Young, cautious or lump-sum investor: How much might I make in my new investment account?

There may have been some disappointment that investors will have to wait until next summer to open the much discussed new investment product. However, the personal investment account (PIA) will have its attractions when it finally launches.Once you abide by the limits set out, your gains will be able to grow without capital gains tax (CGT), exit tax or dividend withholding tax – and you won’t have to worry about the dreaded issue of deemed disposal. Moreover, it will be up to the product providers to settle any tax bill where it arises – so no juggling with Form 11s either.We should learn more about the new product when the Finance Bill is published later this week, but, given that we already have tax free savings products through the State Savings scheme, it’s likely that the new products will be most attractive to those who are willing to take on some element of risk for a greater return.Now that we know how much we can invest in these new products – up to €12,000 a year with a tax charge of 1 per cent on any amount in the fund over €50,000 – how much might we actually make?READ MOREThe young investorAnyone can open an account once they are 18 and have a PPS number. And, as no minimum investment applies, it’s expected that you’ll be able to start investing from as little as €20 or so, though the product providers that will launch products next year may impose their own minimums.In the UK, for example, some ISA providers allow you to invest as little as £1 a month, although many do apply minimums of £50-£100.Young investors could look to the new product to build up their knowledge of investing; to save for big future purchases such as a house (especially if this is at least five years or more away); or for a rainy day or trip around the world. The big advantage they have is that time is on their side – which means it makes sense to open an account, even if what they can invest is limited. Once open, the amount invested can always be increased and the benefits of compounding mean that even small amounts can grow into significant sums. [ Ireland’s new personal investment accounts: Here’s how the scheme will workOpens in new window ]Saving €50 a month, for example, will give a return of about €1,291 after two years, based on an annual return of 7 per cent. But keep investing for longer, and you could have €8,704 after 10 years, or more than €26,000 after 20. If you hadn’t started the account, saving €50 a month in your current account would give just €12,000 after 20 years. The potential upside is clear, although you do need to bear in mind that markets can fall as well as rise, so there is a risk. And product provider charges, which will only become clear next July, will reduce these gains.And what about tax? Well, in a PIA your investment can grow tax free for quite a long time if you’re only investing small amounts. This is a significant advantage. As a comparison, if you held your money outside a PIA, and cashed your savings in after 10 years, you would pay tax on your “profit” of €2,704. Based on the current exit tax rate of 35 per cent, that could cost you almost €1,000 to Revenue. Possible investment choice Vanguard S&P 500 ETFPossible tax bill €0 until the fund reaches €50,000, which could take 28 years, all things being equalProduct provider charges UnknownAnnual management charge 0.07 per centThe cautious investor If the thought of losing your money outweighs any potential joy from making gains, you might be looking for a lower-risk product such as a multi-asset fund.These are available from providers such as Zurich, through its Prisma range, or Irish Life’s MAPS suite of products, and will probably form part of the new PIA product range.These funds aim to diversify your investment across a range of products – such as cash, bonds, equities and property – and smooth returns through volatile stages of the markets. However, they may have higher charges than some competing funds.But again, investing and holding for the long term can deliver strong returns. Someone investing €200 a month, for example, with an average annual return of 4 per cent, would have a fund worth about €5,000 after two years, almost €30,000 after 10 years and close to €75,000 after 20 years.Possible investment choice Irish Life Multi Asset Portfolio 2 (MAPS)Possible tax bill This saver could hit the €50,000 mark after about 15 years (although that limit could have increased by then). Once they pass the tax-free threshold, they will start paying tax at a rate of 1 per cent on the balance of their account over €50,000. So a possible bill of about €38.46 a year, based on assets of €53,846.Product provider charges UnknownAnnual management charge 0.9 per centThe lump-sum investor If you’re one of the people with a share of the €170 billion on deposit in Irish banks, earning a negligible return, you might want to transfer some of your savings directly into the new product.While the full details of the new product have yet to emerge, it’s expected that you will be able to fund your new PIA with a lump sum, up to the annual limit.This means you could seed your new PIA with a €12,000 lump sum, and so could your spouse (so €24,000 per couple), with lump sums made every year thereafter. On this basis, tax would kick in from year five or so. Remember, however, while your investment will be allowed to grow tax free in the new PIA product, if you’re moving it from somewhere else, tax may apply at that location when you cash it in. If it’s in a savings account, you’ll be paying Dirt each year, at a rate of 33 per cent, capital gains tax at 31 per cent if it’s directly invested in shares, or exit tax at 35 per cent if moving out of a fund (provided you encash after January 1st).Possible investment choice iShares Global Equity ETFPossible tax bill €0 until the fund reaches €50,000Product provider charges UnknownAnnual management charge 0.2 per centThe unlucky investorNot everything must go up. While the S&P 500, which tracks the top 500 listed US companies, has returned about 6-8 per cent on an inflation adjusted basis every year over the past 20 years, there have been periods of extended bear markets. In 2008, for example, the index fell by almost 39 per cent due to the financial crisis, while it was down by almost 20 per cent in 2022, due to surging inflation.And if you need to cash in your money when markets are down, you face the risk of losing your money. As our example shows, if you invest €500 a month over 10 years, but your average return is minus-1 per cent, you will end up losing almost €3,000. And, as you have tipped over the €50,000 mark, you will also have a tax bill – even though you have been losing money.Possible tax bill After 10 years, when the fund is worth €57,072, an annual tax of €70.72 will apply.