fbpx

The Irish Business Show | Dublin City FM

The Irish Business Show | An interview with Dublin City FM

It was our pleasure to have been given the opportunity to recently feature on The Irish Business Talk Show at Dublin City FM (103.2 fm).

 

Our very own Mark Gallagher was then interviewed by Dublin City FM’s one and only Natasha Gillies (Director at Diamond Events, Radio presenter, and International speaker).

 

The Irish Business Show | Dublin City FM is a programme that aims to look at various areas of industry from an Irish Business perspective.

Mark and Natasha discussed how Qualified Financial Advisors can assist clients based on good and proper Financial Advice, as well as educating people on the financial services industry, statistics within the industry, and market trends.

 

Mark has both a wealth of knowledge and experience in Financial Services so this will be great for those who are looking for professional financial advice.

 

There were very important questions raised that consumers may not have known about previously, such as savings on premiums, reducing tax, and searching the market for more suitable cover.

 

The pressing topics that were covered related to how consumers were made aware as to how they could benefit from financial advice in connection with:

1. Pensions held with previous employers:

 

2. Life Insurance solutions for Cohabiting Couples (Mortgage Protection)

 

3. Mortgage Protection: How consumers could get better value out of their cover.

  • How consumers could get better value out of their cover (and potentially premiums)

 

4. UK Pension transfers:

  • How to transfer your UK Pension when moving back to Ireland through QROPS.

 

A personal note from Natasha:

“I personally thought it was fantastic and something Mark should be very proud of. He came across very well. Very informative and you can’t fake the knowledge and passion to help and save people money.”

 

FOR THOSE WHO MISSED THE LIVE INTERVIEW ON RADIO, HAVE A LISTEN TO THE BELOW PODCAST – IT WILL BE WORTH YOUR WHILE…

 

 

Where to find us

 

Locally:

If you are looking for a Financial Advisor near you, you can locate us at the famous Walkinstown Roundabout in Dublin 12.

Address: Greenhills Centre, Units 1 & 2, Greenhills Rd, Walkinstown, Dublin 12, D12 YH22.

 

Nationally:

If you are based outside of Dublin, we have Financial Advisors located in Co. Wicklow and Co. Cork (Munster), who would be happy to commute to you.

 

Click on the map below for directions to our offices…

 

Financial Advisor near me

 

 

Need to speak to a Financial Advisor?

Fill out your details and enquiry below, and one of our Qualified Financial Advisors will get back to you shortly.

ESG Investing

What is ESG Investing?

 

ESG investing is a method of sustainable investing that looks at a company’s environmental, social and governance practices, alongside more traditional financial measures. Here, investors consider both an investment’s financial returns and a company’s corresponding impact on the environment (be it positive or negative) as a way of generating those returns.

 

Understanding environmental, social and governance (ESG) issues and trends helps Investment firms to both mitigate the risks that could impact their investments (by assessing a company’s ESG score) and help identify investment opportunities.

 

Financial Advisor Consultation Booking

 

 

 

 

Environmental

An investment’s environmental impact is important to many investors. This can involve avoiding fossil-fuel businesses such as the oil and gas industry or seeking to invest in companies that actively benefit the environment, such as renewable companies.

 

Companies that would have a negative impact on the environment in their daily operations are those that would contribute more towards:

 

  • Pollution
  • Deforestation
  • Resource depletion
  • Climate change

 

Social

The social component of ESG investing is focused on the impact a company makes on its customers, staff, and suppliers. This may include a company’s consideration towards diversity in the workplace, and their responsibility for the labor practices in the supply chain (for example in the retail and fashion industries).

 

Investors have the potential to influence these companies, and further shape our society to deliver a positive social impact by addressing issues like:

 

  • Working conditions
  • Modern slavery & child labour (Human rights)
  • Employee relations

 

Governance

Investment Managers, and others looking to allocate capital, have a responsibility to hold companies to higher governance standards, to ensure the protection shareholder rights, disclosing information, etc.

 

The following factors are usually taken into account when determining a companies governance standards:

 

  • Company Taxes
  • Corruption
  • Executive pay
  • Board diversity
  • Political influence

 

 

Why ESG Investing matters?

 

Impact investing

Impact investing is the process whereby businesses develop a program or projects or do something positive to benefit society. These can include putting money into ventures which don’t aim for a financial return, such as non-profits and charities.

 

As an investment strategy of impact investing, “Impact Funds not only place a high priority on creating constructive social outcomes, they also generate decent financial returns for investors.

