Investment options in Ireland

This post documents all of my findings so far on the different investment options in Ireland along with the pros, cons, tax rates, and estimated real rates of return after inflation, fees and taxes. It may not be a complete list but I will add to it over time as I discover more.

Something to keep in mind that whatever you invest in, will result in needing to file a tax return each year, even if you are not making any money.

Also do not invest any money that you are relying on. Do your own research and get professional advice before investing any large amounts of money.

Property

Real estate

Pros:

• Potential to make large capital gains
• Most expenses are tax deductible

Cons:

• Potential to make large capital losses (just ask all those still in negative equity)
• Effort to be a landlord
• Ongoing costs usually result in negative cash flow annually and gains only realised once you sell. An example of the negative cashflow per year can be seen here.
• Potential large maintenance costs to wipe out multiple years of gains
• Higher downpayments required for investments (30%)
• Higher mortgage rates for investments (~4.75%)
• Lack of diversification
• Rent caps in place could make it difficult to cover costs
• Illiquid as it takes a lot of time, money and effort to sell and free up equity

Tax rate:

• Tax on gains: 33%
• Tax on rental income: Personal income tax rate + PRSI + USC
  • 4.9% if you earn less than 16,500€/year
  • 32% if you earn between 16,501€ and 35,300€
  • 52% if you earn over 35,300€

Real rate of return:

Too many variables to say on this one. Each house will be different depending on length of time held, amount of downpayment paid, amount of expenses incurred, amount of rent received etc.

Rent-a-room scheme

What it is:

Under the Irish government’s Rent-a-room scheme you can rent out a spare room in your house, tax free, if the income does not exceed €14,000 per annum or €1,166 per month. The room must be attached to your house and granny flats in the back garden do not count. Check out revenue.ie for more details.

Pros:

• You can earn 14,000€ tax free!

Cons:

• If you charge 1 cent more than 14,000€ including utilities, you will pay regular income tax on the FULL amount
• You need to live with someone else
• Only applicable to long term lets

Tax rate:

• 0% up to 14,000€
• Personal income tax rate + PRSI + USC on full amount if income exceeds 14,000€

Real rate of return:

100% of the income you receive is yours to keep tax free unless you receive more than 14,000€

Short-term rentals

What it is:

You can rent out your entire house or investment property on sites like Air B&B BUT there are a few things to be aware of:

• recent legislation has been brought in for rent pressure zones limiting short term rentals. Short term lets for investment properties in rent pressure zones are no longer allowed by law. There are even rules around renting your primary residence out while you are away on holidays (you need to register for change of use with the local council and you are limited to 2 week stays up to 90 days per year). You can still rent a room or rooms in your house without limitations so that may be an option if you wanted to rent while away on longer holidays.
• insurance may not cover you in the event of an accident or damage if you have not upped the cover with them in advance

Pros:

• Potential higher returns than longer term lets

Cons:

• More maintenance to clean between guests, meet for keys, handling deposits etc. There are companies that manage short term lets but they are in high demand and may not take on your property. They also take 15-25% of your profits so you need to decide if it’s worth that vs. you managing the property yourself.

Tax rate:

• Profits after expenses: Personal income tax rate + PRSI + USC
  • 4.9% if you earn less than 16,500€/year
  • 32% if you earn between 16,501€ and 35,300€
  • 52% if you earn over 35,300€

Real rate of return:

Similar to the property rates of return this one has too many variables and will depend on your expenses vs the return you receive.

Pensions

There are a lot of things to consider when looking at a pension depending on your personal circumstances. You can read a comparison in this post but at a high level most companies offer a pension matching scheme and if not they must, by law, provide you with an option to contribute to a pension yourself.

