Will ISA's be coming to Ireland anytime soon?

[Billythebuilder]

Most people shouldn't invest in individual stocks and so the John Bogle Index fund approach suits most people I'd say.
Compound interest is what makes you the big money.

41% tax on ETF's makes property the only obvious choice for investment in Ireland. But once you buy property you spend years getting the money back, and property is famously, at best fairly valued, or hugely overpriced for years.

Will investment ISA's likely be coming to Ireland anytime soon, or is the not much incentive for the Gov to do so?

 

[Corola]

No, the Government has conducted a review of the funds sector and Investment ISAs are not one of the proposed changes. You can read more about the recommendations here:

https://assets.gov.ie/static/documents/funds-sector-2030-a-framework-for-open-resilient-and-developing-markets.pdf

22. The following reforms to the taxation of Irish-domiciled funds, with similar amendments made to the equivalent products in EU, EEA and OECD territories, to bring the regime into closer alignment with the taxation on other savings and investment products:
• Remove the eight-year deemed disposal requirement
• Align the IUT and LAET rate of tax with the CGT rate (currently 33%)
• Allow for a limited form of loss relief

 

[TomEdison]

The UK has had ISAs since 1999, and they replaced a very similar structure, the Personal Equity Plan, that was introduced in 1986. If Ireland hasn't mirrored this particular tax relief in the last 40 years there's no particular reason to think that it's imminent now.

The policy beind the PEP/ISA is to incentivise personal saving and investment. Ireland already does this through the tax treatment of pension schemes. There's a secondary policy of incentivising capital formation which can support investment in the UK economy; that wouldn't apply in Ireland, where investment in shares (directly or through pooled funds of one kind or another) is mostly investment outside Ireland.

I think if we did introduce something like the ISA it wouldn't become an alternative to investment in property, but to investment in pension funds. People invest in property because they want the benefit of leveraging (if you buy property on mortgage you make out like a bandit if property values rise) or because they just have a (not necessarily rational) preference for bricks and mortar. The people who are seeking tax advantages are not currently invested in property, which is not tax favoured, but in pension funds.

 

[joe sod]

The policy beind the PEP/ISA is to incentivise personal saving and investment. Ireland already does this through the tax treatment of pension schemes. There's a secondary policy of incentivising capital formation which can support investment in the UK economy; that wouldn't apply in Ireland, where investment in shares (directly or through pooled funds of one kind or another) is mostly investment outside Ireland

It's not an either/or argument as UK also has good tax incentives to invest in private pensions aswell as the ISA. It is misleading to say that Ireland does not have an ISA type savings because it has this great tax savings all included in pensions which is so superior to our European peers.
It is more honest to say that Ireland has a comparable tax incentive scheme via pensions comparable to our peers but does not offer much else to encourage savings via investments.

Also it is a bit disingenuous to argue that Ireland should not encourage domestic investments in shares since most of that would be invested in foreign shares given the huge benefits Ireland has received from the investment of foreign capital (US multinationals mainly) in the Irish economy. That was an acceptable policy when Ireland was a poor agrarian country with little foreign capital investment. Now it is like we want to have our cake and eat it. More pressure should be put on Irish government to change this policy by pointing out these contradictions on the International stage

 

[blackdog]

I think if we did introduce something like the ISA it wouldn't become an alternative to investment in property, but to investment in pension funds

While not disagreeing with the detail of your point, something is fundamentally broken if the two practical alternatives offered within the Irish system to a twentysomething are to invest in property (completely unrealistic) or put those funds away for forty plus years.

Putting a roof over your head in the shape of a PPR is not "investing in property", it's meeting essential accommodation costs via a means other than renting.

Big picture - the situation seems quite absurd if our societal objective had been enabling the ordinary person to forge independence, better themselves and form stable families. As you mention, given how long the situation has prevailed, our real societal objective seems to be something else entirely ... a question I'll leave open.

 

[ashambles]

The policy beind the PEP/ISA is to incentivise personal saving and investment. Ireland already does this through the tax treatment of pension schemes. There's a secondary policy of incentivising capital formation which can support investment in the UK economy; that wouldn't apply in Ireland, where investment in shares (directly or through pooled funds of one kind or another) is mostly investment outside Ireland.

I did read an article some years ago where Revenue's (or maybe the DoF's) view is there is that there is very generous tax relief in pensions and as a result there is no need for an ISA.

Luke warm political support (if we even have that) will not be enought to get something going once the civil service are opposed.

Pensions work best if you activate them after you're really ready to retire, which is no problem if you work int the Dept of Finance - in their view why would anybody not stay with their employer until they're ready to retire.

However workers being laid off in the 50s (and many other categories of people) could really benefit from the flexiblility of a non-pension savings mechanism. Maybe it'd help them setup a new business, or invest in a some business etc.. I feel that activating a pension for people, even if earlier than they want, becomes a way of saying they're done and out of the workforce for good.