 

A Positive Impact

Nowadays, there is a growing number of investors that are commitment to a sustainable future, who would prefer their money to go toward stocks and responsible investments that will see them both generate a profit and reflect of their social standards and values.

 

As Financial Advisors, Investment Managers, Trustees, and the like we should to continue to deliver thought leadership and education for investors, companies, and stakeholders, to be a good corporate citizens to help foster responsible investments for the future.

 

 

How Investment Firms engage with Companies

 

  1. Research & Engagement: Ethical Fund Managers research company activities and measure them against internationally recognized social, ethical, legal, and environmental standards (taking into account human rights, the environment and anti-corruption, etc.). Analysts factor in ESG considerations within company analysis to identify all the potential risks and opportunities.

 

  1. Screening: As shareholders, they then engage with companies through active management, ethical screening, and collaboration. I.e., Screen companies out of the investment universe that fail their Sustainable and Responsible Investment criteria).

 

  1. Portfolio Construction: The Fund Managers would then collate these companies (or stocks) where their ESG Analysts provide an analysis of the ratings of the different types of ESG risks apparent, and construct a portfolio with a lower carbon footprint compared to the benchmark.

 

 

How do investors benefit from ESG Investing?

 

Competitive Returns

 

Growing evidence shows that over the long term, ethical funds can out-perform traditional funds.

 

Taking an example from Standard Life’s Global Equity Impact Fund against the MSCI ACWI this illustrates they are able to generate decent financial returns for investors.

 

Standard Life’s Global Equity Impact Fund - ESG InvestingStandard Life’s Global Equity Impact Fund returns - ESG Investing

 

Lower Risk

 

The white paper by the Morgan Stanley Institute for Sustainable Investing study (in the US) found that sustainable funds consistently showed a lower downside risk than traditional funds, regardless of asset class.

 

The study found that during turbulent markets, as in 2008 and 2009, traditional funds had significantly larger downside deviation than sustainable funds, meaning traditional funds had a higher potential for loss.

 

Pricing

 

More than $30 billion has flowed into E.S.G. funds over the last 20+ years, and given economies of scale, this has reflected a trend for Fund Managers to start reducing charges on ethical funds, additionally as a way of promoting responsible and ethical investing.

 

Companies like Standard Life have recently started launching their ESG funds, like the Standard Life Multi-Asset ESG Fund allowing individual investors to incorporate as part of their investment strategies and reap the long term rewards of ESG investing, commit to sustainable future.

 

Price and Risk:

 

AMC Range ESMA risk rating
Global Equity Impact Fund NEW: 0.60 – 1.10% 5
Global Corporate Bond SRI Fund 0.40 – 0.90% 4
Multi-Asset ESG Fund 0.50 – 1.00% 4

“The AMC (Annual management Charge) of the Global Equity Impact fund reduced from 1.35 to 1.10 in October, demonstrating that you should not have to pay a premium price for a fund that have the ultimate goal of trying to do good in the world, while providing investors with the opportunity to align their own values with their investment objectives.”

 

Financial Advisor Consultation Booking

 

 

 

 

How to get started with ESG Investing?

 

Taking a responsible approach to investing is not about sacrificing returns, it is about delivering more sustainable returns over the long term and in turn securing the future.

 

If you need Financial Advice on how to get started with Ethical Investing, and want to know how to incorporate ESG & Impact funds into your Investment Strategy or Retirement Planning, contact our Smart Financial Advisors, and they will be able to guide you through the process.

 

When providing advice, Smart Financial considers the adverse impact of investment decisions on sustainability. As part of our research and assessment of products, we will examine the Product Providers literature to compare financial products and to make informed investment decisions about ESG products.

 

Smart Financial will at all times act in the client’s best interests and keep clients informed accordingly.

 

The consideration of sustainability risks can impact on the returns of financial products.

 

We are remunerated by commission and other payments from product producers. When assessing products, we will consider the different approach taken by product providers in terms of them integrating sustainability risks into their product offering. This will form part of our analysis for choosing a product provider.

 

 

Where to find us

 

Locally:

If you are looking for a Financial Advisor near you, you can locate us at the famous Walkinstown Roundabout in Dublin 12.

Address: Greenhills Centre, Units 1 & 2, Greenhills Rd, Walkinstown, Dublin 12, D12 YH22.

 

Nationally:

If you are based outside of Dublin, we have Financial Advisors located in Co. Wicklow and Co. Cork (Munster), who would be happy to commute to you.

 

Click on the map below for directions to our offices…

 

Financial Advisor near me

 

 

Need to speak to a Financial Advisor?