Pros:

• Pension matching is free money but again you need to understand your real rate of return after fees to compare against investing outside of a pension – see some examples of when this isn’t as profitable as investing outside a pension here
• This is a tax deferral tool in that you lower your taxable income now and pay lower taxes when you withdraw in retirement once you are no longer earning an income

Cons:

• Potential high fees and lower returns than self directed or other investment vehicles
• Lack of control over what it’s invested in
• Illiquid as you can only access at pre-defined age (depends on your company)

Tax rate:

• Capital gains and dividends: 0%
• Tax on withdrawal on whole amount withdrawn: Personal income tax rate + PRSI + USC
  • 4.9% if you earn less than 16,500€/year
    32% if you earn between 16,501€ and 35,300€
    52% if you earn over 35,300€

Real rate of return: Depends on your pension but a recent study showed the average 10 year real rate of return of pensions in Ireland has only been 2.9% per year after fees and inflation (though the report only has data from 2007 (-7.3%), 2008 (-35.7%), 2015 (4.5%), 2016 (8.1%) and 2017 (6.3%). The 2.9% average excludes the 2008 figure as that was due to the crash which is hopefully an anomaly. So depending on your income at time of withdrawal, the real rate of return could be:

• 2.75% if you earn less than 16,500€/year
• 1.97% if you earn between 16,501€ and 35,300€
• 1.39% if you earn over 35,300€

Employer Share Options

What it is: A lot of the big American tech and pharmaceutical companies are now in Ireland. Some of these companies offer bonuses of shares in the company or options to purchase additional shares at a discount.

Pros:

• A way to buy highly valued stocks at a discount (or free if you are given as a bonus)
• Can sell shares with gains of 1,270€ each year tax free
• Capital losses can be claimed 3 years in arrears or carried forward indefinitely
• Partially liquid as some companies require a three year vesting period before you can sell, once vested you can sell anytime

Cons:

• If you buy too many you are not very diversified
• If you eventually have a value in shares of more than 60,000$US and you have not structured your account effectively through the use of a non-US company, partnership, or trust and/or invocation of treaty benefits, you will be subject to US estate taxes (currently 40% of fair market value at time of death)
• Depending on the type of employee stock (RSUs), you may need to file a tax return EVERY time the shares are PURCHASED as well as when they are sold – I will elaborate on this in a future post

Tax rate:

• Capital gains: 33%
• Dividends: Personal income tax rate + PRSI + USC so
  • 4.9% if you earn less than 16,500€/year
  • 32% if you earn between 16,501€ and 35,300€
  • 52% if you earn over 35,300€

Real rate of return: Depends on the company’s stock value

Bank Savings

Pros:

• Secure
• Liquid

Cons: Loses money to inflation every year

Tax rate: 0%

Real rate of return: -1.9% annually (average inflation in Ireland over the last 30 years)

An Post/State Savings

What it is: There are a number of savings options here

Pros:

• Secure
• Tax free (no DIRT or capital gains)
• No fees

Cons:

• Rate of return does not keep up with inflation
• Illiquid as some options have conditions that if you remove ANY money before the term is up you forfeit all savings

Tax rate: 0%

Real rate of return: Ranges from -0.4% to -1.9% with the -0.4% being for the highest yielding account (10 year at 1.5% AER) once you account for the 1.9% inflation

Stock Market/Index Funds

Irish and EU domiciled ETFs/Index funds

Pros:

• Low cost management fees compared to active funds
• Passive investing – buy and forget
• Lower tax on dividends/income compared to other domiciles IF you intend to withdraw while you are earning above the 40% tax bracket
• Liquid as you can sell anytime

Cons:

• Higher tax on gains compared to other domiciled ETFs
• Higher tax on dividends/income IF you intend to withdraw when earning no other income or earning income below the 40% tax bracket
• Can NOT carry forward capital losses to offset against future gains
• Not eligible for annual capital gains allowance of 1,270€/year (TBC)
• Have to pay taxes every 8 years whether you sell or not (deemed disposal) – you can pay this out of your fund but significantly reduces the effect of compounding and may cause you to sell assets at a loss (which you cannot carry forward).

Tax rate:

Exit tax on gains and dividends: 41%

Note 1: Fund managers are actively lobbying the government to reduce this in line with DIRT (which is being reduced from 41% to 33% over the next number of years) but have not been successful to date. The argument has been made that DIRT and exit tax have been aligned with capital gains tax rates for the last 20 years and they are making investors choose funds based on preferential tax treatment rather than on the underlying investment’s merits. They estimate that bringing this in line would only result in an annual loss of 15 million against the exchequer. This MAY go down in future as a result but is staying put for the moment.

