Summary
Writing in The Irish Times, Robert Whelan argues that Ireland is long overdue a simple, tax-efficient savings account along the lines of the UK’s Individual Savings Account, which lets savers invest up to £20,000 a year with no tax on contributions, growth or exit. He welcomes the recognition that the 38 per cent exit tax deters investment, but cautions that a Swedish-style annual charge could tax savers even in loss-making years. The design of any new scheme, he says, matters as much as the intent behind it.
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A problem successive governments have failed to solve
It is only fair to start by saying this: Minister for Finance Simon Harris is trying to do something that successive governments have failed to do, get ordinary people in the Republic investing.
At a forum in Dublin this week, attended by more than 300 professionals, he acknowledged something that many of us working in financial advice have been saying for years: the current tax regime, particularly the 38 per cent exit tax, is too high and acts as a deterrent to investment.
That matters. Because until that is recognised, nothing will change.
Why Irish savers stay out of the market
For those of us advising clients over the past 20 years, the issues are well understood: the rate of tax applied, 38 per cent, and the deemed disposal rule, the requirement to tax the growth of your fund every eight years, whether you want it or not. And don’t get me started on the nonsense 1 per cent life assurance levy applied to premiums paid into these investment products.
And then there is the broader question of fairness. It is very difficult to explain to someone why they are taking 100 per cent of the risk but only receiving 62 per cent of the gain, while the State takes zero risk and 38 per cent of the upside.
It is no surprise, then, that the State has never seen mass adoption of investing.
Which is why the Minister for Finance’s proposal, targeting the €170 billion on deposit, earning an average of 0.65 per cent, is logical and necessary.
The design matters as much as the intent
However, the design of the solution matters just as much as the intent behind it. Nothing has been finalised yet and that is important. There is still time to get this right.
Based on what has been discussed, the preferred model may resemble the Swedish ISK, a system where, instead of taxing gains, the State applies an annual charge based on the value of the fund, typically about 1 per cent.
At first glance, this may appear attractive. It simplifies taxation and removes the need for exit taxes. But it risks creating a different set of problems.
They always say that complexity kills innovation. And there is a danger that, in trying to be clever, we end up with a system that is neither simple enough to attract the ordinary saver nor effective enough to materially improve outcomes.
An annual charge on the value of the fund, regardless of performance, introduces a subtle but important shift. Capital gains tax is levied on growth. If the fund does not grow, no tax is paid.
Under an annual charge model, tax is paid regardless. You are, in effect, taxing people even when they lose money.
That may not immediately register, but over time it matters. It also raises a broader question: who is this system really for? For the ordinary saver, complexity is a barrier. For the wealthy, an annual charge on assets begins to resemble something else entirely, a form of wealth tax, albeit introduced by another name. This may be offset by allowing unlimited contributions, another feature of the ISK model.
A model that already works: the UK ISA
If the objective is to encourage widespread participation, then simplicity must be the guiding principle. And there is already a tax-efficient model that achieves exactly that.
The UK’s Individual Savings Account, the ISA, is about as straightforward as it gets. Every individual can invest up to £20,000 (€22,900) per year. There is no tax on contributions, no tax on growth, and no tax on exit.
You can hold cash or investments. The choice is yours. It is simple. It is transparent. And crucially, it works.
More than 20 million UK adults hold an ISA. Anyone who has lived or worked there will tell you the same thing: it is incredibly simple and they are glad to have the chance to invest in one.
An opportunity Ireland should not miss
Which is why it is difficult to understand why the Republic would not adopt a similar approach. To be clear, Harris deserves credit for recognising the problem and attempting to address it.
But if we are serious about changing behaviour, about moving people out of deposits and into long-term investing, then the solution must be as simple and as accessible as possible. There is still time to make that choice.
I would also urge caution in how any new scheme is presented. Those of us of a certain generation remember the Eircom shares debacle, when people were encouraged to invest without fully understanding the risks involved.
If we want to build trust in investing, advice has to play a role. Financial literacy is important, but it is not a substitute for professional guidance. If the State wishes to encourage participation, it should do so responsibly. Because ultimately, this is an opportunity: a chance to simplify investing, improve outcomes, and finally bring ordinary savers into the market.
It would be a shame to miss it by choosing the wrong model.
Robert Whelan is managing director of Rockwell Financial.