Fill out your details and enquiry below, and one of our Qualified Financial Advisors will get back to you shortly.

Time in the market VS Timing the Market

As Warren Buffett once famously said, “The only value of stock forecasters is to make fortune tellers look good.”

 

Most stocks can result in a massive profit, but what has led many of investors to try and time the market is the opportunity of taking a gamble and “Hitting it big”!

 

Understanding volatility is paramount! Before one looks at how or why individuals try and time the market. It is important to first consider stock market volatility. Volatility can be defined as the degree of variation of a trading price over time, or the erratic up-and-down movement of a stock based on many factors such as economic releases, company news, or unexpected earnings results

 

SMART investors know that it is impossible to predict a stock’s outcome. However, it is only human nature to make the wrong decisions when it comes to your investments, especially during times of crisis.

 

It is also natural to be concerned when you see markets fall sharply and the value of your investments decreases. As per the previous Global Financial Crisis, once again the COVID-19 pandemic has shown how fast things can change in financial markets.

 

While steep falls in the market can be concerning, it’s important to bear in mind that investment or price volatility is usually associated with investment risk; and short-term volatility is the price you must pay for the chance of higher LONG-TERM returns. This is why we call it “long-term investing”.

 

Financial Advisor Consultation Booking

 

 

 

 

What is Timing the Market, and does it work?

 

As you may have guessed already, Timing the market is where a person tries to predict the future. Although it sounds ideal to buy stock and sell it shortly after it has made a huge profit, it is often times more complicated and costly than that

 

There are people who manage to get lucky, but it is only luck. One may consider the idea of winning consistently but where one may have luck with one stock trade, he/she may lose it all on the next.

 

The cost of Market Timing

 

One of the biggest costs of market timing is being out of the market when it unexpectedly surges upward, potentially missing some of the best-performing days, or points in the cycle.

This can occur when people try to adopt the ‘buy low, sell high’ approach where they try to consistently determine when a stock has hit its lowest or highest point.

 

A classic example:

An investor may assume the market will drop, switches out or sells off the equity allocation in his/her portfolio and places the money in more conservative investments, such as cash. While the money is out of stocks (equity), over the next year the stock market enjoys a high-performing period. The investor has, therefore, incorrectly timed the market and missed those top days or months.

 

 

The importance of ‘Time in the Market’

 

Instead of trying to time the market, we believe that spending time in the market vs timing the market is more likely to deliver good returns over the long term, whilst removing the anxiety of losing part or all of your life’s savings.

 

Of course this would mean taking the rainy days along with the sunny, but if history has proven anything, it is that markets and economies tend to have an upward trajectory over time. For instance, the MSCI World index has delivered average annual returns of +10.9% since it was launched in 1969.

 

At Smart Financial, we base our investment decisions on the long-term fundamentals rather than short-term market noise.

 

For some, it’s difficult to invest that much time in the market, but one should remember how it aligns with their financial goals. The investment may be needed for retirement purposes, marriage, purchasing a new home, or even saving for their child’s education. So, there are important factors that come into play.

 

By waiting for steady and achievable growth over time, SMART investors are able to achieve their long-term financial goals, as outlined in their financial plan.

 

The power of Compounding returns

 

As Harry Markowitz once justifiably noted that diversification “the only free lunch in finance,” this meant that investors get to have the benefit of reduced risk while diversifying into various asset classes.

 

Not only do investors get to enjoy this benefit over the long-term, but they also benefit from the potential to achieve great returns from the power of compounding. This essentially means that get to enjoy generating more returns over time via the “snowball” effect (Interest on interest).

 

For example, when a person invests in equities for 10 years, the positive effects of compounding coupled with investment growth reaps significant rewards.

 

 

An Investment journey of Three friends

 

The need to make changes to our investments may provide temporary emotional relief and a feeling that we are slightly more in control of the situation, but at a cost. In the longer term, the wrong decisions taken during market volatility and times of uncertainty can have a devastating effect on your investments as well as into retirement.

 

The last time the markets experienced a similar shock like the one earlier in 2020 was the global financial crisis of 2008/2009. Many investors would have taken the knee-jerk decision to switch to ‘safer’ investments or sell out of the market, irrespective of their investment goals.

 

To try and time the market as an investor, as John and Michelle did, is a guaranteed way to lock in any losses and, consequently, also to miss out on any potential recovery in markets. So what should investors do? Like Claire, doing nothing is often the best strategy.