Note 2: For the EU domiciled ETFs, according to the Revenue, “it is not possible to give other than a general guidance” on these, although it does say that, as most of these will be similar to non-UCITS Irish domiciled funds, they should also be subject to exit tax at 41%. However, this may not always be the case, and investors can make a case to Revenue as to what tax rate should apply. There may be a case to be made that gains on such a fund could be subject to CGT, which is levied at a lower rate. “It is always open to an investor and his/her tax advisers to take a different view,” the Revenue says.

Real rate of return:

Depends on the fund but the stock market 10 year average has been 9-12% so taking the average of 10% minus inflation of 1.9% minus sample fund fees of 0.19 = 7.91% minus the 41% tax on gains/dividends = 4.67%

Examples:

• Ireland UCITS: Anything with UCITS in the description such as:
  • VANGUARD FTSE ALL-WORLD HIGH DIVIDEND YIELD UCITS
  • VANGUARD FTSE ALL-WORLD UCITS
  • VANGUARD FTSE DEVELOPED EUROPE UCITS
  • VANGUARD FTSE EMERGING MARKETS UCITS
  • VANGUARD S&P 500 UCITS ETF
  • iShares Core S&P 500 UCITS ETF
• Ireland non-UCITS: iShares Physical Gold ETC
• EU UCITS: iShares Core DAX UCITS ETF (DE)

US domiciled ETFs/Index Funds

This one is almost not worth going into as they are no longer available to purchase by Irish every day investors but will include for completeness sake.

Pros:

• Lower tax on gains compared to Irish domiciled ETFs
• Income tax on dividends/income is much more beneficial to long term investors who only intend to withdraw when no longer earning other income or earning income below the 41% tax bracket
• Can carry forward capital losses to offset against future gains
• Low cost management fees

Cons:

• As mentioned above these are no longer available to purchase in Ireland as an individual investor due to EU legislation, these MAY be available through professional money managers but the fees would negate the benefits, you may also access if you open a US investment account with a minimum investment of 10,000$ but I have not confirmed this and am not sure about the tax complications
• Only an issue if you die but, for any investments domiciled in the USA with a value of $60,000 or more, an Irish investor will be liable for the punitive US estate tax rate. Local estate taxes may also apply potentially raising the liability above 40%. There are potential avenues to explore that may protect a non resident US investor when using US domiciled products, these include joint tenancy arrangements and / or the establishment of on shore foreign grantor trust. Both these options have complexity and uncertainty attached.
• US withholds 30% withholding tax (15% if you complete a W8-BEN) which you need to claim back on your Irish tax return

Tax rate:

• Tax on gains: Capital gains tax at 33%
• Tax on income: Income tax + PRSI + USC
  • NOTE: if you are not earning any other income and only plan to withdraw the 16,500€/year per person this rate effectively becomes 4.9%

Real rate of return:

Depends on the fund but the stock market 10 year average has been 9-12% so taking the average of 10% minus inflation of 1.9% minus sample fund fees of 0.19 = 7.91%

• Real rate of return on gains: 5.29%
• Real rate of return on dividends:
  • 3.79% while you’re earning in the highest tax bracket
  • 5.38% while you’re earning in the lower tax bracket
  • 7.52% while you are no longer earning income or below 16,500€
  • minus any purchase/sales fees

Example: SPDR S&P 500 ETF Trust

Individual Stocks

Pros:

• Lower tax on gains compared to Irish/EU domiciled ETFs
• Income tax on dividends/income is much more beneficial to long term investors who only intend to withdraw when no longer earning other income or earning income below the 41% tax bracket
• Can carry forward capital losses to offset against future gains
• Can sell shares with gains of 1,270€ each year tax free
• Liquid in that you can sell anytime

Cons:

• Higher risk
• Less diversification
• More work to watch markets and pick winners
• More fees to buy and sell

Tax rate:

