50k to invest - looking for ideas/advice

Bob24

s3ndnudes wrote: »

I am open to correction, but it is my understanding that it is only the accumulating ETFS that the 8 year rule applies to. It was my understanding that you could have a distributing ETF whereby you pay the Income tax for the dividends each year, and then when you sell the ETF, you would only then pay capital gains tax? If i'm correct a distributing growth ETF with low dividend yield would be quite tax effective.

Is this not the case?

I don’t believe the above is correct (for Irish and E.U. domiciled ETFs that is).

In the case of a distributing ETF as far as I know you are paying exit tax on the dividends as they come, and exit tax potential capital gains every 8 8 years (i.e. neither income tax nor CGT).

s3ndnudes

The exit tax I assume is at your marginal rate? So, therefore, little difference to your income tax rate?

The exit tax on your marginal gains on disposal of ETFs is very disappointing and very punitive.


If you are paying tax as you receive the dividends, it seems unfair to tax your capital gains on an exit tax basis? I see the logic in taxing dividends at your marginal rate- that would be a similar treatment to shares. But it seems deeply unfair to put an exit tax on distributing ETFs as you are not getting tax free growth as such.

I don't see any tax efficient strategy then aside from individual stocks ? or mutual funds with hefty fees?

Bob24

s3ndnudes wrote: »

The exit tax I assume is at your marginal rate? So, therefore, little difference to your income tax rate?

For Ireland and EU domiciliated ETFs, I believe it is 41% regardless of your marginal tax rate and both for dividends and capital gains (which makes no sense to me but I believe this is the case).

See: http://www.moneyguideireland.com/buying-exchange-traded-funds-etfs-in-ireland.html

Also I stand to be corrected as I am not sure about that one, but I believe the other way this is screwing you is that since the tax which is due on gains is not technically CGT, potential losses on one ETF cannot be offset against gains made elsewhere (as is the case with CGT).

s3ndnudes

Wow! If this is the case it is fairly brutal. I work in finance so have lots of tax contacts- might try and persue this a little further and do some research. I was thinking of starting a new thread on what is your Investment strategy from a tax perspective. There seems to be so few options here with much less favorable treatment to what you get in the US/UK where there are Roth IRAs and ISA accounts that give a much more preferable treatment than to what we have.

To me there seems to be fairly few (tax efficient) options:
1. Invest in a mutual fund that does the tax for you and accept the hefty fees.
2. Invest in individual stocks

I think if you developed a large enough well diversified portfolio of individual stocks it may be the best option. This is frustrating though- I would much prefer to stay passive with Vanguard world Index/emerging markets etfs/S&P 500 ETFS.

Bob24

Yeah they basically voted crazy laws in relations to ETFs as they see long term ETF investment as a way to avoid paying capital gain tax (which is BS as eventually a tax is due, I think in truth this is jusT the government deliberately taxing future potential gains to have today the tax money it should only have tomorrow and if there is indeed a gain).

s3ndnudes wrote: »

To me there seems to be fairly few (tax efficient) options:
1. Invest in a mutual fund that does the tax for you and accept the hefty fees.
2. Invest in individual stocks

Just on 1 - it will make tax reporting and payment easier than with ETFs, but you still have the nasty taxation of unrealised gains which is killing the compounding power of your investment.

A third option are U.K. investment trusts, which are close-ended investment vehicules and are taxed like regular company shares as legally their are LLCs (and most of them have pretty decent fees IMO). Some of them are very well actively managed as well (don’t take this as investment advice and of course past performance doesn’t predict future performance, but have a look at “Scottish Mortgage” and you might be impressed by the performance).

ixtlan

Bob24 wrote: »

Do you have an example of those out of curiosity? I know Irish mutual funds are handling the 8 years rule, but I haven't seen one based solely on ETFs and I'd be curious to see what kind of fees they charge (the main selling point of ETFs is the low cost structure, so wrapping them into a mutual fund seems to defeat the purpose unless the fees for the fund are really low).

BOILife have for example the "Technology Indexed S9 fund".
This fund aims to generate long term capital growth by tracking the performance of the Nasdaq 100 total return index (inclusive of dividends).
I don't know enough to say if it's exactly an ETF but it is "passively managed", and it's 5 year performance graph exactly matches the Nasdaq.... but indeed you are right on the costs, with that being 1.5%p.a. which indeed is rather ridiculous for a passively managed fund. There is also a Eurostoxx passively managed fund, also at 1.5%. I would say the low cost is one ETF advantage, but also it's a more conservative/hands off approach rather than picking stocks.

Bob24 wrote: »

Also I would say that the issue with the 8 years rule isn't just tracking the paperwork, but also the fact that it is reducing the compounding power of your investment (being taxed throughout the investment period rather than just once when you sell the asset prevents from compounding part of the yield, so at the end of the day you end up-up with less capital than if you could have compounded your full gains).