 

[Fortune]

While not disagreeing with the detail of your point, something is fundamentally broken if the two practical alternatives offered within the Irish system to a twentysomething are to invest in property (completely unrealistic) or put those funds away for forty plus years.

In my early 20s, I began to invest through a life assurance savings plan. At the time the exit tax was 23%, so it does seem to be that it shouldn't be too complicated to at least partly fix what is broken

 

[nest egg]

No, the Government has conducted a review of the funds sector and Investment ISAs are not one of the proposed changes.

If the powers-that-be introduced an ISA then for the vast majority of people the taxation differences between open and close ended funds would be academic

While we often cite the UK, many European countries offer similar investment incentives, Switzerland has no CGT, Belgium has its Life Insurance contracts, Italy has its PIR, France has the PEA etc.

Plan d’Epargne en Actions (PEA) Accounts | Interactive Brokers Ireland

French tax-resident clients use a PEA account to acquire a portfolio of European securities while benefitting from preferential tax conditions.

www.interactivebrokers.ie

The Funds Sector 2030 report called out the fact that Ireland is falling behind its European peers, as there are a smaller percentage of people investing here than elsewhere. Irish people miss out on the ERP and the compounding effect of that over time is that we fall further and further behind our neighbours.

 

[Billythebuilder]

If you were looking at it from person who is in their teens. Which is better ; Working 10 years to save or pay off a mortgage for a crazy valued small 200k house, or continuously contributing and doubling their money on a main index after around 8 years which is also tax free?
(Although not saying now is a good time to invest in stocks)

 

[joe sod]

The Funds Sector 2030 report called out the fact that Ireland is falling behind its European peers, as there are a smaller percentage of people investing here than elsewhere. Irish people miss out on the ERP and the compounding effect of that over time is that we fall further and further behind our neighbours.

that also explains why ireland's net wealth per capita is not as high as you would expect only mid table the same as spain and portugals despite all the multinational investment and corporation tax bonanza we have received. Alot of money is just sitting in deposit accounts slowly losing value with low interest rates, dirt tax (even though interest rates lower than inflation it is still having 33% lopped off by government)
Gabriel Makloof the central bank governor made this very point only this morning that we are way behind our peers in getting this money properly invested.
I doubt Pascal Donohue's colleagues in the ECB would be too happy with the irish government's policy of discouraging investment in those european stocks and shares because they are foreign stocks.

 

[Protocol]

How responsive are savers to tax rates?

If the exit tax on funds/ETFs was reduced from 41% to 30%, would there be a strong response?

I know that my parents, with maybe 300-500k on deposit, would not react at all. They don't know what exit tax is.

There are loads of people aged 60+, with loads of deposits, who would not transfer those deposits to funds/ETFs, even if exit tax was zero.

 

[nest egg]

The EU's SIU may finally start to move the dial...

"The savings and investments union (SIU) aims to create better financial opportunities for EU citizens, while enhancing our financial system’s capability to connect savings with productive investments. This will lead to more choice for savers who wish to grow their household wealth and allow businesses across Europe to grow."

"The reports of Mario Draghi and Enrico Letta highlighted remaining inefficiencies in EU’s capital markets, in particular a significant savings and investment mismatch in the EU, where citizens' financial wealth is being underserved with savings held overwhelmingly in low-yielding deposits, and companies, particularly young and innovative ones, are struggling to meet their capital needs due to inadequate financing options. There is therefore urgent need to act to better link up savings with investment opportunities to create real economic impact."

Savings and investments union

Connecting savings and productive investments.

finance.ec.europa.eu

They're currently seeking feedback on the topic. I'm going to make a submission.

Commission seeks feedback on a European blueprint for savings and investments accounts

The European Commission has invited citizens and stakeholders to contribute to the development of a European blueprint for savings and investments accounts.

finance.ec.europa.eu

European Commission - Have your say

European Commission - Have your say

ec.europa.eu

 

[ashambles]

There are loads of people aged 60+, with loads of deposits, who would not transfer those deposits to funds/ETFs, even if exit tax was zero.

I've sometimes wondered why many older Irish savers are reluctant to make any effort to earn interest. Partially I think historically due to lack of competition bank deposit interest rates were so low it wasn't worth the effort - they'd happily charge 15% mortgages and something like 0.1% instant access saving. It might have been the unpopular introduction of DIRT with some possibly believing it was a tax on the savings rather than the interest.

While I admit my efforts last year to persuade an older relative to put fairly significant savings into an account in the same bank paying some interest were met with such a blank puzzled look I gave up, I'm not so sure that it's hopeless.

Tax free are a magic combination of words and would change some people's behaviour.
ETFs have reasonably safe cash or bond options that could compete with DIRT charged deposits for the risk adverse.

 

[Dr Strangelove]

There's a secondary policy of incentivising capital formation which can support investment in the UK economy; that wouldn't apply in Ireland, where investment in shares (directly or through pooled funds of one kind or another) is mostly investment outside Ireland.

This is an excellent point.

Ireland doesn’t need a domestic pool of capital the way a country with its own currency does. There would simply be no domestic economic benefit from taxing retail investment less in Ireland.

This is why tax policy supports farmers, bloodstock, and the film industry. The cynic in me says they have the best lobby groups but in fairness they generate a lot of employment in Ireland.

 

[TomEdison]

It's not an either/or argument as UK also has good tax incentives to invest in private pensions aswell as the ISA. It is misleading to say that Ireland does not have an ISA type savings because it has this great tax savings all included in pensions which is so superior to our European peers.
It is more honest to say that Ireland has a comparable tax incentive scheme via pensions comparable to our peers but does not offer much else to encourage savings via investments.

I agree, it's not an either/or argument; you can do both, as the UK does. My point is more that, for the investor, these are alternative investments; if we did introduce a tax-favoured ISA-type arrangement, ,money put into into the new ISAs would largely be at the expense of money going into pension plans. At a time when the government is worried about a looming demographic crisis, that won't look to them like sound public policy.

And it's simply not true to say that "Ireland has a comparable tax incentive scheme via pensions comparable to our peers", unless for some reason you think our only peer is the UK. Ireland and the UK have very similar pension fund taxation regimes. They are both more generous than the US (because of the tax-free lump sum) and they are conspicuously more generous than what is normal in other European countries

Also it is a bit disingenuous to argue that Ireland should not encourage domestic investments in shares since most of that would be invested in foreign shares given the huge benefits Ireland has received from the investment of foreign capital (US multinationals mainly) in the Irish economy. That was an acceptable policy when Ireland was a poor agrarian country with little foreign capital investment. Now it is like we want to have our cake and eat it. More pressure should be put on Irish government to change this policy by pointing out these contradictions on the International stage

I didn't argue that Ireland shouldn't encourage (non-pension) private investment in equties; I just observed that we don't have a public policy reason for doing this.

Of course we do, as already pointed out, have very generous incentives encouraging investment in equities via pension funds. I think there is zero chance of foreign governments pressing Ireland to introduce domestic tax incentives to invest in equities outside of pension funds. They don't care; the contribution Irish private savers could ever make to international equity markets is trivially small. Even if they did care, they would be well aware that it's not their business.

However workers being laid off in the 50s (and many other categories of people) could really benefit from the flexiblility of a non-pension savings mechanism. Maybe it'd help them setup a new business, or invest in a some business etc.. I feel that activating a pension for people, even if earlier than they want, becomes a way of saying they're done and out of the workforce for good.

I think any need of that kind would be met in a much more simple and straightforward fashion by allowing early access to pension funds in the case of people who are laid off in their 50s, etc. Having two separate savings vehicle would make people choose, at the time they were putting money in, whether they were saving for retirement or for unforeseen life events occurring pre-retirement, and it's in the nature of unforeseen life events that you can't know in advance whether, or how much, provision it is optimal to make for them. You'd be forcing people to commit to one or other in advance for no good reason.

While we often cite the UK, many European countries offer similar investment incentives, Switzerland has no CGT, Belgium has its Life Insurance contracts, Italy has its PIR, France has the PEA etc. . . . The Funds Sector 2030 report called out the fact that Ireland is falling behind its European peers, as there are a smaller percentage of people investing here than elsewhere. Irish people miss out on the ERP and the compounding effect of that over time is that we fall further and further behind our neighbours.

In a nutshell, the situation seems to be that savings/investment tax incentives in Ireland are heavily skewed towards retirement savings, compared to other European countries. Couple of thoughts about this, in no particular order:

• There might be good public policy reasons for this. Most European countries have much more generous (and much more expensive-to-taxpayers) state pension schemes than we do, so we have a particular need to encourage investment in non-state pension arrangements.
• If, despite this, we think that a rebalancing is desirable, that could in principle be acheived by (a) more generous tax treatment for non-pension investment vehicles; (b) less generous tax treatment for pension investment vehicles; or (c) a bit of both. So be careful what you wish for!
• Remember that the public policy justification for tax incentives is to alter people's behaviour — we have the pension fund taxation system that we do because we want people to put money into pensions. But, with the introduction of auto enrolment, the policy justification for generous tax treatment of pensions may get weaker. The more successful auto-entrolment is at increasing participation in pension schemes, the less need there is for tax incentives — why offer people tax incentives to do what they do for other reasons anyway? So if auto-enrolment works well some trimming of the pension tax incentives may be on the table in any case. And those who want an ISA-type scheme might think that presents them with an opportunity.
• Lest you think I'm scaremongering, be aware that something very similar happened in Australia. The "superannuation guarantee" legislation in the 1990s was very successful at increasing participation rates, and in not very long it was followed by a progressive reduction in the generosity of pension tax rules. (They are still not bad, but much less generous than they used to be, and much less generous than they currently are in Ireland.)