• Tax on gains: Capital gains tax at 33%
• Tax on income: Income tax + PRSI + USC
  • NOTE: if you are not earning any other income and only plan to withdraw the 16,500€/year per person this rate effectively becomes 4.9%

Real rate of return: Depends on the company but the stock market 10 year average has been 9-12% so taking the average of 10% minus inflation of 1.9% = 8.1%

• Real rate of return on gains: 5.35%
• Real rate of return on dividends:
  • 3.88% while you’re earning in the highest tax bracket
  • 5.50% while you’re earning in the lower tax bracket
  • 7.70% while you are no longer earning income or below 16,500€
  • minus any purchase/sales fees

Individual Bonds

What it is: Bonds are basically investments you can buy where governments or corporations borrow money from you the investor and agree to pay them back with interest at a set schedule. These are highly unlikely to default but with lower risk comes lower reward. You can choose bonds with fixed income paid throughout the loan as well as the repayment at the end OR forego the income throughout and earn higher capital gains upon payout. If you choose fixed income throughout and are still earning at the higher tax bracket you will need to pay income tax on those payments. If you are working towards financial independence within the payout time of the loan it might be better to avoid the fixed income bonds to lower your tax bill and increase your returns at a later date.

Pros:

• Safer/more stable than stocks
• There is no capital gains tax payable on Irish government bonds for Irish bondholders

Cons:

• Lower rates of return
• Some have long term lock ins where your money is not available

Tax rate:

• Capital gains: 0% on Irish bonds, 33% on non-Irish bonds
• Dividends: Personal income tax rate + PRSI + USC so
  • 4.9% if you earn less than 16,500€/year
  • 32% if you earn between 16,501€ and 35,300€
  • 52% if you earn over 35,300€

Real rate of return: Depends on the bond but the bond market since inception from 1928-2017 when looking at 10 year treasury bonds has averaged 5.21%/year minus inflation of 1.9% = 3.31%

• Real rate of return on gains: 2.18%
• Real rate of return on dividends:
  • 1.58% while you’re earning in the highest tax bracket
  • 2.25% while you’re earning in the lower tax bracket
  • 3.15% while you are no longer earning income or below 16,500€
  • minus any purchase/sales fees

UK Investment Trusts

What it is:

Investment trusts are closed-end funds, typically in the UK and Japan. They are publicly listed companies that invest in financial assets or the shares of other companies on behalf of their investors. You can read more about these here.

Pros:

• Can be more tax efficient than ETFs
• Capital losses can be offset 3 years in arrears or indefinitely in the future
• Good diversification
• Potentially higher and more consistent growth in dividend pay outs
• Qualify as shares for taxation purposes so:
  • 8% less tax on gains than ETFs
  • 36.1% less on dividends if earning less than 16,500€
  • 9% less on dividends if earning between 16,501 and 35,300€

Cons:

• Actively managed meaning higher management fees ranging anywhere from 0.37% to 2.7%
• Subject to the same fees for buying and selling as shares
• 11% more tax on dividends than ETFs if dividends are paid out while you are in the highest-earning tax bracket
• Most are based in GBX (Britsh pence), and therefore subject to currency exchange fees and risk which could outweigh any tax benefits
• You are still buying “stocks” in an individual company which comes with more risk. Personally, I’m trying not to hold more than 5% of my portfolio in any one company’s stocks, this will hold true for any investment trusts I buy in future.

Tax rate:

• Capital gains: 33%
• Dividends: Personal income tax rate + PRSI + USC so
  • 4.9% if you earn less than 16,500€/year
  • 32% if you earn between 16,501€ and 35,300€
  • 52% if you earn over 35,300€

Real rate of return:

I couldn’t find a summary for longer historical averages but in a review of the top 14 investment funds in the last 5 years their dividends have averaged 5.54% and their returns have averaged 4.36%, if we assume an average fee of 1.5% and inflation at 1.9% that brings the real rates of return down to:

0.63% for capital gains

and the below for dividends

• 2.04% if you earn less than 16,500€/year
• 1.45% if you earn between 16,501€ and 35,300€
• 1.03% if you earn over 35,300€

Examples:

