Opinion: consumer tax incentives like ISA accounts could provide benefits to both individuals and the Exchequer
In 2022, the average Irish household saved around 20% of their disposable income. However, the options of where to put this money to beat inflation are somewhat limited. Irish banks pay some of the lowest interest rates in Europe with even members of the Government calling out how "offensive" it is when the ECB rate increases are not passed on by Irish banks to their clients.
Why don't banks pass these rates on? Well, because it drives significant revenue for them. The less they pass back to clients the more they make - essentially risk free.
All of this begs the question – where to put your money to make steady returns? One option, of course, would be for Irish banks to pay their clients a fair rate on cash holdings and act in their interest - and we have seen some banks increasing deposit rates in recent months.
Fintechs now exist in the Irish market that find the best rates across other European countries and allow Irish clients to save with European banks offering the best rates on cash savings. However, when ECB interest rates are low, some might not want their cash making low returns. Additionally, while cash is an important part of a saving pot, holding all your assets is cash is not a long-term solution to significant capital growth.
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From RTÉ Radio 1's Morning Ireland, Petula Martyn reports on younger people using phone apps to trade in market shares
A third option is to invest some of your money. This is something which countries like the UK and US have made more accessible through providing tax incentives for people to invest their disposable income in the stock market. These are called stocks and shares individual savings accounts (S&S ISA) in the UK and are offered through various retailers, including high street banks and investment platforms. It takes only a few minutes to set up an account. As long as you stay within the S&S ISA wrapper limits, no tax will be applied and whatever your investment(s) return is yours to keep.
How does it work? Every UK tax resident who meets the eligibility criteria can invest up to £20,000 per year into a S&S ISA account. They can invest in individual stocks like Amazon or Apple or into indices like the S&P 500 or into "one stop shop" portfolios that combine a mix of stocks and bonds. There is no one best option as everyone differs when it comes to risk and understanding of the markets to make certain decisions – but there are options for everyone. The facts are simple – historically, those who want to invest for the long term in simple, low-cost funds are better off than those who stick with cash.
While the above graph does not include the fees typically paid to the asset manager or investment platform, it does show the clear advantages of investing versus saving in cash for the long term. Cash had an annualized return of 1.2% from 2002 to 2021, whilst investing in the S&P 500 or a balanced 60/40 portfolio of stocks and bonds returned 9.5% and 7.4% respectively.
In monetary terms, let's take a €10,000 portfolio. Over the 20-year period cash would be worth €12,700 or 27% return on investment. However, the 60/40 portfolio would be worth €41,700 or 317% return on investment whilst the S&P 500 portfolio would be worth €61,400 or 514% return on investment (this is based off compounding the annualized return for a 20-year period).
Of course, historical returns do not in any way guarantee future returns. However, take any five-plus year period and you will struggle to find a time when cash was king.
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From RTÉ Radio 1's Today Show in 2020, the story of trader and entrepreneur Oonagh Keogh who became the first female member of a stock exchange in 1925 at the age of 22
But the issue in Ireland is that there is no such incentive to invest in the stock market. Capital gains tax is extremely high at 33% for all gains made on your original investment versus 0% in the UK if the investments are in an ISA (and the US takes a similar incentive-based approach).
Ireland needs the Government to bring in a similar wrapper type to that of the UK or the US. It works, it makes people better off and it would attract more competition in the Irish market which would drive down fees and bring better propositions. For the Government, these products can be simplified for people buying homes or saving for retirement, which are two of the major issues we have in the country at the moment.
Investing does not need to be complicated or only for wealthy individuals. Providing incentives to people to invest in a safe and Government-backed manner only brings benefits to both people and long-term Exchequer spending.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ
