When it comes to investing, we have 3 pillars that we base our portfolios on: cost efficiency, tax efficiency and diversification.
All three of these play an important role in any investment strategy. And when investing through a pension in Ireland, we can use all three to make sure you have a highly competitive investment strategy in line with your Metis LifePlan.
However, this becomes a lot more difficult when we’re talking about non-pension investments. As I see it, you can only have two of the three at any one time in Ireland. I want this article to be more of a conversation starter for investors rather than me telling you the way it is or should be. But at the same time, I want to put my views out there and am happy to engage with anyone who has differing views.
Before I do get into the detail, it’s important to note that everyone’s situation and values are different and there may be specific reasons why you should favour certain strategies over others. This isn’t a one-size-fits-all approach.
So, let’s not stand on ceremony and let’s get into the meat and potatoes, to borrow a phrase from our favourite podcast.
I’ll start with diversification. It’s not fair to say it’s the most important pillar, but it’s certainly the easiest one to define. When we say diversification, we mean buying into the global stock market (thousands of different business) rather than buying individual stocks. Put simply, it’s just about not putting all your eggs in one basket.
We’re evidence-based investors, so we only invest in things that we know will work and have a long-term track record. If you have time on your side (and most of us do), buying into the great companies of the world and letting them do what they do will work. You can read more here about why the stock market always goes up in the long run.
Any step you take that moves you away from investing in the great companies of the world increases the risk that your investment strategy may not work (although it might also increase your returns – this is where your individual appetite for risk comes in).
Some common examples of investments that may or may not work are:
• direct property
• individual share dealing
• cash on deposit
• structured products
• loan notes
• just about any investment that sounds too good to be true.
We tend to avoid recommending these at Metis Ireland, as we prefer to stick with what the evidence tells us will work – buying funds and/or instruments that track the performance of the global stock market.
This will give you a real return above inflation and it’ll ensure that you don’t outlive your money. There’s a relatively low risk of permanent capital loss, as it’s extremely unlikely that your investment value will ever plummet to zero – every investor’s worst nightmare.
We use this term very much intentionally; we did not say cheap or low cost.
When it comes to advice, the evidence tells that paying for expert advice is worth its weight in gold. What I mean here is, if you are paying for an investment, you of course need to get value for money. But paying for an investment product without getting independent financial advice and a real financial plan is fraught with risk.
Generally, if you know where to look (real financial planning firms – hi, it’s us!) you invest in a product, get advice, and come away with a financial plan for pretty much the same cost as the bank. In some cases, it also works out a lot cheaper than some of the larger private wealth managers.
So, what is good value? Well, this all comes down to your personal situation, your own experience as an investor, and if you want to someone to manage your investments for you. But to put a figure to it, provided you are getting great service, independent advice and real financial planning, anywhere between a 1% to 1.5% fee would be really good value.
If you’re paying the same as this without advice and a plan, I personally don’t see how this could be construed as good value.
If you are paying more than this well… here is my number 😉
This is where things get tricky outside of pensions.
There are two main options that I’ll discuss: Exit Tax and Capital Gains Tax (CGT).
Exit Tax is charged either every eight years or when the fund is sold – whichever is first.
The rate of Exit Tax is currently at 41% on the gains you make. Even if you don’t make a withdrawal, you’re taxed on the growth every eight years.
You can invest in what are called accumulating funds, which means that dividends that are automatically reinvested in the fund and not considered to be taxable income in your hands.
CAPITAL GAINS TAX
CGT currently has a lower rate of 33% and you don’t pay any tax until you make a gain. It’s certainly more attractive on the surface. There’s also an annual exemption of €1,270 so you can crystalise gains of this amount every year without paying tax. You can also write off previous losses against future gains.
That’s where the good news ends for CGT. On the face of it it might seem like a no brainer, but when we go to implement a strategy that’s where things get tricky.
Retail investors can’t invest in index tracking funds that buy the great companies of the world and stay within the CGT realm. You can only invest in direct shares or direct property, so immediately you’re giving up the diversification aspect of things. It’s a trade-off between either tax-efficiency OR diversification – we believe you need all three pillars.
The other issue is that any dividends or rental income you receive are taxed as income in your hands. In most cases, this will be at the rate of 52%. Additionally, almost nobody immediately reinvests the income these types of assets generate. This step is vitally important, as about 50% of market returns come from immediately reinvesting dividends, so there’s a built-in loss as part of the process there.
You can potentially get around losing the diversification pillar by investing through investment trusts or some discretionary fund managers. However, these tend to be much more expensive, so you’d give up the cost efficiency pillar. They often cost around 2-3% all in and you usually don’t get a financial plan as part of this service.
Our research suggests that if you’re paying an additional 0.5% per annum to access CGT instruments, it erodes almost all the tax savings, assuming returns are the same.
How do you get the best of all three, then? Well, to borrow a phrase from former Irish Rugby coach Eddie O’Sullivan, we can only control the controllable.
We can choose a diverse investment strategy and we can control costs. But unfortunately, we don’t control tax law in Ireland (if only!). The laws and regulations can change very fast depending on who’s in power and what’s going on in the world.
So, our advice is this:
1. Get independent advice
2. Make sure it’s with a real financial planner
3. Buy the great companies of the world
4. Make sure that if you are paying for something you’re getting value for money (that doesn’t mean ‘make sure it’s cheap’!)
5. Don’t let the ever-changing tax landscape derail you long term investment strategy
If you’d like to discuss anything I’ve covered in this article, or your investment strategy, or are interested in a financial plan, please don’t hesitate to give us a call on 01 908 1500 or email us at firstname.lastname@example.org.
Private Client Manager
Metis Ireland Financial Planning Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland.
All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified financial adviser before entering any financial contract. Metis Ireland Financial Planning Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts.