complication/risk for the providers is key to keeping costs down. Maximum advantage to the taxpayer if Revenue take the responsibility of managing the 'last mile' to ensure the tax liability is correct.

 

[TomEdison]

I take your point, but there is a financial literacy element to this exercise too. Citizens should be perfectly capable of interacting with the tax agency . . .

They should. But the problem we're tackling here is a large number of people leaving large amount of money on deposit at low rates for long periods; financial literacy is not their strong suit. So it would be a mistake to design the account in a way that assumes or requires a degree of financial literacy, or an appetite for completing tax returns; that would be a barrier to the very people you hope to attract.

 

[Duke of Marmalade]

The only element that complicates the taxing of these accounts is the tax free element, otherwise it can be a flat tax. In my opinion, it would be far simpler for the providers to just deduct 1% from every account they have on their books (no complication, simple calculation, no worrying about how many accounts are held by the individual).

Yes that's right and since there can be only one account per PPSN the provider is in a position to apply the tax free threshold. That is why there is only one account. I am thinking now that the mechanics of this system have been well thrashed out by the officials.