Indeed quite true. Still for some people these mutual funds (thanks for that term, which is correct) based on ETFs may suit. One advantage of the mutual funds is that I believe that within the umbrella of an account you may have several funds invested, and gains/losses between funds in the same account can be offset.

Ix

Bob24

ixtlan wrote: »

BOILife have for example the "Technology Indexed S9 fund".
This fund aims to generate long term capital growth by tracking the performance of the Nasdaq 100 total return index (inclusive of dividends).
I don't know enough to say if it's exactly an ETF but it is "passively managed", and it's 5 year performance graph exactly matches the Nasdaq.... but indeed you are right on the costs, with that being 1.5%p.a. which indeed is rather ridiculous for a passively managed fund. There is also a Eurostoxx passively managed fund, also at 1.5%. I would say the low cost is one ETF advantage, but also it's a more conservative/hands off approach rather than picking stocks.

Thanks.

I couldn’t find the information document by googling the fund name, but yes based you what you are saying it seems like a very expensive passive tracker. I guess they sell it to people who don’t want to bother with tax reporting as well as some of their captive audience who is intimidated with opening a brokerage account and trusts their bank to do the investment for them.

Saudades

ixtlan wrote: »

BOILife have for example the "Technology Indexed S9 fund".
This fund aims to generate long term capital growth by tracking the performance of the Nasdaq 100 total return index (inclusive of dividends).
I don't know enough to say if it's exactly an ETF but it is "passively managed", and it's 5 year performance graph exactly matches the Nasdaq.... but indeed you are right on the costs, with that being 1.5%p.a. which indeed is rather ridiculous for a passively managed fund.

Presumably that fund is taxed at 41%?

ixtlan

Saudades wrote: »

Presumably that fund is taxed at 41%?

Yes indeed it is, and every 8 years it automatically implements a sale of shares as required to to cover the tax owed at that point in time. That could lead as you might expect to a scenario where you pay tax on a gain, then the market crashes and you paid tax on a gain (but had no opportunity to hold that gain outside the account) and now your account is possibly even below what you put in. At that point you probably should stay in and not cash out, as any future gains will be covered by the tax already paid.

I must confess as you might have guessed that I have one of these mutual funds accounts with the nasdaq/eurostoxx trackers. They have already gone though one 8-year "deemed disposal". Every year or so (sometimes when I read this forum!) I ponder how stupid am I to be paying 1.5% p.a fees on a tracker. What makes me hold on to them is that I would not feel confident handling the tax on an ETF, ie would I remember the date of the acquisition several years in the future and pay the tax? I do also have a broker account with individual shares, but with the mutual funds it's a trade-off of tax convenience and less volatility vs costs.

Ix.

[Deleted User]

Bob24 wrote: »

................ETFs.......

Also I would say that the issue with the 8 years rule isn't just tracking the paperwork, but also the fact that it is reducing the compounding power of your investment (being taxed throughout the investment period rather than just once when you sell the asset prevents from compounding part of the yield, so at the end of the day you end up-up with less capital than if you could have compounded your full gains).

Most folk would be happy enough with 8 years of compounding and an exit tax after 8 years of 41% of the profit surely? Admittedly the annual €1270 CGT exemption is non applicable but there's still huge merit in the ETF option just from a diversification standpoint IMO.

Drumpot

I’m not making any Recommendation but if OP is working and paying income tax, topping up their pension as at least part of their strategy seems like a no brainer:

Let’s say you apportion €20k of your savings into the pension. Instead of drawing down €25k/€33k of income, you put more income into your pension and use this €20k fund to subsidise drop in income.

If you are on the lower rate of tax you can actually put maybe up €25k into your pension or circa €33,000 if you are on the higher rate of tax before you have your €20k or savings spent. So your €20k investment turns into as much as €33k from the start.

You don’t just get compounded interest on this money, you get compounded interest and zero tax on it while it grows. The difference in value that. €20k investment over 15 years in a pension versus after tax investments can be massive.

People tend to focus on “well I will be taxed coming out” without doing any maths. I had a client who wanted to payoff his mortgage at 58. I showed him how to do that and then showed him what he might be able to Build up in a pension in the same period. It was a no brainer, the figures told him all he needed to know.

Paying off a mortgage is not an unwise decision , Peace of mind is priceless. But When you understand the benefits of alternative ways of using your money you can take multiple strategies that you are comfortable with and make a lot more of your money.

Bob24

Augeo wrote: »

Most folk would be happy enough with 8 years of compounding and an exit tax after 8 years of 41% of the profit surely? Admittedly the annual €1270 CGT exemption is non applicable but there's still huge merit in the ETF option just from a diversification standpoint IMO.

