Savings Calculation

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Daddy

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If I put away €45 k in one lump sum for 15 years at a constant savings rate of say 4.75% gross per annum for 15 years what would the lump sum be worth in monetary terms net of DIRT at the end of the term allowing for say no change in 20% dirt tax.

Thanks.
 
See this calculator:

[FONT=verdana, arial, helvetica][FONT=verdana, arial, helvetica][FONT=verdana, arial, helvetica]Periodic Compound Interest

If you assume an effective rate of 4.75% CAR x 80% = 3.8% (to account for deduction of DIRT) compounded annually then I calculate that €45K will be worth c. €79K after 15 years.
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Thanks Clubman.

There is no other tax to pay other than DIRT on this for a higher rate taxpayer i.e do I have to declare and pay tax on the difference between
DIRT 20% rate and PAYE rate of 41% ?
 
No - deposit interest is subject to DIRT and not income tax so 20% is the full extent of your liability. However if annual deposit interest exceeds some limit (c. €3,175 I think) then you may also be liable for 4% PRSI. Not 100% sure on that.
 
Thanks again.

How about this situation:

Now suppose I borrow under a mortgage € 45k over 15 years at a constant interest rate of 6.5% I would be repaying €397 x 12 x 15 yrs = €71,460 allowing now for no mortgage relief interest.

Surely, I'm missing something here in that it would pay me to borrow the 45k money over 15 years. i.e your calculation of 79k versus 71k in this situation.
I'm confused.
 
Intuitively you can't borrow at 6.5%, invest at 3.8%, and come out ahead. The explanation is the net present value of money.

You are comparing apples and oranges. €79k is a maturity value (money in 15 years time), whereas €71k is a sum of installments (money spread over 15 years.). €71k evenly spread out over 15 years costs you much more in real terms than €79k will be worth in 15 years time.
 
OK I see where your coming from.

Though, If I was to borrow the 45k there is a fair chance that in 15 years time (or at points during that timespan) if this 45 k was to be put into a high yielding share(s) now(and there are many a blue chip about) the 79k pot stated by Clubman should indeed be a lot higher and might outweigh the real costs of time associated with paying back the 71k on the amount borrowed.

Any thoughts ?
 
Mugs Game:

Don't believe the yield would need to be greater than 6.5% absolutely as there is a potential for a capital gain also.
 
I presume that MugsGame was referring to total yield (e.g. dividends plus capital gains) and not just dividends as you seem to be assuming?
 
Originally Posted by Daddy
There is no other tax to pay other than DIRT
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While it's a bit of a grey area AFAIK the Health Levy of 2% is also payable on savings (unfortunately!) except possibly for very low incomes which are exempted - I think.
 
I thought that it was just PRSI on deposit interest income above the c. €3,175 limit?
 
Originally Posted by ClubMan
I thought that it was just PRSI on deposit interest income above the c. €3,175 limit?
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That would be great if true. I've never heard of an exemption limit but if this can be confirmed I'd love to hear about it.
With the Medium Term Special Term Account, you are entitled to receive the first EUR 480 interest earned per annum Deposit Interest Retention Tax (DIRT) free. With the Long Term Special Term Account, you are entitled to receive the first EUR 635 interest earned per annum Deposit Interest Retention Tax (DIRT) free.
Tax at the prevailing Deposit Interest Retention Tax (DIRT) rate will be deducted from interest earned in excess of these figures but you will have no further income tax liability on this excess interest. However, you may be subject to PRSI/Health levy.
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This is from the AIB Special Term Account but I've seen PRSI/Health Levy mentioned before on other Savings Accounts. It does seem to be a grey area. Maybe it's left to the individual to pay the HL - I don't know but always thought it had to be taken in account when filing a return.
 
Mugs Game:

In your last post to which I replied can you confirm if you meant dividend + capital gain or dividend yield only. 'Clubman' thinks you may have meant both. When you said the return must be at least 6.5% I thought you meant if I could find a blue chip share(s) giving a dividend of 6.5% that any capital gain thereafter would greatly help in offsetting the cost of money borrowed in repaying 71k over the 15 years.

Thanks.
 
I meant inclusive of capital gain, as ClubMan surmised. I'm not recommending you borrow to invest in equities, though there are probably situations in which it makes sense.
 
Hi Daddy,

If I can offer another perspective that might help...

Daily mortgage interest on a repayment mortgage is generally calculated as follows: -

€45,000 * 6.5% / 365

As each month's repayment is made, the repayment is deducted from the balance and therefore reduces the balance on which interest is calculated from that point on.

Hope this helps.
 
I would be repaying €397 x 12 x 15 yrs = €71,460 allowing now for no mortgage relief interest.
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Look at it this way. Where are you going to get those repayments? You will have to borrow them. So you will be repaying €71460 + the accumulated interest on your borrowings.

Brendan
 
Daddy said:
If I put away €45 k in one lump sum for 15 years at a constant savings rate of say 4.75% gross per annum for 15 years what would the lump sum be worth in monetary terms net of DIRT at the end of the term allowing for say no change in 20% dirt tax.
Click to expand...

For a long term investment, would you not be better off putting the money into a pension to get tax relief (even if it might take a few years to get full relief for your contributions)?

ClubMan said:
I thought that it was just PRSI on deposit interest income above the c. €3,175 limit?
Click to expand...

Health levy applies whatever the amount is. In practice revenue tend to ignore PRSI on deposit interest for paye workers unless it reaches/exceeds €3,174 when you fall under self-assessment rules.
 
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