Sir, – The attempt by the Government to change the culture of saving and investment across Ireland is laudable and essential.
The lack of availability of such options has held back the financial wellbeing of our society for decades and lagged behind other western counterparts. Much is being made of the importance of simplicity, which is entirely correct.
However, much deference is being directed towards the Swedish model, with inadequate detail. The key component to understanding these investment models is compound interest and the fact that associated fees and taxes themselves compound over time.
Consider a single investment of €10,000 in two different scenarios. In the first scenario, consider a fairly typical management fee for Ireland of approximately 0.75 per cent and a further government taxation of 1 per cent. Also presume the investment is made in a globally diversified fund with a long-term average return of 7 per cent, which would be typical for these funds.
RM Block
The cumulative fund value at 10, 20 and 30 years for this investment would be €16,680, €27,780, and €46,580 respectively. Without full details this may sound on the surface like a reasonable return.
However, now consider the second scenario where there is no government taxation and a management fee of 0.2 per cent. This management fee would be very typical for the Canadian tax-free savings account (TFSA) system and in other competitive banking economies. In fact, in some jurisdictions there are near zero management fees associated with exchange-traded funds (ETFs) . This same investment of €10,000 at 10, 20 and 30 years will now equate to €19,300, €37,290 and €71,180.
The first example represents an additional cost to the account holder of €24,600 over 30 years compared with the second. The total compounded cost of fees to the account holder in the fisrst example is €29,543 – 41.5 per cent of what their account would have otherwise earned.
Over the last few decades informed populations in other western countries such as Canada have driven down outrageous management fees through financial education and widespread recognition that fees crush the savings of the account holder and act to transfer their hard-earned wealth to the banks.
Annual government taxes with lovely soundbites of 1 per cent do exactly the same thing. The cumulative compounding of these costs over time are very sizeable and stacked towards the government and banks, who also enjoy taking none of the risk.
There is much being made by vested interests which confuse and distract and imply complexity that the average account holder doesn’t understand. This is nothing but noise and the hard figures above and associated fees are what’s at stake.
The narrative from the Government is that this savings and investment scheme is meant to have a meaningful impact on the wealth and financial wellbeing of Irish households. For this to hold true, these schemes need to offer a sizeable benefit to Irish account holders. The massive cost of living and the magnitude of house prices mean anything less will be nice, but not adequately impactful.
Any system with annual taxes in addition to management fees is neither simple nor generous and will not achieve this goal. A Canadian-style TFSA system, however, would go a substantial way towards progressing the Government’s stated objective and is the simplest of all. – Yours, etc,
MARTIN ARRIGAN
Malahide,
Co Dublin.
