At the moment, most individuals leave money in deposit accounts in banks, which get negligible interest.
The Government is working on a plan to encourage people to save for the future instead, by making it more attractive to consumers to put money into new investment accounts – which offer a better return.
For example, while individuals are normally liable for tax on the interest earned on their savings, the new initiative would offer tax-free returns on investments up to a certain limit.
What has the Government announced?
So far, Minister for Finance Simon Harris has only announced the broad parameters of the scheme. The first returns from the account will be tax-free and – beyond that – a “low rate” of tax will apply, according to the Department of Finance.
There will be no requirements to make a minimum contribution but an annual maximum limit will apply.
When will we know the full details?
The specific tax-free threshold, low tax rate and annual contribution will be announced as part of the Budget on 6 October.
Currently, Irish investors are taxed at 33% on any gain on shares and 38% on many funds. So, getting a tax-free return is attractive. But it will be limited.
The Department of Finance says one individual won’t be allowed to own multiple accounts. Investors will need to be over 18 and have a PPSN. It is expected consumers will be able to open their first accounts in the middle of next year.
Why is this happening?
Generally, investors get a better return by investing in the stock market than leaving money on deposit. But many people feel that is not for them.
They are worried about shares plunging in value; remember the financial crash? They are discouraged by fees charged by stockbrokers. Meanwhile many are put off by the fact that you need to understand companies in order to figure out if it is worth buying specific shares.
Encouraging people to invest in a scheme backed by the State, which has a tax-free element, should coax more people to put money into these investments.
Where will the money be invested?
It can be invested in a variety of ways:
- Shares in companies listed stock markets
Shares represent small pieces of a company, which can be bought and sold on stock markets, such as the Irish Stock Exchange in Dublin or the FTSE in London. - Bonds available on markets
This means the investors would typically lend to a company or a country for a specific interest rate. For instance, some investors like putting money into US Treasuries or German government bonds. They are usually seen as stable, secure investments. - A range of funds which are suitable for retail investors
Frequently, these are invested in a wide range of companies. It means consumers can be less exposed to the ups and downs of individual firms. - An exchange trade fund
This is invested across a range of assets such as stocks, bonds or commodities such as gold or oil. It means there is the benefit of diversification for investors. - Other financial instruments
There will also be a range of other financial instruments available according to the Department of Finance. That is a broad phrase of a wide range of investments in the stock market, debt instruments or foreign exchange investments.
The scheme won’t offer access to highly risky or complex investments such as cryptocurrencies.
Whose idea is this?
This is all driven by the EU, which has announced a Savings and Investment Union.
A significant part of initiative is encouraging financial literacy for all ages to help them understand financial markets. Ireland launched a financial literacy strategy last year.
The idea behind the Savings and Investment Union is that it envisages making it simpler and more accessible for people to invest.
Ireland is behind many European countries, including the UK, where such schemes are already offered.
Will people make huge sums from this scheme?
No, this is not a get-rich-quick scheme.
As well as the limit on how much people can invest, financial institutions will offer accounts to consumers and they will charge fees. It is worth bearing in mind that to make money from this you need to have funds to spare.
Not everyone is that lucky.
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