It’s wrong that Ireland taxes some savings at a higher rate than others

​Reform of the tax take on investment products is urgently needed to align it with the 33pc rate that government applies to both the Deposit Interest Retention Tax (Dirt) on deposit savings and Capital Gains Tax (CGT) charged on the profit made on the disposal of an asset.

The exit tax rate applying to life insurance savings is currently 8pc higher, at 41pc, and represents an unfair tax burden on consumers. Finance Minister Michael McGrath recently indicated that government is looking to reform this tax anomaly so that individuals who invest are not unduly penalised.

Looking back at the history of how the various tax treatments of Dirt, CGT, and the Life Assurance Exit Tax (LAET) have changed since the early 2000s further underscores the inequality of the tax treatment on savings in life insurance products.

In 2001 the tax-take on both Dirt and CGT was 20pc, while the exit tax on life insurance savings was slightly higher at 23pc. These rates were all revised upwards from 2009 and they peaked in 2014 when a tax rate applied to both deposit interest and life insurance savings reached 41pc, while CGT remained at the 33pc rate introduced in the previous year.

However, the tax rate on deposit savings began reducing from 2017 and in 2020 reached the current level. Unfortunately, no reduction was made to the tax on life insurance savings over the period, which effectively means that the rate imposed on these savers has almost doubled in the last 20 years.

Consumers opting to invest in individual shares pay a tax rate on gains of 33pc, which is in line with Dirt, while other funds are subject to the higher rate of 41pc.

A further anomaly exists for consumers saving into life insurance policies. In 2009 the government introduced a 1pc levy which only applies to savings and investment policies with life assurance companies.

This acts as a disincentive for consumers looking to grow their savings and creates a further unwelcomed distortion to market competition that the minister should move to abolish.

A myth exists that all those saving into life insurance products are rich and can afford the higher rate of tax applied on any gain accrued. The reality is that customers can invest from as little as €100 per month with some life assurance companies. By imposing these higher rates of tax, they are negatively impacting small and medium-sized savers and investors.

Deposits in Irish banks rose to a new record of €153.6bn in March of this year, much of which remains in low interest paying accounts that, for the most part, are yielding little or no return.

As a result, the tax return to the Exchequer has consistently declined because of the low interest rates paid on these savings. Imposing a higher rate of tax on those investing in life insurance companies is both unfair to consumers as well as limiting the revenue take for the Exchequer.

Government should not be penalising consumers who invest in equity funds, which have had historically greater annual returns for investors and that could in turn produce greater returns for the Exchequer. Quite simply, the current tax structure is neither looking after consumers nor the Exchequer’s interests.

Consumers seeking medium to long-term growth for their savings – whether they are saving to buy their first home, for their children’s education, or are simply seeking to provide financial security for their future – must be allowed a level playing field in terms of the tax taken on those savings, regardless of where they invest their money.

The Finance Minister closed the public consultation on the tax take on investments in September of last year and advised that his Funds Review team have until summer 2024 to report on their findings and recommendation. We believe that this review must highlight the distortion in the current taxation regime on those investing money in life insurance companies.

Given the unwelcomed market distortion that this creates for both consumers and financial institutions, particularly at a time when most interest rates on customer deposits in financial institutions are significantly below our current inflation rate of 2.6pc. We are looking forward to the outcome of the review and, following the recent comments from the minister acknowledging that consumers should not be unduly penalised for trying to put their money to work, we are optimistic that this market distortion will be corrected.

We believe that consumers, the life insurance industry, and the Exchequer would benefit from a more equitable tax treatment on all market investment options. It is time to level the playing field.

Barry Cudmore is CEO of Aviva Life & Pensions Ireland

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