The Destruction of the Irish Savings Market

The Irish Government campaign to discourage people from saving must come to an end. 

Regular savers to unit linked (fund) investments have really been maltreated and hounded. Not happy with the Government 1% Levy (Tax) on every contribution to a long-term unit linked saving plan, the current Government Exit Tax on any growth on the funds is 41%. Think about that. It's HUGE.

You're trying to be prudent, saving for the future, taking a risk on your investment and you get hammered on the growth in value. It's mind-blowingly stupid and short-sighted for a Government to maintain an obscene high tax regime on long-term savings. Of course, Governments think in 5 year election cycles so having a plan that goes beyond that short term is a collective anathema.

You can currently get a 'safe' tax-free return of 25% over 10 years (this was 47.5% in 2010 when the bond was introduced) by lending money to the Government via the Solidarity Bond. To get an equivalent current return from a product with a higher 'risk' insured investment fund, the fund would have to grow by about 55%, when you take annual management charges and taxation into consideration.

If we roll the clock back over the last 10 years and look at the SuperCapp Fund with Zurich Life and the With-Profit Fund with Standard Life we can see how difficult it is to compete with a Government sponsored product.

The gross return on the Standard Life Fund over 10 years, to February 2016, is 33.07% - deduct tax @ 41% and you're left with 19.51% net. The person that sold you the product got paid, the fund manager got paid, the Government got paid, but you're left with a paltry return on investment.

The figures for the Zurich Life SuperCapp Fund are a healthier 47.54% gross and 28.05% net. 

What needs to happen is that the Government need to get rid of the levy on these products and reduce the tax rate dramatically  OR introduce a tax efficient scheme like the Individual Savings Accounts (ISAs) in the UK. These allow individuals to save/invest Stg. £15,240 per annum in a variety of tax-free products.

If this doesn't happen, regular savers will be lured back into investing in property again, as the alternatives are so unattractive.

Given the way the Government have raided pension funds in the past and the current prohibitive tax regime on savings, there would want to be some reassurances from them on keeping their mitts off any surprise attacks on savings in the future.

The best person to save for the rainy day is you. So any talk of the Government setting aside a 'rainy day fund' is just nonsense. They'll just blow it, in time.

  

Rationalisation in the Life & Pensions Industry in Ireland

Last week Zurich Life announced (quietly) that it plans to close the Cork and Galway branches and is looking for about 70 voluntary redundancies. The company cites the continuous decline in the health of the Life & Pensions industry, since it peaked in 2007.

What’s surprising, is that it has taken 5 years to come to this conclusion and that there have not been similar occurrences with some of the other players in the market.

You see, I’d consider Zurich Life to be one of the better players in terms i) the product range they have to offer to the end consumer ii) their service and iii) a unique ability to listen to what type of product I want and try to deliver it.

There are two existing players that have basically single (okay) product offerings and I don’t know if their parents are going to plough money into the small Irish market at this time. Why would they? It’s a mess.

There are two others that I would find it very difficult to place business with based on past experience with service and crappy products. Standard Life wouldn’t be one of these.

The biggest operator is owned by the State and has just swallowed up Quinn Life. There’s a few boutique players flogging deposit based tracker bonds to death. Bank Of Ireland are ‘trying’ to sell New Ireland.

The only speculative conclusion that I can come to is that: now that Zurich Life have made a move some of the others will follow by letting folk go to reduce costs in an attempt to enhance profitability. Life & Pension companies in Ireland don’t like to be ‘first’ with crappy news so I’d expect a few of the others to come forward any day now and tell us how terrible things actually are in the industry.

Improved Charging Structure from InvestAndSave.ie

With immediate effect, there will be no 1% Levy on contributions to the InvestAndSave product, for the duration of the contract, provided that the minimum Single and Regular payments are made. This applies to business transacted from 24th November 2011, or business that is currently in the pipeline but has not yet been issued.

