New investment account: greater returns or greater risks?

The new State-backed investment account has been hailed as the first serious attempt to make investment more appealing to the Irish public. But it carries risks and a steep learning curve. Irish consumers are among Europe's best savers, but lag when it comes to putting their money to work, according to the Central Bank. Its figures show households here hold only about 2.3% of their financial assets directly in listed shares and debt securities, compared with an EU average of 7.5%. What are the terms of the new investment account? According to the details announced by Minister for Finance Simon Harris, there will be no minimum contribution, so savers can start with even the smallest amount. There is, however, an upper limit of €12,000 a year. Money in the account is tax-free up to €50,000. Above that, a 1% annual charge applies to the value above the threshold (not just to returns). Savers will be able to invest in shares, bonds, and ETFs, while complex and risky products, including derivatives and crypto assets, will not be eligible. The account is due to open on 1 July next year, subject to legislation. Then there’s a practical launch. Revenue said a technical forum will be established between the regulator and the account providers (banks, brokers or insurers), as well as any software companies willing to take part. Providers have time until 16 October to submit applications. Are the conditions good? It depends on one’s perspective and long-term plans. The lack of deemed disposal tax – a charge collected every eight years even if no investment has been sold – has been welcomed by analysts. Minister Harris said that due to the €12,000 annual limit "it is extremely unlikely that any tax will be due in the first few years following the opening of an account". In theory, users could hope to earn higher returns than through regular savings accounts, but shares can fall in value and money can be lost. Consumers will not have to deal directly with Revenue to report or pay the tax – the provider will handle it. "It's getting people an introduction to investing in a structured way. I think it's a good idea," said Owen Redmond, Head of Financial Planning and Pensions Strategy at Goodbody. "It’s the first time investment has been made simple," said Sinead Colreavy, Financial Services Tax Partner at EY. Sinead Colreavy, Financial Services Tax Partner at EY, believes "financial literacy has to key with this initiative" She thinks the scheme is designed for investment novices, not for seasoned shareholders. Some argue that long-term, larger-value investments could be less beneficial. Michael Healy, Chief Executive of IG Consumer, believes the 1% tax on value above €50,000 "has undermined the account’s long-term appeal". He told RTÉ News that "a seemingly modest annual charge can significantly erode returns over several decades, as investors lose not only the money paid in tax but also the compound growth it could have generated." According to IG modelling, someone investing €12,000 a year for 30 years at an average return of 7% would pay around €185,000 in tax. Will consumers have to make investment decisions themselves? Ultimately, yes. Despite the promise of a simple and accessible scheme, consumers will not be able to delegate decision-making entirely. "How you spend the money or invest is up to the person. I would expect some providers will probably give you a risk assessment if that's what you want," said Sinead from EY. Mr Healy said people "won't necessarily have to pick their own stocks or become market experts to use a Personal Investment Account." "Investment platforms already offer a range of solutions for different levels of experience, from self-directed investing to ready-made, diversified portfolios." CEO of IG Consumer Michael Healy thinks the Government's "missed its chance to get Ireland investing" But professional support is likely to come at a cost, including account charges, dealing commissions and foreign-exchange fees. "Even small charges can eat into returns over time, so comparing providers and understanding their fee structures is essential," Michael Healy pointed out. Speaking on RTÉ’s Morning Ireland, Managing Director of Baggot Investment Partners Peter Brown warned that for many it will have to be self-investment, as brokers do not tend to work with "small" amounts. He warned that investing is complex. "I've been in the financial market since 1980... and I learn new things about the financial markets every day." He believes the Government needs to push for providers to create a "set product." To "catch up" with the rest of Europe in personal investment, the launch of the new account "needs to be done in conjunction with financial literacy and educating people on the options that are available," Sinead Colreavy of EY said. What are the risks? Market movements can bring greater returns but also significant losses. Patience is how most brokers recommend navigating the ups and downs of shares. "Losses only really occur where people lock in a loss or somebody cashes in when markets have corrected. It tends to crystallize that loss for somebody," said Owen Redmond. He added that for someone investing over the medium to long term values will go up and down. His view would be to stay "committed to the plan and not being reactive to times of weakness in markets." Owen Redmond, Head of Financial Planning at Goodbody While a scheme like this could boost retirement savings or deliver a better return on a child’s college fund, experts warn against putting all life savings into it. "It's a piece in the puzzle of your overall financial wellbeing," Mr Redmond said. Putting a deposit for a house into it is a big "no" for Baggots Investment's Peter Browne. "You never invest your deposit for a house because in the last year you could fall 20% and it's a catastrophe." Mr Browne also points to the recent sell-off in bond markets. Although bonds will be available through the scheme, he calls them an "incredibly complex product". "If you'd bought a 10-year US government bond in January, you'd be down 30% now." Senior financiers have become more alarmed about possible market shocks, or even a crash, driven by the AI boom and the concentration of capital in the sector. The Bank of England Governor stopped short of saying that AI bubble will burst, but warned of a possible "correction of asset prices." AI shares have risen strongly and now make up roughly half the value of the S&P 500, according to the Bank of England. That concentration means a fall in AI stocks could potentially drag down entire indices and major funds. "What happens if a whole lot of people, 100,000 people go into this and the markets collapse and they lose money, there's going to be pressure on the Government to bail them out," said Peter Browne of Baggot Ivestment.