Is the State’s new investment account going to be a good deal?

Is the State’s new investment account going to be a good deal? The announcement of key details in the budget has certainly attracted renewed public interest. But it is essential to understand the fundamentals of the scheme to judge how it might fit in to your personal financial plan. And in assessing this, investors need to realise that they are going to be largely on their own. Most of those providing the plans – the big banks and insurance companies initially – are likely to follow a low-charge model, meaning they will not offer personalised advice. Instead people will get some online essentials about the various plans on offer and choose – via a bank app, for example – what level of risk they wish to take. It will, of course, be open to potential investors to seek personalised guidance from an adviser, or sign up for a more bespoke scheme, but this will cost more. All kinds of funds offered by brokers will be “wrapped” in the new scheme, in other words constructed to take advantage of it. But charges here will be higher. As the offers develop, options are likely to grow. But cheap and cheerful will be the hallmark of the initial approach when the big players kick it off next July. READ MOREThe tax-free nature of the scheme on holdings up to €50,000 is attractive. But still, there are some steps to assessing whether taking part works for you. The first key point is that the return has to be greater than that available on a risk-free asset such as a bank account. Many people have cash currently in demand accounts with the main banks offering very low returns. But they could get 2 to 3 per cent – or even a bit more – if prepared to move into a savings account which might require notice on withdrawals. [ Lower-than-expected annual €12,000 investment account limits may curb take-upOpens in new window ]Returns are subject to deposit interest retention tax (Dirt) at 33 per cent, so that needs to be deducted – a third of your interest goes to the taxman.Traditionally, stock markets have offered significantly higher returns than this. The Stoxx Europe 600 index, for example – the kind of index which an investment under the scheme might be based on – has had an average return of 8 per cent over the past 20 years. Most European indices has returned at least 6 per cent over that period. But the Stoxx index lost 12 per cent in 2022, as inflation surged following Russia’s full scale invasion of Ukraine. So the first thing for new investors to understand is that you have to be able to ride out the bad years and let the averages – the fact that equities tend to go up more years than they go down – lead to gains over time.Revealed: Ireland's new personal investment account - so how will it work? Of course we cannot be sure that stock markets will behave in future like they did in the past. And we don’t know what markets will look like next July when the funds are launched, but this will need to be taken into account. A bursting of the artificial intelligence (AI) bubble or the wider knock on to bond markets from rising interest rates present risks. Investors will have a broader exposure than those who put cash into Eircom when it floated in 1999, but its initial rise and then fall as tech shares were hit as the dot.com bubble burst is worth noting, nonetheless.If investors are happy to lock in their money for a period, then history suggests that equity market will beat deposits. Their next key call will be how much risk to take. At least initially, funds are likely to be marketed as high, medium and low risk. The latter will put some cash in traditionally less volatile areas such as bonds (though these have been on a volatile run of late). This is where the lack of advice on basic products could be difficult for new investors in choosing where to put their money. We will have to see how the offers line up, but the funds will make more sense for those willing to take a somewhat higher level of risk and thus get a higher return over time. You need to beat the bank account return and also take into account the costs of the scheme.The key cost most investors will need to factor in is whatever the provider is charging to offer the service. The indications are that there will be an effort to keep costs on basic offers down below 0.5 per cent – but remember this is a charge on the total value of the fund. There are also likely to be products offer bespoke advice but with higher charges, likely more than 1 per cent. A charge of 0.5 per cent would be €100 on a €20,000 pot, while 1 per cent would be €200. This may not sound like a big difference. But over time charges matter as more money is taken out of the pot and there is a cumulative hit. Over 10 years the difference between a 0.5 per cent fee and a 1 per cent one on a €50,000 pot would be well in the thousands of euro. The best hope for investors is that the charges will be low. Photograph: Niall Carson/PA Wire The best hope for investors is that the big banks and their investment arms will keep the charges low to try to hold on to money which people are moving from deposits with the same group. But charging structures will be vital to assess. And these low-cost products leave investors making their own decisions.The next bar to jump is the State tax. A big attraction of the scheme is that normal taxes on investment – capital gains tax and the taxes paid on exchange-traded funds – will not apply. It is only on pots of more than €50,000 where the new 1 per cent charge on the balance above this figure applies. So a couple could have two accounts summing to €100,000 and pay no tax. Like charges from the provider, the 1 per cent will be significant for bigger investors. If an investor has saved, say, €100,000 then the annual charge will be €500 (1 per cent of €50,000).As with charges, this eats away at the pot over time. And – crucially – this will be charged in good years and in bad – in other words in years when the value of your investment falls you will still pay the 1 per cent charge on balances of more than €100,000.In Sweden this type of levy was initially charged on the whole sum saved and this led some experts to conclude that the tax advantage offered by the products – which like Ireland spared investors from capital gains tax – was limited.The key attraction, they said, was simplicity, the fact that the provider does all the administration and also avoiding having to pay a big capital-gains bill all at once when the investment was sold. More recently Sweden also introduced a tax-free scheme this year, which means a pot of up to €27,000 will not face a levy. The tax on amounts above this is 1.065 per cent.For Ireland, investors will need to realise that the sums change significantly when savings become subject to the 1 per cent charge. There will probably still be tax advantages, but they will be narrower on the part of the fund exceeding €50,000 – and having to pay no matter how the fund performs is significant in bad years. The bottom line is that the new investment vehicle is better suited to slightly riskier investments The bottom line is that the new investment vehicle is better suited to slightly riskier investments which offer a higher potential return. It also requires the investor to understand the risks and the need to be able to leave money where it is – if necessary – to recover from bad years. And to understand the impact of the 1 per cent charge on larger sums and the fees on all investments. For many it may still offer an attractive part of a wider savings plan, which might also include a pension plan, some highly tax-incentivised additional voluntary contributions and some money in the bank for the “rainy day” when funds might be needed quickly. But understanding what is and what is not on offer is vital. Just because this is a “State” scheme does not mean any kind of guarantee is on offer. It is not a special savings incentive account Mark 2. As the radio ads say. investments can fall as well as rise.Budget 2027 snapshotBudget main points Conor Pope’s 90-second budget summaryWhen will Budget 2027 measures kick in? Childcare package - what does it mean for parents? How much will families be better off? Fiona Reddan finds out Find out for yourself with our Budget 2027 calculatorNew personal investment accounts - Dominic Coyle on how they will work We aren’t given to soundbites, but…. 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