 

Let’s see how the different Investment Strategies fared…

 

Let’s take three friends, all aged 30 years, as an example of what to do, and what not to do when it comes to investing. Claire, John, and Michelle, after receiving financial advice, all decided to invest 10,000 each into an aggressive fund on 1 January 2020. By 23 March, after a rocky time in the markets – the stock market had already crashed by more than 30% because of uncertainty around the pandemic and the worldwide lockdowns – John decided ‘enough is enough’, he wants his money to feel safer and switched out of the fund into a conservative fund.

 

Michelle, worried about the markets and panicking, decided to withdraw all of her money from the fund and keep it in the bank. Claire, however, listened to her financial advisor and decides to stay focused on her long-term goals. She keeps her money in the fund, knowing that her that her investment strategy should always align with her goals.

 

In April the market begins to recover, as markets usually do. At the end of June, Claire is better off than John and Michelle. Claire’s investment is now worth 9,100. This is still less than the initial investment, but she knows her money is in the most suitable fund for her personal circumstances, and that over time her money will grow and she will achieve her financial goals.

 

John, who switched to the conservative fund, is worse off than Claire and his money is now only worth 8,300. On top of that John’s investment – if he doesn’t switch back to the aggressive fund – will likely not grow as much as Claire’s, and over the long term, he will be worse off.

 

Michelle, who panicked and withdrew all her money into the bank only has 7,500 at the end of June. Michelle will have to reinvest back into the original fund if she wants her money to grow over the long term, but she will buy back at a time when the markets have recovered and she has less money to invest, which will most likely leave her in a worse position over the long term compared to his two friends Claire and John.

 

time in the market

 

The lesson is, be like Claire , and not like John or Michelle…

 

Investing has more to do with waiting than doing – let your Financial Advisor guide you through your journey.

 

Financial Advisor Consultation Booking

 

 

 

 

There’s never been a better time for Financial Advice

 

Here at Smart Financial, we can’t stress enough the importance of investors focusing to their goals, as well as the time frame for their financial plan, before starting the investment process.

For any one who is looking to weigh up the pros and cons of time in the market vs timing the market, its important to remember that, although market volatility can produce the feeling of financial uncertainty, TIME IN THE MARKET will offer a better outcome for your future!

 

How our Smart Financial Advisors can benefit you through the ups and downs:

  1. Discuss why it’s important to prevent unnecessary risks and costly mistakes by avoiding emotional decisions.
  2. Help you prepare a financial plan to address immediate challenges and to put a strategy in place for you to achieve your long-term financial goals.
  3. Our Advisors have a wealth of training, knowledge, and experience in the financial industry, who can assist you to make SMART DECISIONS about your money, to budget and save accordingly.
  4. A Financial Advisor will undertake research on a regular basis in order to ensure they are up to date on current events in the industry, and of the markets, so you don’t have to.
  5. Giving you assurance that your financial future is well looked after, and that we are one phone call away…

 

 

Where to find us

 

Locally:

If you are looking for a Financial Advisor near you, you can locate us at the famous Walkinstown Roundabout in Dublin 12.

Address: Greenhills Centre, Units 1 & 2, Greenhills Rd, Walkinstown, Dublin 12, D12 YH22.

 

Nationally:

If you are based outside of Dublin, we have Financial Advisors located in Co. Wicklow and Co. Cork (Munster), who would be happy to commute to you.

 

Click on the map below for directions to our offices…

 

Financial Advisor near me

 

 

Need to speak to a Financial Advisor?

Fill out your details and enquiry below, and one of our Qualified Financial Advisors will get back to you shortly.

How to Transfer my UK Pension to Ireland

 

Changes Following Brexit

 

As of January 2020, the United Kingdom (UK) had officially left the European Union (EU). With the provision of the withdrawal agreement came the transition period, which will run up until December 31st, 2020 allowing UK citizens and business to remain as part of the EU’s rules, regulations and trading arrangements.
 
This will give businesses on both sides time to adjust for upcoming changes. The transition period will end on the 1st of January 2020, changing the conditions of policy and trade outcomes and will highly depend on negotiations held between the UK and EU during the transition period.
 
Despite of the many uncertainties involving Brexit, UK Pensions seems to be a more stable matter. The governments of Ireland and Britain have guaranteed the continued payment of state pensions, child benefit and other social welfare payments in the event of the UK crashing out of the EU without a deal.

 

Financial Advisor Consultation Booking

 

 

 

 

UK State Pensions

UK Pension Claimants

 

As demonstrated by the graph above, Ireland ranks 1st on European Countries pension claims. With the possibility of a no deal scenario, it is natural that many financial concerns arise with regards to UK pensions.
 