Sure agree the lessened compounding efficiency doesn't render ETFs useless and they are still fine for many people. But added to the fact that tax reporting becomes messy after 8 years (if you make regular purchases), that you lose the CGT exemption, and that (as far as I understand) you can't offset losses from a particular ETF against gains made on any other asset/ETF, those things are starting to add-up in terms of reducing the attractiveness of ETFs for long term investment.

I personally tend to prefer a portfolio of good investment trusts, in good part because of our tax laws related to ETFs.

[Deleted User]

Bob24 wrote: »

.........But added to the fact that tax reporting becomes messy after 8 years (if you make regular purchases).............

Ah yes, definitely true, great for a lump sum though IMO if someone wants to just leave €xxxx somewhere for years as an investment.

For regular investors it does indeed get messy

Lex Luthor

if it was me, I would always hold a 6 month emergency fund that is readily accessible in case you ever lose job or an unforeseen circumstance

then look and see if you can clear some debt and then think about what to do next

Daddy Ireland

Drumpot wrote: »

I’m not making any Recommendation but if OP is working and paying income tax, topping up their pension as at least part of their strategy seems like a no brainer:

Let’s say you apportion €20k of your savings into the pension. Instead of drawing down €25k/€33k of income, you put more income into your pension and use this €20k fund to subsidise drop in income.

If you are on the lower rate of tax you can actually put maybe up €25k into your pension or circa €33,000 if you are on the higher rate of tax before you have your €20k or savings spent. So your €20k investment turns into as much as €33k from the start.

You don’t just get compounded interest on this money, you get compounded interest and zero tax on it while it grows. The difference in value that. €20k investment over 15 years in a pension versus after tax investments can be massive.

People tend to focus on “well I will be taxed coming out” without doing any maths. I had a client who wanted to payoff his mortgage at 58. I showed him how to do that and then showed him what he might be able to Build up in a pension in the same period. It was a no brainer, the figures told him all he needed to know.

Paying off a mortgage is not an unwise decision , Peace of mind is priceless. But When you understand the benefits of alternative ways of using your money you can take multiple strategies that you are comfortable with and make a lot more of your money.

I am 61 and earning 35k p.a and intend retiring at 65. My pension pot is 220k in a cash fund and I only contibute 1,200 to my pension and employer puts in 4 k. So annual costs of fund are approx 2k so between now and 65 the pot will end up to be 232k approx. I only have a small mortgage for several more years and interest is only cosing 85 euro p.a I have 60k sitting in a deposit account doing nothing. For such a short timeframe of 4 years to retirement would you suggest that I max my pension contibution % for next 4 years as a 20% tax payer as the best safest way to make good use of the 60k that I can do without.

[Deleted User]

Maxing pension contributions with intention to take a big a tax free lump sum as possible would be not a bad idea. As you are not paying 40% income tax thectax benefit isn't as big for you.

Still 200k+ pension pot is a nice fund.....

Maxing contribution & taking a nice lump tax free will see you save lots of 20% tax.

Drumpot

Daddy Ireland wrote: »

I am 61 and earning 35k p.a and intend retiring at 65. My pension pot is 220k in a cash fund and I only contibute 1,200 to my pension and employer puts in 4 k. So annual costs of fund are approx 2k so between now and 65 the pot will end up to be 232k approx. I only have a small mortgage for several more years and interest is only cosing 85 euro p.a I have 60k sitting in a deposit account doing nothing. For such a short timeframe of 4 years to retirement would you suggest that I max my pension contibution % for next 4 years as a 20% tax payer as the best safest way to make good use of the 60k that I can do without.

Obviously I have no idea how any of your other circumstances line up so can just comment in isolation. This is not professional advice, just musings and food for thought but this sounds like a reasonable plan that you have pitched. I regularly suggest to clients To blitz in as much as they can getting closer to retirement if they can. Particularly ones who are on higher rate of tax and will be lower rate when retired. But some people actually won’t pay much tax on retirement (single to 18k and couple to 36k) so it can still be worthwhile).

If you have a partner working as-well , depending on their income and tax rate you could move tax credits to them (would talk with a tax consultant first of which I am not one). So for example let’s say they were on 68k and you were on 35k, you give them all your tax credits, max out your pension contribution (40% of your salary) and may end up paying much less tax between you. You would potentially be paying higher rate of tax but you’d be putting nearly half your salary into a pension. That’s only a throw out example that might work for you.

But let’s say your income is 35k, you can put in up to 40% per annum into your pension. That’s an extra 14 x 4 = 50k that may push your pension over 270k.

At that stage 25% tax free and presumably balance into ARF/AMRF. At that stage you can try to devise an investment stragey to grow what you won’t be drawing down. On €270k you get €67.5k into hand tax free. Balance of roughly 200k you Drawdown as income. 5% per year works out at circa €10k income. You shouldn’t be liable for too much take on €10k + state , circa combined 23k.