So, if you invest €5,000 (or more) as a Single contribution and €100 (or more) per month as a Regular contribution you will avoid the Government Levy of 1% on all contributions.

If you invest a Single contribution only, the levy will apply to this payment.

There are no entry or exit charges on this product. You can choose to invest in any of the 17 Actively Managed and 13 Passive Funds available. The annual management charge on these funds is 1%pa.

'Funds' For Thought

Global Absolute Return Strategies (GARS) Fund - Standard Life

Risk Profile : Low-Medium

This fund has similar volatility rating to a cautious managed fund but it invests in a broader range of assets. It aims to provide positive investment returns in a variety of market conditions over the medium term by providing access to a range of different assets and strategies.

The Annual Management Charge is 1.35% and there are no entry or exit charges if you invest though www.bond.ie on an ‘Execution Only’ (no advice) basis.

SuperCAPP Fund - Zurich Life

Risk Profile : Moderate

A unitised with-profits fund that aims to deliver a regular return, consistent with prevailing long-term interest rates while maintaining the potential for higher growth than a bank deposit account. The fund will have exposure to bonds, equities and cash.

Returns are distributed through Annual and Special Dividends. Dividend distributions aim to provide policyholders with a smoothed accumulation of returns over time.

It has an indicative equity range of 20% – 40%. The fund’s exposure to equity volatility is normally controlled by limiting maximum losses and gains for the majority of the equity portfolio.

The Annual Management Charge is 1%. Zurich Life also retain 1/20th of earnings, distributable as policy dividends. This latter charge is taken before the dividends are declared. For Non-Standard PRSAs only, the charge for this fund is 1.25%.

Brendan Johnston, Pensions Director, and David Kavanagh, ALM Actuary, Zurich Life, talk about the SuperCAPP Fund in a Z-Cast.

Diversified Assets Fund - Zurich Life

Risk Profile : Medium

A unit-linked fund that gives exposure to four asset classes: equities, bonds, property and commodities. The following Zurich Life investment funds are currently used to gain access to these asset classes: the International Equity Fund, the Active Fixed Income Fund, the European (Ex-UK) Property Fund (via ETF) , the Australasia Property Fund (via ETF), the Global Commodities Fund (via ETF).

Indicative Equity Exposure is 70% to 80%. The Annual Management Charge is 1%

Cautiously Managed Fund - Zurich Life

Risk Profile : Moderate

A unit-linked fund offering a well-diversified portfolio of bonds, equities and cash. It has an indicative equity exposure of 20% – 50%. The Annual Management Charge is 1%


These Zurich Life Funds can be accessed for Savings/Investment via www.investandsave.ie and for some Pension Products via www.prsa.ie. There are no entry or exit charges on the products available through these websites and they are on an ‘Execution Only’ (no advice) basis.

Some Caveats

* If you do not understand why you should save/invest in these products or what investment funds are appropriate to your risk profile, then an ‘Execution Only’ service may not be suitable for you. If you need advice, pay a fee for it and then purchase the products online.
* The above funds are not to be interpreted as a generic recommendation as each person will have a different investment profile based on their attitude to risk, term of investment and current investment portfolio.
* Some or all of the assets in the different funds are invested outside the Eurozone, so currency fluctuations may impact on the funds performance.
* The 1% Annual Management Charge on the funds that invest via ETFs does not include any charges that may accrue within the ETF.


Warning: Past performance is not a reliable guide to the future performance. The value of your investment may go down as well as up.

Education Fees and Investment Policies. Banks? No Thanks!

Just when you thought your bank couldn’t make you feel any worse via increases in mortgage rates, account charges, and the stifling of credit; they have the gall to start delivering sermons on the need to start saving for your children’s education with one of their investment policies.

It’s all designed to scare the bejaysus out of you: motivation to save through fear. They give the impression that they are doing you a favour by highlighting the issue of education costs and prompt you to start saving as soon as possible.

