After an eight-month drip feed of information, Minister for Finance Simon Harris finally revealed crucial details about the new State-backed investment scheme in Tuesday’s budget.
The personal investment accounts are being designed to tempt ordinary savers to take their money off deposit, where it’s earning little interest and losing value due to inflation, and put it into the stock market, where – over the long term – it is likely to rise in value.
There are myriad reasons why ordinary Irish people are wary of investing. Mostly those reasons can be summed up in four words: eircom shares, financial crash. We won’t go into those now but suffice it to say the phrase “if you know, you know” very much applies here.
But the biggest barrier to ordinary Irish people investing their money is tax-reporting obligations that are complex and intimidating.
In this episode of the Better with Money podcast, we outline how these new personal investment accounts, which are expected to be offered by financial institutions from July 1st, 2027, will have a simple formula: invest a maximum of €12,000 a year, pay no tax on the gains until the pot is worth €50,000, after a which a flat-rate tax of 1 per cent will apply to the portion above that threshold.
There will be no deemed disposal tax applied every eight years, a tax that assumes you’ve sold your shares and made money even when you haven’t (you are deemed to have disposed of them and realised a gain).
[ Ireland’s new personal investment accounts: Here’s how the scheme will workOpens in new window ]
Many ordinary retail investors often can’t pay that bill without cashing out, which counter-intuitively nobbles the compounding effect they would have achieved otherwise.
Deemed disposal has been reduced from 38 per cent to 35 per cent in Tuesday’s budget. So a 1 per cent tax rate on the personal investment account sounds very low in comparison.
However Dan Malone, a tax expert, personal finance influencer and founder of Honest.ie, is lamenting the fact that any tax is applied to what is effectively a “beginner investor” product.
In this episode of Better with Money, he explains why he sees the 1 per cent rate as a “mini deemed disposal that happens every single year on balances above €50,000 regardless of whether you make or lose money".
That’s because Dan is a proponent of investing over decades rather than short-term speculating.
“Even though 1 per cent doesn’t sound like a lot, the actual effect of a 1 per cent annual tax on a portfolio over long time horizons, which is what a lot of people will be intending to use this account for, it actually turns into a net wealth tax of between 20 and 30 per cent. That’s the combination of both the tax that Revenue takes from your account and also the loss of wealth that you suffer by not having that money be invested in the first place. So you have to combine those two things together to get your true cost or drag on the portfolio of that 1 per cent over time.”
[ Budget Calculator 2027: Here’s how this year’s budget will affect your incomeOpens in new window ]
But of course, that assumes you manage to reach those high sums. Only time will tell how people choose to view the personal investment accounts. Will they be used as an adjunct to pension-type investing? Or will younger people aim to maximise profits over a shorter time frame, perhaps in the hope they’ll have enough for a house deposit?
And while €175 billion euro is on deposit making very little interest in Irish bank accounts, just how much of that is actually available to households to invest
Those are not the only known unknowns. There is still uncertainty over which companies will create a product for the scheme, how much they’ll levy to manage any funds and handle the tax reporting, and whether fintech apps such as Revolut and Trading 212 will get on board.
Malone also answers the €50,000 question: should ordinary savers wait until this scheme is up and running next summer? Or take the plunge now so they don’t waste any more time?
You can listen to this conversation on the player above, or search for Better with Money wherever you get your podcasts.
This episode is brought to you in association with Standard Life.