.

 

[TomEdison]

While not disagreeing with the detail of your point, something is fundamentally broken if the two practical alternatives offered within the Irish system to a twentysomething are to invest in property (completely unrealistic) or put those funds away for forty plus years.

Putting a roof over your head in the shape of a PPR is not "investing in property", it's meeting essential accommodation costs via a means other than renting.

Big picture - the situation seems quite absurd if our societal objective had been enabling the ordinary person to forge independence, better themselves and form stable families. As you mention, given how long the situation has prevailed, our real societal objective seems to be something else entirely ... a question I'll leave open.

Well, think this through.

You present the "two practical alternatives" offered by the Irish system as the only savings/investment options open. You then say that "putting a roof over your head in the shape of a PPR is not 'investing in property'". But you yourself have treated it as exactly that in your first paragraph. Is there a bit of a tension there?

Obviously, people buy houses for non-investment reasons, and the transaction delivers benefits which go beyond a financial return on investment. Neverhtheless it is an investment — and, up to now, for most people by far and away the best investment they will ever make , even if we ignore all benefits other than the financial return. If you're above the median wealth in Ireland today, this is amost certainly largely because you bought a house on mortgage.

And then you say "the situation seems quite absurd if our societal objective had been enabling the ordinary person to forge independence, better themselves and form stable families". Actually, up to now the system has worked very well — for the ordinary person to buy a house absolutely has been the key to independence, financial betterment and stable living arrangements, and we have acheived fairly high rates of home ownership.

But the system is not working well now — for more and more people, home ownership looks unattainable. And those who do attain it are not likely to enjoy the same real growth in property values that their parents and grandparents enjoyed, because it's that rapid growth in property values that has led to the affordibility crisis we have now. The system has run out of road, basically.

What has this got to do with tax-incentivised plans for investing in equities? Well, possibly not much. But possibly this: we urgently need to make housing more affordable, and to keep it that way. I don't have a magic wand that I can wave which will do that, but suppose we do succeed in doing it; what are the implications?

The implications are mostly very good, but one of them is that owning a house will no longer be a long term route to signficant wealth accumulation — the value of your house will be more or less stable, relative to earnings. Which means that, if we want people to accumulate wealth, we need to offer them alternative mechanisms. Something like an ISA might have a role to play in that.

But that's for the future — that case has no traction at all until we have a stable and realistically-priced housing market.

 

[joe sod]

They are both more generous than the US (because of the tax-free lump sum) and they are conspicuously more generous than what is normal in other European countries

I would be in favour of abolishing the tax free lump sump at retirement if it meant bringing in an ISA type arrangement like the UK and also abolishing exit tax and deemed disposal for ETFs. I think that would be far more beneficial to the majority of investors and encourage young people to start the investment habit in their 20s. The tax free lump sum only benefits a minority given that people only become aware of it late in their working life and most won't benefit from it's full effects. Also someone in their 20s is not going to be persuaded by a tax free windfall 40 years away that could be done away with at the whims of a possible future leftist government. An ISA and ETF friendly system would be far healthier and more beneficial to the majority I would think

 

[Dr Strangelove]

I would be in favour of abolishing the tax free lump sump at retirement if it meant bringing in an ISA type arrangement like the UK and also abolishing exit tax and deemed disposal for ETFs.

The TFLS for private sector workers exists because public servants get one by default on retirement.

Abolishing one would mean abolishing the other.

A lot of people don’t realise this.


Otherwise I fully agree with your post.

 

[TomEdison]

Also someone in their 20s is not going to be persuaded by a tax free windfall 40 years away that could be done away with at the whims of a possible future leftist government. An ISA and ETF friendly system would be far healthier and more beneficial to the majority I would think

If a "possible future leftist government" could abolish the tax-free lump sum, surely it could also withdraw ISA tax concessions and/or reimpose the exit tax? Indeed, a "leftist government" is surely more likely to eliminate tax breaks that are not connected to employment than those which are. The TFLS is a tax break which only workers can access; leftists will approve.

If you make any investment at all for tax reasons, be aware that the investment is attended with a political risk — namely, the risk that the tax treatment that has induced you to make the investment could change. It's not just "possible future leftist governments" that you need to worry about here.

 

[nest egg]

It appears changes to ETF taxation are on the way (paywalled)

https://www.businesspost.ie/markets/irish-public-encouraged-to-invest-as-government-plans-relaxation-of-punitive-etf-tax/