There’s nothing wrong with saving for education via an investment policy, but it only makes sense to do so if you are not going to get screwed on charges. Do you want to save for your own child’s education or for the education of the child of the person that’s selling the product? If you are going to start saving for education fees you have to get the product right from the outset, otherwise you will end up with something that is not fit for purpose.

It would not be unusual for a bank to charge you 5% of every payment you make to an investment plan, plus an annual management charge of 1.5% pa of the value of your fund. Or, to put it another way; if your fund had a growth rate of 6% pa over the term of the policy the charges would reduce the growth to about 4% pa. This ‘beast’ of a product is woefully bad value for money.

In addition, your ‘make-it-up-as-we-go-along’ Government have increased the tax on growth of these investment policies to 41% AND introduced an idiotic 1% Tax on all contributions that you make to the plan.

Seriously folks, you have got to put the time into researching what is on offer in this market. You can’t really do anything about the Government Tax, except giving your local TD a piece of your mind. What you can do is focus on the product charges. It is possible to save/invest in these products without the 5% charge on each payment and reduce the annual management charge to about 1% pa. Your bank will not be able to provide you with a competitive product.

Example: If you saved €150pm for 18 years in what the bank are offering you would end up with a fund of €43,088. This would be increased to €45,867 if there was a single charge of 1% pa on the value of the fund. A potential €2,779 more in your pocket, as opposed to the banks. Both funds assume a growth rate of 6%.

Criminal Justice (Money Laundering and Terrorist Financing) Act 2010

The above act comes into effect on the 15th July 2010. Life Assurance Companies and Financial Advisors are deemed to be ‘designated persons’ under the Act, so that means that they have procedural obligations to comply with. The bulk of the new changes that apply will be in relation to Single Premium Investments (Bonds).

Up to now ‘Customer Due Diligence’ was carried out by the Financial Advisor in the form of a Certificate of Identification. He/She held this documentation for identifying the client on file, but there was no requirement to send it to the Life Assurance Company unless it was requested by them.

From today, certified copies the identification documents will have to be sent to the Life Assurer and they will also have to satisfy themselves under the headings of ‘Sources of Wealth and Funds’. These should be incorporated into the proposal form along the basis of ‘how the money was acquired’ and ‘what is the combined income of the applicants’. Details of your ‘Occupation’ were not a requirement prior to today but this has also been included at proposal stage.

Re-Balancing of Portfolio

When you have decided on an investment strategy for your Pension or Investment Product, you will no doubt have given due consideration to as to what percentage of your money will be allocated to each asset class (Cash,Equities, Bonds and Property). This will probably be based on your attitude to risk and any existing assets that you may have.

At the end of a certain period you may decide to 're-balance' your portfolio so that you have the same percentage of your investment is each asset class, that your started out with. The changes in your investment occur because the values of the different assets will have performed/underperformed over a period of time. This is like a mini-audit of your portfolio so that you can reassess how much risk you are exposed to on a given day.

The following is provided as a practical example, using historical data, of how this works in practice and is not to be taken as advice. The assumptions used are that the Annual Management Charge is 1% and that 100% of your money was invested from day one.

€10,000 invested on 01/01/2001 into the Zurich Life's 5*5 Global, Balanced and Active Fixed Income Funds (1/3, 1/3, 1/3 respectively). The end values are calculated as at 31/12/2009.

With No Re-Balancing (no changes to initial allocation for 9 years): The value of the investment at the end of December 2009 would have been €13,291.37

If the client had re-balanced (making sure the 1/3 ratio in each Fund) on the 1st of January every year : The value of the investment at the end of December 2009 would have been €13,887.92


Again, this historical information is provided purely for illustrative purposes only and should not be construed as advice.

Compensation Schemes for Investors (Life Insurance Products)

In uncertain times, investors get worried about the security of the monies that they may have invested with the different product providers.