• BMO Capital and Income Investment Trust PLC (BCI)
• BMO Global Smaller Companies PLC (BGSC)
• BMO Managed Portfolio Trust PLC – Income Share Class (BMPI)
• BMO Managed Portfolio Trust PLC – Growth Share Class (BMPG)
• BMO Private Equity Trust PLC (BPET)
• BMO UK High Income Trust PLC – Ordinary Share Class (BHI)
• BMO UK High Income Trust PLC – B Share Class (BHIB)
• BMO UK High Income Trust PLC – Units (BHIU)
• F&C Investment Trust (FCIT)

Peer to Peer lending/Crowdfunding

What it is: This is something you can do to lend your money to other people or companies through an online match making and collection platform. You choose the loan type and durations you want to buy and the platform loans out the money and pays you back the principal including interest as the loans are paid back. The platform divvies up your money across multiple loans so that you are not loaning to just one person/company which reduces the risk. Loans can default so you can lose portions of your investments.

Pros:

• Higher returns
• Regular fixed income

Cons:

• Not yet regulated though certain platforms are pushing for this
• Higher risk

Tax rate:

Hard to make out exactly but according to this document from Revenue it looks like the interest received on the loans is treated as regular income and subject to your marginal rate of income tax + USC + PRSI

Real rate of return: Loans can get you anywhere from 3-25% depending on the loan type and risk. Take off inflation and that range comes to 1.1% to 23.1%. I’m not sure if there are any management fees to remove as well. I know someone who is getting 1%/month paid into their account (so 12%/year)

If we take the average of 12.1% and remove taxes, your real rate of return will be:

• 11.5% if you earn less than 16,500€/year
• 8.23% if you earn between 16,501€ and 35,300€
• 5.80% if you earn over 35,300€

Note: There may be a way to invest in P2P via a company which would bring your tax rate down but I need to look into that a bit further

Other

There are a few other options I’ve yet to look into including:

• Dividend reinvestment plans (DRIPs) (automatic reinvesting of dividends through a fund)
• Forex trading (buying and selling currencies)
• Employment and Investment Incentive (EIIS) (government scheme with tax relief similar to pensions but accessible after 4-5 years)
• Irish whiskey (quoting 12-18% annual returns)
• Christmas trees (quoting 15% annual returns with locked in capital for 5 years)

Comparison

So if we look at all of the options along with their real rates of return – how much would 100€ be worth in 10 years , 20 years and 30 years time for each?

Assumption: I took the rate of return based on income of less than 16,500€ on withdrawal with the exception of the peer to peer as those are paid every month and so I picked the highest tax bracket for that rate of return

I have not taken dividends into account as I couldn’t quite figure out how to account for these simply.

If you wish to see how 10,000€ or 100,000€ would fare over the same time frame simply multiply the below figures by 100 or 1,000.

Investment Type	Real Rate of Return	100€ worth in 10 years	100€ worth in 20 years	100€ in 30 years	Risk
Peer to Peer	5.80%	175.73	308.83	542.71	High
Stocks	5.35%	168.4	283.59	477.57	High
US ETFs	5.29%	167.44	280.38	469.48	Med-High
Irish ETFs	4.67%	157.84	249.14	393.25	Med-High
Pension	2.75%	131.17	172.04	225.66	Med-High
Bonds	2.18%	124.07	153.93	190.98	Low
Investment Trust	0.63%	106.48	113.38	120.73	Med-High
An Post Savings	-0.40%	96.07	92.3	88.67	Low
Bank Savings	-1.90%	82.54	68.14	56.24	None

It’s not surprising to see that the highest risk investments have the highest returns and vice versa. The key with all investments is to have a well diversified portfolio so you can realise some of the higher gains while having some more secure vehicles to offset losses or volatility.

I hope this was of some use and as usual I’ve gone on WAY longer that I thought.

Let me know if I’ve missed anything.

Spreadsheet templates

Want access to Mrs. Money Hacker’s spreadsheet templates?

I launched a member’s area where you can gain access to all the latest spreadsheets which have taken hundreds of hours to create and fine-tune over the last number of years.

Check out this page for more details and a sneak peek of what you’ll get if you sign up.