Depending on your circumstances, You may also be a year or two out of state pension (67).

Even reinvesting your ARF money , it grows tax free. If you have after tax money on deposit or in savings , why not consider your ARF money your investment risk and Consider not using after tax money to invest?

I suggest to a good few people To use their pension for risk (when appropriate and they understand the risk) if they absolutely want to grow their portfolio. After tax income is harder to earn and you pay way more tax trying to grow it.

Daddy Ireland

Thanks for that food for thought.

RasTa

Buy a place in Liverpool for the rental market. 50k would get you something. Even if you rent it back to the council.

uli84

That whole topping up pension advice, would that work also for someone under 40? Can it be accessed before the retirement? Im worried that i’ll die before i even see any of the money “invested” that way.

Mantis Toboggan

uli84 wrote: »

That whole topping up pension advice, would that work also for someone under 40? Can it be accessed before the retirement? Im worried that i’ll die before i even see any of the money “invested” that way.

Yeah that would be an issue for me too, 20% of people don't make retirement. Grand that your family will benefit but I'd probably focus more on my mortgage until at least aged 50. Last 20 years then focus more on the pension.

Bob24

Mantis Toboggan wrote: »

Yeah that would be an issue for me too, 20% of people don't make retirement. Grand that your family will benefit but I'd probably focus more on my mortgage until at least aged 50. Last 20 years then focus more on the pension.

Only thing if you do that is that is you are missing out on an easy and fairly large tax saving opportunity (assuming you’re are a PAYE worker), and on the compounding affect of investing (tax free) over decades - which is very large as well.

I get the rationale for wanting to pay up a mortgage as well, but essentially by doing that exclusively you are gifting revenue a big financial favour and passing on a long term compounded investment opportunity. Maybe something to think about ...

AndrewJRenko

uli84 wrote: »

That whole topping up pension advice, would that work also for someone under 40? Can it be accessed before the retirement? Im worried that i’ll die before i even see any of the money “invested” that way.

It depends on the rules of the particular scheme and whether you are still working for that employer. In most cases, if you have left that employment, you can 'retire' and get access to the funds with no tax penalty once you hit 50.

It is another nice State subsidy to middle and wealthier classes.

You would need to check the rules of your own scheme to be sure.

uli84

ok, sorry to hijack the thread, I will have similar amount or maybe slightly more to invest - say 75K but no mortgage, credit cards etc Not interested in topping up pension as would need money in about 4-5 years. Any ideas anyone?

[Deleted User]

It depends on your risk appetite ............ even with a diversified portfolio 4/5 years is just about long enough to be fairly sure that you shouldn't walk away with a loss.

But looking at a conservation 5% growth per annum over 5 years with tax free rollup 75k would grow to maybe 94k after charges............. 19k profit, taxed at 41% would yield €11k profit and your €75k back all going well.

Decent IMO ........ once you accept funds tracking the S&)500 dropped 10% over the last week but they are now where they are a month ago......... best not to look at short term fluctuations at all but one needs to be mindful of what will likely happen your €75k over the years

AndrewJRenko

uli84 wrote: »

ok, sorry to hijack the thread, I will have similar amount or maybe slightly more to invest - say 75K but no mortgage, credit cards etc Not interested in topping up pension as would need money in about 4-5 years. Any ideas anyone?

Pension might still work, depending on your age and your retirement age. Would be worth checking this out, given possibility of tax relief.

Drumpot

AndrewJRenko wrote: »

Pension might still work, depending on your age and your retirement age. Would be worth checking this out, given possibility of tax relief.

If a person inherited 100k and they didn’t really need it, had a significant amount of savings (emergency fund etc) and they really wanted to grow this money , one consideration would be a pension.

Depending on their persons annual income , to drawdown €100k in income can cost from 20% to over over 50% on the top rate. If you are self employed and on the higher rate of tax you can theoretically throw in €200k(maybe over multiple years) that might only be worth 90k in your hand after tax. So if you took it that you were going to basically subsidise your income by drawing down your inheritance , you could theoretically throw in 200k from your company as an employer contribution without paying a penny in Income tax, usc or Prsi. So what would of been €90k net income into your hand would be €200k top up of your pension, 25% (or more) of which you might get tax free.

That doesn’t even factor in the tax free growth. For non self employed the figures are similar but no USC and PRSI relief on personal contributions and limited amount they can put in per year (max 40% of 115k over 60).

uli84

Thanks guys, i feel i am too young (35) for putting so much extra onto pension especially since i have long term illness and don’t see myself lasting until the retirement age. Would like to do something nice when im around 40 and that’s the reason i’m looking for something no longer than 5 years.