The scheme that operates in the Republic of Ireland (Investor Compensation Scheme) pays compensation where a firm, authorised by the Financial Regulator, is unable to return investment monies owed to an eligible client due to its financial circumstances.

There is a limit to the amount that the Investor Compensation Scheme may pay in compensation. They can only pay 90% of the amount lost, subject to a maximum of €20,000, to each investor.

Companies like Standard Life operate in Ireland as a branch of their UK parent. Therefore, their policyholders are covered by the UK's Financial Services Compensation Scheme (FSCS).

The level of cover provided by the FSC Scheme (for policies issued after 01/12/2001) is 100% of the value of the policy up to £2,000 plus 90% of the balance without limit.


Featured Product : Standard Life Portfolio Invesment Bond

Is this a concern for you?

1% Levy on Unit-Linked Savings and Investments

I'm a bit piqued by the 'not for turning' attitude on the Government on this Levy; as introduced in the Finance Bill.

Let's call a spade a spade; this Levy will have a negative affect my business but it also affects me as a consumer as I have a preference for saving/investing through these products. I don't fancy handing over 1% of every payment I make, to save for my family's future, to subsidise a Government that can't think beyond tomorrow.

In 1985 the Government introduced a 'temporary' insurance levy of 2% on General Insurance (house, motor etc.) premiums to assist with the bailing out of the Insurance Corporation of Ireland. 25 years later, it's still there and it was increased by 50% in 2009.

Now, the Governments attention is focused on Life Insurance Protection type policies (mortgage protection, term insurance etc.) as well as Unit-Linked Savings and Investments. They had initially planned to apply the 1% Levy to private Pension policies but did a u-turn on the wisdom of that between the publication of the Budget and Finance Bill. The 'great minds' that had the temerity to even think about slapping a levy on these pension policies should be the ones that are emigrating.

Anyway, back to the title of this post. I understand that Government need to raise revenue to bail out the reckless spending and lending that has landed us in the mess we are in, but I don't understand the train of thought that goes along with some of the areas they are hitting.

Here is a summary of why I think that the 1% Levy on Unit-Linked Savings and Investments is a bad fecking idea :

# It's Anti-Competitive - It does not apply to all similar type products in this sector.
# It's a deterrent to save/invest - Folk should be encouraged to save so that they have something to fall back on when their Country goes bust, just to keep the show on the road.
# I would have serious doubts about the anticipated revenue it will raise - Do they (DoF) even know?
# The Government take tax at 41% of the growth on these funds already.
# Consumer groups have been campaigning for a long time to reduce the costs of these products - not increase them.
# There seems to have been no thought given to the costs of administering the collection of the levy.
# It punishes those that are being prudent with their money by saving for the long-term - Unlike you-know-who.
# It will drive savers/investors to the doors of the Banks and Post Office - Think about that one!
# There is no 'plan' as to how long this levy will apply - "Shur they'll get used to it like the Insurance Levy".
# It comes at a time when the Government are introducing their own medium to long-term savings scheme via the National Solidarity Bond - No levy on that then. Ahem!!!


Folks, would there be any appetite out there to get the Government to reverse this levy on Unit-Linked Savings and Investments? They haven't listened to the Industry heads. Do you think that they might listen to the consumers?

UPDATED 30/12/2011

The 1% Levy on the Savings & Investment product available at www.InvestAndSave.ie will not apply for the term of the contract.

CGNU Policy Change (Ireland)

Anyone that has a CGNU (GA Life) Investment Bond, that is 10 years old, will recently have got a communication from Hibernian Aviva. This letter is basically telling you that, because it is the 10th anniversary of the policy, you can currently exit from the Bond without a Market Value Adjustment (MVA).

You can exit/surrender/encash a CGNU Investment Bond without an MVA (currently 14%) applying on the 10th anniversary and on each subsequent 5th anniversary. This condition would have formed part of the original policy document.

