A new savings scheme for the “middle classes” has been promised by Tánaiste and Minister for Finance Simon Harris. But what will this mean for savers? Is it going to be another SSIA scheme, which delivered nicely, or the kind of risky investment – like Eircom shares – which left so many out of pocket?
What is the issue here?
Irish savers have vast amounts of money – around €170 billion at the moment – on deposit with the banks, much of it earning little interest in demand accounts.
The idea is to tempt them to move some of this money by creating new products which give the public more incentive to invest in shares or other investments with an element of risk. This, the argument goes, can help households to build wealth over time and also provide businesses with access to new sources of funds.
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What is stopping people from doing all this now?
A range of things. Part of it is the tax regime, with investment returns subject to 33 per cent capital gains tax and specific tax disadvantages to investing in products such as Exchange Traded Funds (ETFs), on which tax must be paid every eight years on investment gains – the so-called deemed disposal rule.
Investment also involves charges for savers, an area in which the industry needs to be more transparent, and an element of risk. As the ads on the radio say – in the bit they inevitably read through quickly at the end – the value of your investment can fall as well as rise. This means the only exposure most people have to the markets is through their pension scheme, where significant tax advantages are at play.
The main tax-incentivised savings products, meanwhile, are the State Savings schemes offered by An Post which offer attractive tax-free returns.
So what might the new scheme look like?
Well, it won’t be like the SSIA, the scheme introduced in 2001 by then finance minister Charlie McCreevy offering a 25 per cent government-financed bonus on savings after five years, subject to certain limits. This was a no-risk scheme for savers. With billions now locked away in deposit accounts, the Government is not looking to boost savings; instead, the scheme will focus on providing other options for the public.
Harris has mentioned schemes in the UK, Canada and Sweden which all offer tax advantages for money invested for various purposes over a period of time.
In the UK, for example, the Individual Savings Account (ISA) scheme means savers can put a maximum of £20,000 away each year, with the returns not liable for tax on interest or on investment gains and no requirement to disclose them in a tax return. A government top-up is available for a special so-called Lifetime ISA through which people can save to buy their first home or for retirement. But for the main ISA schemes, the incentive is not paying tax.
Canada has a scheme in which C$7,000 can be invested each year in products linked to the stock market with tax-free returns – and also a separate retirement savings plan. Sweden offers an investment savings account with generous tax free limits and low tax on the remainder.
What are the key issues for Ireland?
The Government needs to decide precisely what it wants to do. As of now we have little detail. The UK scheme for investment in the stock market, for example, might provide a good model. But the Coalition would be unlikely to try to mimic the UK “cash ISA” which provides savers with an incentive to put money into a bank account.
Work would also be needed with the financial industry to structure products which were simple and did not have high charges – an endemic problem for many investors in the markets over the years.
Decisions will be needed on whether there are wider changes to the taxes on investment products – particularly ETFs – and how this fits in with the existing pensions regime. Also, the Cabinet could consider whether cash could be used as a source of finance for State investment in the longer term in areas like housing.
And the Government will try to fit this within the framework of the so-called savings and investment union the EU is trying to create to allow a much bigger single market funded by savings and available to fund start-ups, business growth and so on. This EU policy is the catalyst that has encouraged Irish political interest in the area.
What are the politics of this?
Not straightforward. The tax advantage can be dressed up as a “give back” to those putting in money. But unlike the SSIA, money invested in the markets does come with a risk. History suggests investment in the markets offers returns in the longer term and will deliver more than is available in bank accounts. But there will be ups and downs, too. Investor education will be vital – including the message that this is a long-term savings vehicle and not some kind of no-risk quick win.
