Upcoming Budget, The sneaky stuff to watch out for.

Here is a link to the interview I did this morning with Nick Bullman (he is standing in for Ian Guider) on Newstalk scroll forward to 5mins 15 seconds http://www.newstalk.ie/player/listen_back/5/13334/07th_October_2014_-_Breakfast_Part_1

The idea behind this morning’s piece on Newstalk was that the budget is coming up next week, on the day most people with half an interest will be clued into what happens to income tax, the cost of alcohol and diesel and the other main topics.

What I am hoping to cover here is not these “hot items” but more the things that come back and bite you months later, if ever.

For example I might get a brand new client coming into my office and they have a pension but yet they did not know about the pension levy.

So what are the areas we should be looking at in the coming budget, what are the stealth changes that generate huge revenues for the state but yet don’t attract huge crowds to the streets in protest?

Pensions

Obviously there are going to be a few key areas to watch out for here.

Levy

There are over 400,000 people who have existing private pensions, what a lot of them don’t realize is that  since 2011 the state has been sticking there paws into their pension pots and taking out on average about half a billion a year. This year it will be closer to €700 million, this is more than the water or property tax generates.

The levy was supposed to stop last year but it was extended for a year and a little extra was added to it for 2014. From 2015 onwards it is supposed to go down to the lower 0.15% but we were also promised it would be stopped and the minister went back on his word on that. The cost of this is significant to the individual so it something people should be aware of.

Fund size cap

It is believed that long before the global financial crisis a senior banker in a bank that will remain nameless retired to Florida with a pension fund of €100 million, he took €25million tax free cash and off he went into the sunset.

The government subsequently moved to cap the maximum pension fund at €5 million and it has since been reduced to €2 million.

Last year there were calls from the labour side of the camp to reduce it further and a figure of €1.2 million was thrown about.

The difficultly here would be that the average, and I mean the average, civil servant retires on €32,000 per year. With all the bells and whistles on their pension it would cost a private individual about €1.4 million to buy this pension so it’s unlikely they will reduce the cap to a figure below that of the average civil servants pot.

I would like to see the €2 million cap adjusted slightly and I think that it should be a €2 million contribution cap rather than fund size cap. This would mean people would not be penalized for choosing the right investment. I would also like to see it index linked.

Imputed distribution

At the moment anybody who has already retired and has what’s called an ARF must take 5% of their fund out each year or is taxed as if they had. This 5% figure dramatically increases the likelihood of the ARF account “bombing out” long before the person is ready to die!

Chasing a consistent 5%+ per annum for somebody in their 70’s is not an ideal investment goal and I think the government should consider reducing this to 3 or 4%.

Capital Gains Tax

Capital gains tax has gone from 20% pre 2008 to 33% currently. Believe me if you are lucky enough to be making a profit in the current climate you really feel that extra 13%, at a time when we should be encouraging people to take risks instead we are penalising them for making profits.

Inheritance tax rates/thresholds.

If you received an inheritance from your mother or father back in 2009 you could have gotten almost €550,000 without any tax implications. Today that figure is down at €225,000 not only that but the rate of tax you pay on it has risen from 20% to 33%.

This means if your parents were going to give you €500,000 in 2009 but they held off until now instead you will get hit with a tax bill of over €90k that  bill would have been €0 in 2009.

DIRT and Exit tax

The rate of interest you pay on your deposit accounts is 41% since 2011 you also have to pay PRSI on that too. This is up from 23% in 2009.

For life company investments the rate has climbed in the same way although there was a slight lag. The advantage of investing with a life company or investment platform is that the tax is only paid on exit and is not subject to PRSI.  Your investment is however in some circumstances subject to a little beauty of a stealth tax called the insurance levy, where they take 1% of your money going in.

Summary

With a lot these taxes the government has stood behind the mantra that the industry will move to cover these costs for the individuals, in the main this hasn’t been the case.

What’s worse is for most people they are oblivious to things like pension or insurance levies and therefore it’s unlikely it is going to be very damaging to a minister’s opinion poll.

But if you are listening to the budget debate next week be acutely aware of these “stealth taxes” and don’t be under any illusions they are costing you a lot more now than they were pre-crisis.

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