The letter from Hibernian Aviva goes on to say that '...if you decide to leave your money invested, you can reduce any MVA that may apply when you subsequently withdraw from the fund by up to a maximum of 14%'. This is very important. But, Hibernian Aviva have not communicated the mechanics of it to the very advisors you will rely on to direct you on what the correct course of action is right for you.

What this additional condition means is that, if you want to cash in your policy at any future date, and the MVA on this tranche of business stays at 14%, you can do so without penalty. The only situation that could arise that would mitigate against you would be where the MVA were increased. If this happened, and say it was increased to 20%, you would only pay 6% of an MVA on your future encashment value.

If you cash in your CGNU Investment Bond before the 1st of January you will not be eligible for the final installment of the Special Bonus that is due for 2010. The Reattribution Bonus will, however, be paid in any event.

I honestly do not know why this new 'condition' has been applied to these particular policies. Perhaps it has something to do with the whole Reattribution process?. Maybe, the company have decided that it is not cost effective to administer these policies from the UK any more and that they would prefer that this tranche of business left them for good?

Eagle Star (Zurich) Gold Fund

Eagle Star Zurich have launched a unit-linked Gold Fund as part of its Matrix Range of Funds. The Gold Fund is aimed at those who (i)would like to gain exposure to movements in the price of gold (ii) want to diversify a portfolio of existing assets and (iii) have a higher risk preference.

The fund tracks the spot price of gold by investing in an Exchange Traded Commodity(ETC), which is backed by physical gold. A currency risk arises here for the Irish Investor, as the spot price is denominated in US Dollars.

You can access this fund through the products available on the www.InvestAndSave.ie and www.prsa.ie websites. There are no entry or exit charges through these websites. The Annual Management Charge is 1%pa of funds invested but do bear in mind that this does not include any transaction charges that are made within the ETC.

NB: While the fund is available to pension and investment/savings clients: unfortunately, it is not available under a PRSA type product.


Warning: The value of your investment may go down as well as up. Some products/funds may be affected by changes in currency exchange rates.

Direct Investment in Stockmarket V's Unit Linked Funds

Individual investors who are between two minds as to whether they would be better off investing in a diversified portfolio of individual stocks or unit linked managed/index tracking funds may find this article of interest.

The author is of the opinion that :

....the decision to go with stocks or funds comes down to a realistic assessment of how much you want to make your own investing decisions and your ability to handle that responsibility. Walter Updegrave

If you allow for the Regional differences in terminology, resources and taxation the principles are basically the same. The 3 questions posed are very relevant.

Featured websites InvestAndSave.ie Bond.ie

Active Fund Management V's Consensus Fund

Are there any Consensus Fund lovers out there that would like to rebut the points made by the Pensions Director of Eagle Star/Zurich in favour of Active Fund Management?

The Z-Cast is available here

In short, he argues that:

a)'Consensus' (follow the herd) has had its day
b) The out performance of some active managers could be the difference between having a solvent and insolvent pension scheme
c) The 'rear view' investment approach does not capture investment opportunities due to a time lag
d) Trustees of pension schemes should reconsider their 'safe' investment decisions
e) Some Actively Managed Funds are not necessarily more volatile than Consensus Funds.

Would be very interested in any views that you may have on this debate.


PS: It's specifically to do with Consensus Funds V' Active Fund Management. Not to be confused with the Active V's Index Tracking debate.

Relevant/Featured Website www.investandsave.ie

Exit Tax - FAQs

What is Exit Tax? It is a tax on the gain/profit you earn on life assurance savings, investment bonds (Tracker/Guaranteed or Unit-Linked) and protection policies that have a unit-linked element.

What rate is it charged at? From 01/01/2014 the rate will be 41% 

When is it paid/due? It is paid/due when a 'chargeable event' takes place.

What is a 'chargeable event'? A claim, partial/full surrender, maturity or every 8th policy anniversary.

Who has responsibility for paying it? The Life Assurance Company pay the tax directly to Revenue. The company will write to you and notify you of the tax paid and quote the investment's current value.

