Irish Finance Act 2000 Improves Taxation Regime For Personal Savings
When Finance Minister Charlie McCreevy introduced the Irish Finance
Bill 2000, he was criticised in some quarters for loosening his
fiscal stance at a time when the Irish economy is booming. One
of the tax-reducing measures in the Finance Act is a major change
to the tax treatment of personal savings through life assurance
policies outside pensions legislation, ie those which permit full
cash payouts on maturity. Under the current
system, which was inherited from Britain, tax is deducted each
year at 22% from the growth in the life assurance company's funds,
and cash payouts are free from tax when they eventually take place.
Under the new system, similar to that operated in most other member
states of the EU, life assurance funds are allowed to grow without
deduction of tax; instead, tax is deducted when a policy is finally
encashed. Currently, the rate of tax at maturity would be 25%.
The new system already
applies to life assurance companies operating out of the Dublin
IFSC (International Financial services Centre), and the new legislation
brings the remainder of the domestic industry into line with IFSC
practice. The change is a consequence of the Irish government's
agreement with Brussels to build one unified tax system, which
began with the decision to harmonise corporate tax rates at 12.5%
across the economy by 2005. The government could have chosen to
bring the IFSC into line with the rest of the country as regards
personal savings, but is doing the reverse. Existing policies
do not convert automatically to the new regime - it is necessary
to wind up the existing policy and open a new one under the new
rules. In many cases the cost of doing this will negate the benefits
on offer, so careful checking is in order. The change is beneficial
for the policy-holder in most situations, but not all. On death or disablement
before maturity, the full cash sum available is payable tax-free;
disablement is not defined in the legislation but is likely to
include entry into a nursing home. Dublin-based research
firm Technical Guidance Ltd has produced a study of the behaviour
of a typical policy over time, which shows that people taking
early surrender values from savings policies are likely to be
worse off under the new legislation, while those maintaining their
policies for at least 12 years are likely to be better off. Even
after 20 years, the improvement in final payout is only 5%, on
fairly conservative assumptions. This is not a bonanza, but how
often does government actually reduce taxes? .
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