Some time ago I wrote a little rant against the Minister for Finance Michael Noonan’s decision to impose a pension levy on the prudent people of Ireland who were saving money into their pension plans to provide income for their retirement. I called it “daylight robbery” see blog post 26th of Feb 2014.
Thankfully eventually that disgraceful appalling tax/levy was removed. That tax was wrong and should never have been imposed. It should be repaid in full.
Today’s rant is I think just as important and hopefully with your help, it too will have a successful outcome.
As a parent of four children, now thankfully grown up I listened with alarm on the radio to the debate as to whether loans should be readily available to college students to enable them to borrow long term to pay for their college education. Perhaps as a last resort it is better for them to be able borrow for fees, rather then not going to college at all.
There could be and should be however, for most people a much better solution, and again I am appealing to the Minister for Finance to do something positive to help parents and perhaps grandparents to save money on a regular basis to fund future college fees for their children or grandchildren.
The way it was
When I started in business 45 years ago if we did a savings plan in Ireland we received tax relief on the premiums paid. When the savings plan was encashed, the proceeds were paid out without tax, even though a small amount of tax was deducted as the profits accumulated year by year within the savings plan. I think that the tax deducted was at a rate of 23% on the profits. The tax relief on the money invested offset most of that small taxation figure.
The way it is now
Today it is very different. No tax relief on the amount of money being saved on a regular basis. Instead a levy of 1% is charged on each payment made.
The money being paid out is no longer tax paid. The profits instead are taxed at the staggeringly high rate of 41%. Not good enough Mr Noonan!
Today Mr and Mrs Prudent Parent of say a one year old child decide that they want to save some money each month into a college fee savings fund for their child to go to college aged 19.They want to create a college fee fund of €50,000 at that time which they feel would cover most of what the costs might be.
By investing their money each month in line with their attitude to risk which is average and taking into account the long term nature of the investment i.e. 18 years, it was agreed that a net return of around 4% whilst not guaranteed might be feasible.
To achieve a fund of €50,000 in 18 years and getting an average net return of 4%pa requires a monthly investment of just €158.43 per month. They were absolutely delighted as they felt it was quite affordable and, that when and if, baby number two came along they might be able to do something similar.
Then I had to tell them some nasty bad news compliments of the same Minister for Finance Mr Michael Noonan.
And so I had to explain to Mr and Mrs Prudent parents that they would have to pay a 1% tax on everything they invested. They were taken aback. I then had to explain that there would also be a tax payable on any profits their savings plan generated at a current rate of 41%.
As per the above example the amount paid in would be €34,220 and the final estimated fund is €50,000, so profits of €15,780 would be generated, which would then be taxed at the current rate of 41%. The tax deducted would be €6,470 (tax is deducted every 8 years and on maturity).
Surely this is just plain stupid. Ireland is already a highly taxed economy and before most people invest money into a savings plan they have already paid tax on their incomes at the standard rate tax of 20% or in many cases at the higher rate of 40%.
My suggestion/proposal to the Minister for Finance Michael Noonan is that in the upcoming budget of 2016 is that he gives some positive news for a change to parents who are really struggling to fund their children’s college education. My proposal is that he should create a new type of savings plan whereby any money saved for the payment of college fees will, from this budget on, be totally free of the government levy of 1% and the current draconian exit tax on profits of 41%.
Come on Minister do something positive to help our young people to a higher level of education so that borrowing to fund college fees doesn’t become the only option for our college students.
Ted Dwyer Family Business