I took out my investment policy before 01/01/2001, am I liable for Exit Tax? No. It only applies to policies taken out after this date. Prior to this date, the tax was deducted on an annual basis and paid by the life assurance company to Revenue.

My policy is worth less that amount invested on the 8th anniversary, is there any tax due? No.

Does my policy 'mature' on the 8th anniversary? No. Your policy will continue as before.

Can Exit Tax be offset against other tax liabilities in at the end of a tax year? No. However, where Exit Tax is paid as a result of a death claim it may be offset against an Inheritance Tax liability in the hands of the beneficiary.

Whats is the 'deemed encashment' date? The 8th Anniversary of the policy.

Is a 'deemed encashment' Exit Tax taken into consideration in calculating future exit tax liabilities on a policy? Yes.

Is the Exit Tax paid on a partial surrender before the 8th anniversary taken into consideration in calculating future tax liabilities on the policy? No. It is only taken into consideration for partial surrenders after the 8th anniversary.

Is anyone eligible to claim Exit Tax back from Revenue? Yes. The following people can reclaim Exit Tax a) a permanently incapacitated person who has invested a compensation payment from a personal injuries claim b) the trustees of a qualifying trust where the investment gains/profits are the sole or main income of the incapacitated person c) a thalidomide victim investing a compensation payment made by the Minister for Health.

If a client invested €10,000 on 01/01/2001 and then added €5,000 to the same policy on 01/01/2006, is the exit tax payable on the growth (if any) on €10,000 payable in January 2009 and on the €5,000 in January 2014? No. The tax is policy based so the allowable premiums (total premiums paid before the chargeable event) will be €15,000 in January 2009 for the purpose of calculating the Exit Tax due.

Green Resources Fund

This fund has recently become available under the Matrix Range of Funds from Eagle Star Life. If you are of the opinion that economic development and global population growth will drive demand for clean water supplies and alternative energy sources, then it may be financially prudent to take a closer look at what it has to offer.

It is a unit-linked fund that tracks the performance of the PowerShares WilderHill Clean Energy and iShares S&P Global Water ETFs. The current asset split on the fund is 75% Alternative Energy and 25% Water. This exposure is not expected to deviate much from 70%-80% Alternative Energy and 20%-30% Water.

These ETFs invest in renewable energy, power delivery, cleaner fuel, water utility and water equipment industries. As with any fund that invests in companies outside the EuroZone, a currency risk arises. When you add this to the limited sector that it operates in, it would be considered a Higher Risk investment fund and may be more suited to an investor as part of an overall portfolio.

The Fund is available to Pension, Savings and Investment clients of Eagle Star Life but excludes PRSA contracts. The Annual Management Charge is 1%pa of funds invested but do bear in mind that this does not include any transaction charges that are made within the ETF.

Celebration Bond

If you are the holder of one of these With-Profit Bonds through Norwich Union/Hibernian, it may be a good idea to put a note in your diary regarding the 10th anniversary of your investment.

The products that were sold during the period 1999 to 2002 have an underlying guarantee on the 10th Anniversary of the start date - and every subsequent 5th anniversary - that the company cannot impose a 'Market Value Adjustment' (MVA) on these dates. Unfortunately, the company are under no obligation to notify you that these important dates are coming up.

Under the terms of the contract, the price of the units held in this with-profit fund are guaranteed not to drop. This means that you are guaranteed your original investment plus attaching bonuses on the 10th/15th/20th etc. anniversary.

The current 'nominal' value of your investment could potentially be much higher than the 'surrender' value, as MVAs are applied outside of the guaranteed dates. If you are thinking about cashing in this bond at present, it may be prudent to wait until the 10th anniversary. It will put the policy holder 'in the driving seat' as the company cannot reduce the price of the units in the with-profit fund on the guaranteed dates.

