protect your savings - investment bonds

In a week where AIB announces profits in excess of €2 billion and reports indicate Irish deposits have more than €150 billion held in cash, much of it in low yielding instant access accounts, we release the second article in our series on what options there are for Irish savers to protect the real value of their savings.  

Introduction ​
An investment bond is an investment product taken out with a life assurance company which allows you to invest in a wide range of funds. An investment bond can be a good option for people who have cash saved that they would like to earn a return on to keep pace with or potentially outpace inflation.

​With Irish banks still offering very low deposit rates, an investment bond can offer a suitable alternative. The investment options range from very low risk cash funds to high-growth equity and other specialist funds. 

What are the benefits? 
The main benefits of an investment bond are: 

• Flexibility – you can invest any amount over €10,000 either personally or through a company. 
• Range of investment options – you can invest in a full menu of investment funds covering all risk profiles and most types of assets and investment strategies.
• Low fees – for amounts over €100,000 there is a competitive annual charge of  0.75% - 1.50% per annum. 
• Switching – within the investment bond you can switch between investment options without creating a taxable event.
• Compounded returns – The current rate of tax is 41% on gains.  However, you are only taxed on gains when you withdraw funds or on every 8th anniversary.  This allows your funds to earn many years of compounded growth without tax, unlike a bank deposit which normally deducts DIRT every year.
• Easy administration – the life company will calculate and pay any taxes to Revenue directly without the need for you to declare it to Revenue yourself. 
• Online access – you will get access to a portal to review your account at any time.
• Withdrawals – you can access your funds at any time. There may be tax and charges payable on withdrawals, depending on the  specifics of the bond.

Example 
Alan and Mary currently have €350,000 in a Bank of Ireland current account which is earning 0.1% interest (€350) per annum. After DIRT of 33% they are left with €235 net interest for the year. If the inflation rate is 3%, this means that leaving their funds in the current account is providing them with a negative real return of -2.80% every year. If their hard earned savings are held in cash for multiple years when inflation remains high, this negative return is compounded.

Alan and Mary wish to look at an alternative option that will provide a better rate of return while also keeping their funds secure and accessible.  After having a call with Alan and Mary to discuss their needs, Distinct recommend they consider investing the €350,000 in an Investment Bond and allocate the full amount to the Cash Fund which has a current annual yield of 4.04%. 

​	Investment Bond	Bank Deposit
Initial investment ​​	€350,000	€350,000
​Annual Interest rate​	4.04%	0.10%
Total Interest after 5 years (net of fees)	€51,627	€1,752
Tax payable ​(Exit tax @ 41%)	€21,167	€0
DIRT payable	€0	€578
Total return net of fees and taxes	€30,460	€814

Assumes a fee of €6 per month on the bank deposit 
Assumes a total annual fee of 1.25% on the Investment Bond
*This is the yield on the Aviva Cash Fund at March 2024 and is subject to change 

The investment bond will allow Alan and Mary to earn a significantly higher interest rate without taking a higher risk. The Aviva Cash Fund invests in a range of deposits and notes with A rated global financial institutions and is rated 1 on the Aviva risk scale of 1 to 7 i.e. the lowest risk tier.  

As part of Distinct's advice to Alan and Mary we have determined that they will not require access to these funds within the next 5 years as they have suitable income and cash holdings elsewhere, however, should an unforeseen event result in them needing to withdraw funds then they will be able to do so at any time. They can also choose to withdraw up to 7.5% of the value of the fund annually as a regular or ad-hoc withdrawal. 

​As part of the regular client review service, Distinct will monitor the yield on the cash fund and may recommend a switch to a different fund in future. Switches between funds can be done easily and will not result in any tax becoming payable. 

​If you would like to have a discuss investment bonds and how they can help with your financial plan, please contact one of the team at [email protected] or call 01 5392601. 

mark slattery

Mark is a Qualified Financial Adviser (QFA) and Certified Financial Planner (CFP). He has 15 years’ experience in Wealth Management, specialising in operations and advising clients.

Disclaimers 

• This document is intended as a general guide and does not constitute advice. Please contact us to arrange advice specific to your own situation. 
• All tax rates are based on indicative rates as of March 2024.  Please note this document is not meant to be a comprehensive assessment of the tax rules that could apply under all scenarios and it is possible the tax rates outlined above may change and may be different depending on the individuals’ circumstances. 
• Worked examples are intended as a guide only and the actual return will depend on the product available at the time and the tax rates applicable to your own situation. 
• Examples are for personal investors. Different tax rules apply for Corporations and Charities.