Over the course of our How to Invest series, we have offered insights on many aspects of investing in different classes of assets, including the importance of diversification, the various taxes that apply and the pros and cons of different investment choices.
To take a more practical tack, we have asked a series of experts to answer some of the common themes raised by our readers during the series, around issues such as saving for the future of their children, investing lump sums and investment priorities.
Investing a lump-sum
Q: “I’ve recently come into a lump sum and want to invest in fairly safe options for five to 10 years. I’m a retired 68 year old and want to invest so that the lump sum returns something to keep up with inflation and some more. This fund is for my own use and not to build up returns for after my death.”
Q: “I am in my early 60s and I am about to sell an investment property I owned for 20 years. I was receiving very low rent and, between tax and mortgage, was losing about €1,000 a month. I anticipate I will have €300,000- €350,000 after taxes to invest. Should I consider a mortgage free property managed professionally (I anticipate this would yield about €14k)? I intend maximising my pension for the remaining few years.”
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David Quinn: Many retirees face such dilemmas after receiving windfalls from pension lump sum payments and property sales. It is a nice problem to have, but there is an understandable concern about how to grow your new nest-egg to beat inflation (currently around 2 per cent in Ireland), while preserving capital for the longer term, or even inheritance.
In many cases, relying on a single asset, such as a rental property, may feel familiar, but can leave you exposed to concentration risk, tax inefficiency and limited access to funds.
We tend to recommend a balanced approach to investing. This means spreading the lump sum across a mix of assets: cash or deposits for security and short-term needs; high-quality bonds for stability and regular returns; and an allocation to global equities to provide growth and help offset inflation over time.
Such a portfolio can be expected to deliver returns in the region of 3 per cent to 5 per cent annually over the medium term, though this is not guaranteed.
Pension contributions are also worth considering, especially if there is some household earned income. Tax relief on contributions (up to 40 per cent of income) still applies, with the eventual benefit of tax-free lump sums and tax-free investment growth.
Buying an investment property is still a popular option. A €300,000 property might offer an attractive gross rental yield, but it is vital to factor in taxes, vacant periods, depreciation and repairs. Some of the hassle can be outsourced to agents, but this comes at significant cost.
Investors should retain flexibility, avoid overcommitting to illiquid assets and ensure their investment strategy aligns with their income needs and risk tolerance.
David Quinn is managing director of Investwise.
Invest or over-pay a mortgage
Q: “I’m currently buying a house. I’m wondering if I’m better off using the spare €100 or €200 a month towards a mortgage overpayment, or investing it elsewhere?”
Michael Dowling: I have been advising mortgage holders for over 30 years, and it is fair to say no one wants a mortgage. It is the objective of any mortgage holder to clear the mortgage as quickly as possible. This is achievable for some borrowers through two methods: 1) making additional lump sum capital repayments over the term of the mortgage; and/or 2) increasing your monthly repayment when you can during the mortgage term.
The question specifically asks about making increased monthly repayments to clear the mortgage quicker compared to investing the same amount over the mortgage term.
If you have a mortgage of €300,000 over a 30-year term at 3.5 per cent interest rate, the monthly repayment is €1,347, and you will pay €185,000 in interest charges. If you increase your monthly repayment by €100 to €1,447, you will clear your mortgage in full in 26 years and three months and pay €156,000 in interest charges.
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If you increase your monthly repayment by €200 to €1,547, you will clear your mortgage in full in 23 years and seven months and pay €138,000 in interest charges (so a reduction of €47,000 on interest bill).
If you invested €100 or €200 a month in a managed fund, at 2 per cent over a 30-year period, you would generate €13,272 (at €100 per month) or €26,545 (€200 per month). These returns are assuming the fund makes a 2 per cent return every year and there are risks and tax to pay on the investment returns – but a stronger rate of return would deliver a better outcome.
I would advocate very strongly for overpaying your mortgage. The sense of relief and achievement in paying off your mortgage is an incredible feeling. One note of caution – not all banks allow you to overpay monthly, so seek advice before you commit.
Michael Dowling, of Irish Mortgage Brokers.
Investing for children
Q: We’ve been using the small gift exemption to invest for our kids. Between us and the grandparents, they have a nice pot of about €20,000 each but it is losing value every year in deposit accounts. Given the time frame, we could take on some risk but this money is for them, not us, and we are trying to keep it separate from our own finances in separate accounts. How do you invest for your children?
Aoife Quinn: You are already making good use of the small gift exemption, which allows any individual to receive a gift of up to €3,000, tax‑free, from any number of people. Because this exemption can be used by multiple family members, parents and grandparents can together build up meaningful sums for children over time, without reducing capital acquisitions (CAT) tax-free thresholds for future gifts or inheritances.
To ensure the exemption applies correctly, it is important that gifts are paid into accounts held in the child’s name.
As balances grow, many families encounter a common issue: deposit accounts feel safe but over longer periods, inflation can steadily erode purchasing power. Where the money is not needed for several years, investing part of it can be worth considering.
The key is to match the level of investment risk to the purpose and timing of the funds and to be comfortable with normal market ups and downs.
For children under 18, investing is typically done through an investment account in the child’s name, with parents or grandparents acting as trustees. Trustees make the investment decisions, but the child is the beneficial owner, meaning any growth belongs to the child.
It is important to bear in mind (depending on how the account is set up), that once the child turns 18, they may gain full legal control and access to the money. This may not be optimal as many parents will feel that this is too young to have unrestricted access to a significant amount of money.
There is no single right strategy, but combining regular gifting with a thoughtful investment approach can make a meaningful difference to a child’s future financial security.
Aoife Quinn is a financial planning director with Davy
Q: I am actively pursuing the best option for investing some of our children’s allowance each month to help pay for education, houses, weddings etc. What avenue would you recommend considering the Government taxes ETFs every eight years and at a rate of 38 per cent?
Jane McAleese: The children’s allowance (currently €140 a month) lends itself well to long-term planning, so it’s encouraging to see you investing rather than leaving it on deposit, which is currently subject to DIRT at 33 per cent.
The concern around exchange-traded fund (ETF) taxation in Ireland is valid. ETFs and life-wrapped funds are subject to exit tax at 38 per cent, with a charge triggered every eight years regardless of whether you remain invested. That said, the direction of travel is worth noting; the rate has already reduced from 41 per cent, with some indication it may move closer to capital gains tax levels over time.
[ How to invest in shares: Pros, cons and the smart way to keep costs downOpens in new window ]
Even with the tax, these fund structures remain a sensible option for many families. They offer broad diversification, access to global markets, relatively low costs and a simple, low-maintenance way to invest regularly.
The main alternative is direct investment in shares, where gains are typically taxed under capital gains tax rules. While this can appear more tax-efficient, it usually involves greater complexity, more ongoing reporting and a higher risk of poor diversification if not carefully managed.
In practice, the best approach is the one that balances growth, risk, simplicity, flexibility and tax efficiency. For most families, a globally diversified fund through a life assurance structure provides a straightforward and effective solution.
Over the long term, the real driver of outcomes is not perfect tax optimisation – but starting early and investing consistently.
Jane McAleese is managing director of Fenrir Financial.