Should market conditions continue in the same direction in the short to medium term, then this 'guarantee', on these significant dates, may become very valuable indeed. This may have prompted the company to place 80% of the fund in Fixed Interest Assets in recent days and the product is now closed to new business.

If your Celebration Bond had a commencement date outside of the 1999-2002 dates, then your guarantee applies to your capital only on 10th/15th/20th etc anniversary.

You should definitely review this investment, especially if you may need access to your capital between the 10th and 15th anniversary dates. Do remember that the 'window' that you can apply the guaranteed periods to, is limited to 14 days either side of these important dates.

Absolute Return Fund (GARS Fund)

There's a new 'breed' of investment fund in town and it may be worthwhile to have a more in-depth look at the mechanics of it. The investment strategy that it adopts is akin to a hybrid of a Diversified Asset and Hedge Fund. The current offering from Standard Life has effectively made this type of fund available to the regular investor, without the stipulation of an excessive minimum investment.

The fund holds a broader range of asset classes, insofar as it includes your typical (equities,bonds and property) assets but also uses Derivatives to implement alternative investment strategies in a variety of market conditions.

The success of this type of strategy is broadly dependent on the skills of the fund managers in getting the mix of asset selection and investment strategies correct over time. It is anticipated that the Volatility Rating of this type of fund will be much lower than equity based funds, such as Managed or Consensus.

The relative performance of your typical Actively Managed Fund is measured by linking it to a benchmark Index or Consensus type Fund. The Absolute Return Fund has a Targeted Positive Return. The current, ambitious, target is the 6 month Euribor (currently 5.36%) + 5% (over a rolling 3 year period), Gross of fees (AMC 1.35%pa). Do bear in mind that the Euribor is 'inflated' under current market conditions.

Unlike the typical Hedge Fund, there are no out-performance fees but there are no 'penalties' imposed on the managers for not achieving the target either. Also, it does not borrow cash to invest in the fund.

It is my opinion that this type of fund would be a welcome addition to most investor portfolios. Given the relatively low volatility rating, this may be especially true for Trustees of Pension Schemes. As the fund is priced on a daily basis, it is more liquid than a managed fund that would have exposure to real property. This is important, as the fund manager should not impose waiting periods on redemptions. All things considered, the annual management charge is competitive @ 1.35%pa.

See Glossary for definition of terms.

Exit Tax

If you are the holder of a unit-linked savings or investment product (non-pension) you will be liable to pay Exit Tax when a 'Deemed Chargeable Event' takes place. A 'chargeable event' can be a full or partial encashment, a maturity or claim, an income draw-down facility or every 8th policy anniversary. This Exit tax is charged on the 'gain/investment profit' element of your policy.

Exit Tax was introduced on 1st January 2001 as the taxation system for all policies issued on or after this date. The current rate of tax is 41%. Prior to its introduction, the tax on the funds was paid, to Revenue, on an annual basis by the life assurance company. If you ever see the fund prices in the media, you will notice that there are 'Net' and 'Gross' prices quoted. The 'Net' prices are for policies issued before 01/01/2001 and the 'Gross' prices refer to policies issued after that date.


As far as the individual investor is concerned, there is no obligation on you to do anything about the tax, as it will be deducted by the life assurance company and they, in turn, pay it to Revenue. A non-resident is exempt from Exit Tax but they must complete a specific Revenue Declaration and provide the life company with proof of non-resident status, at the inception of the policy.

It may be possible to reclaim Exit Tax from Revenue, in certain circumstances. These specific circumstances relate to certain compensation payments invested i) from personal injury claims (assumes permanent incapacity) or ii) from awards made to thalidomide victims by the Minister for Health. It may also be possible to offset Exit Tax against Inheritance Tax (if applicable) on the death of the policyholder.

Case 1.

You invested €10,000 on a date after 01/01/2007. The investment is now worth €12,000 and you wish to take €1,000 as a partial encashment on 01/01/2014.

The 'chargeable amount' is calculated as follows:

€1,000 - [€10,000 x €1,000/€12,000] = €166.67

Exit Tax @ 41% (current) = €166.67 x 41% = €68.33

The €68.33 is paid to Revenue by the life company.

Case 2.

You invested €10,000 on a date after 01/01/2006. The policy is now worth €14,000 on the 8th Anniversary (01/01/2014).

As the 8th anniversary is deemed a 'chargeable event' , the gain of €4,000 is taxed @ 41% = €1,640

This €1,640 is paid to Revenue and the value of your investment is now €12,360.



This is written as a very basic guide. There are various subsequent scenarios on chargeable events for partial and full surrenders. It will up to the life company to calculate and pay the correct taxes due.

Exit Strategy

One of the most important factors to consider when making any type of medium/long term investment is deciding on what your exit strategy is going to be.

This applies to any investment in a unit-linked fund, as the main asset classes, your money is invested in, are considered medium to long term plays.

It is all very well doing vast amounts of research on the level of risk you are willing to take, the time frame involved and deciding on which product/s are most suitable to your requirements; but you also have to consider the fact that at some stage you are going to need to call on the funds invested.

The best time to formulate an exit strategy is before you invest. Decide on some ground rules based on a few ‘What If?’ scenarios. For example, what if the investment is at break-even, at a loss, on target or ahead of target, after your initial target term for the investment has expired?

We all set out with the intention of making money, but sometimes things just don’t go to plan. The current unfavourable market conditions for property and equities can be a cruel reminder of what happens when your plan takes a set back.

Once you have a clearly thought out exit strategy for your investment, it lessens the likelihood that you are going to panic when/if things start going pear shaped. In other words, you had a plan B and you can now fall back to this, if circumstances dictate. This scenario emphasises the need for having short term cash deposits available to you.

On the other hand, you should also consider what you are going to do if your investment achieves or exceeds its intended target. Do you capitalise on the gains and exit or do you stay invested and review your position at regular intervals, having due regard for any tax implications?

It does not matter if you are investing directly or indirectly in property or equities, you have to decide, at outset, how you are going to exit. This may be at some distant point in the future but a consideration nonetheless.

Taking The Plunge !

You have decided that you want to invest a lump sum and you are happy that you will not need to call on these funds for a good number of years to come. You understand that the value of these unit-linked funds can fall as well as rise. You are aware that you should diversify your investment so that all your eggs are not in the one basket, just in case one particular asset class takes a nose dive.

The problem you are faced with is in deciding which product to invest in as there is a multitude to choose from. The following are some of the factors that you should consider, before you take the plunge.

Investment Style

You can choose ‘Active’ or ‘Passive’ management for your investment. Some companies will allow you to combine both styles under the same product. ’Active’ refers to the involvement of a fund manager in the selection of assets that make up the fund. With a ‘Passive’ fund, your investment tracks the performance of an ‘Index’.

Much has been written about these two investment styles. The determining factor is in whether you believe a fund manager can add value to your investment through his or her decisions. Active management tends to be more expensive so also bear that in mind.

Diversification

Does the product allow you to spread your investment by region, sector, and asset class or investment style?

Flexibility

Does your investment permit you to redirect or switch funds easily? Does it allow you to add to your existing investment, if needs be? Can you make partial withdrawals without penalty and where can you get the value of your investment at any particular moment in time? Are there any restrictions on how much money must remain in the investment to keep it ‘live’?

Charges

How much of your money is invested in the product from day one? What are the management charges for each of the funds you are interested in? How much commission is paid and can this be negotiated? Are there early encashment charges that would penalise you in the event of a partial or full withdrawal of your funds? What charges apply to switching or redirecting funds? Are there any incentives for you, in the form of extra allocations, for large investments?


If you have all the answers to these questions and you are happy that the product offers good value and is suitable for its intended purpose then you should be able to take the plunge, with the parachute.