Essentially, this article will target the impact Brexit will have on UK pensioners living in Ireland. Would their Pensions enjoy the same entitlements? What is the right way to transfer UK’s pensions to Ireland?

 

Statistics Source: Ireland leads the number of UK pension Claimants. Source BBC – DWP Figures for August 2019

 

 

Uprating

If you live in the UK, your state pension is uprated every year in line with the triple lock, which means it rises by whichever is highest of average earnings, inflation or 2.5%.
 
As regards to uprating, Ireland and Britain Governments agreed that you will continue to get your UK State Pension uprated if you move to Ireland and you are a UK or Irish national, even after the Withdrawal Agreement deadline.

You will be able to claim and continue to receive UK benefits in Ireland if you are an UK or Irish national, as long as you continue to meet the qualifying conditions.

 

 

State Pension Eligibility

UK State Pension eligibility could also incur some material change. When the UK was part of the EU, the process of claiming retirement for people that worked in different European countries was simple and done by a single claim.
 
For instance, if someone had worked for 10 years in the UK, other than having worked in different EU countries, when they were eligible to retire, they could apply for their state pension in the last country where they lived or worked, and the single claim would then be coordinated by that country’s authorities.
 
You are currently also entitled use period work in other EU countries to count towards your 10 year minimum threshold to claim for a UK pension (it is worth noting that you would only be paid based on the contributions made when you were working in the UK).
 
The withdrawal agreement keeps that coordination going for those living in Europe until the end of 2020, however it will depend on negotiations on the future relationship between the EU and the UK.


UK Pension Transfers

 

How can I transfer my UK Pension to Ireland?

Most Irish residents under the age of 70 are also eligible to transfer their pensions, with a few restrictions.

 

If you have worked in the UK some time during your career you would have probably built up a Pension pot. If you are planning to move back to Ireland, or if you have already done so, you can move/transfer your UK Pension to Ireland by way of a Qualified Recognised Overseas Pension Scheme (QROPS) Buy Out Bond. This would give you more control over your investment options, both now and when you retire.

 
That is the ideal option in most cases, as it is more convenient to have your pension in your country and in your exchange rate. In addition, having your pension abroad can increase bureaucracy in future operations such as Inheritance Planning.

 

*If the scheme to which you are considering transferring your pension savings is not a QROPS, your UK pension scheme may refuse to make the transfer, or you may have to pay at least 40% tax on the transfer.

 

QROPS

A Qualifying Recognized Overseas Pension Scheme (QROPS) is a pension scheme that is allowed to receive a transfer of UK pension benefits free of tax.
 
QROPS offers a retirement opportunity whether you are an Irish national that had paid into a pension in the UK and is now planning to transfer your pension to Ireland, or a UK national concerned about the effects of Brexit on your pension and want to safeguard your personal retirement savings against the increasingly restrictive UK pensions regime.
 
A QROPS offers flexibility and significant taxation and investment advantages, allowing UK pension holders to still be able to invest in them.

 

What are the benefits?

 

  1. Control Greater control over your pension investment.
  2. Tax – A QROPS can accept pension transfers from the UK without potentially triggering a tax charge.
  3. Convenience It is easier if you are planning to retire back home in Ireland. If you leave your pension benefits in the UK, you will have to submit an annual tax return in Ireland in retirement declaring your income from the UK. Transferring your pension to Ireland would also allow you to work with a Financial Advisor familiar with the Irish market.
  4. Inheritance Planning If the beneficiaries of your Will or your dependents are not living in the UK, leaving your pension there may be more complicated to deal with in the event of your death, making more sense to transfer your pension to Ireland.
  5. Standard Fund Threshold Any pension savings you transfer to a QROPS in Ireland does not count towards the €2 million Standard Fund Threshold (which is the maximum pension amount you can save for in Ireland without heavy tax charges). The SFT only takes into consideration pension savings in relation to Irish earnings.

 

How does QROPS affect my Tax Free Lump Sum?

 

  1. The tax free lump sum you claim from your QROPS forms part of your lifetime limit in Ireland.
  2. It will be included in your €200,000 tax free lump sum limit (and optional €300,000 taxable lump sum taxed at the standard rate of tax).
  3. If your total pension fund at retirement exceeds €800,000 (between your UK & Irish pensions), the excess in the lump sum over €200,000 would be taxed in Ireland at 20%, where it could be tax free in the UK.

 

Financial Advisor Consultation Booking

 

 

 

 

Considerations before transferring your UK Pension to Ireland

 

Tax charges on Transfer:

First off, make sure to transfer your pension to a scheme that’s been registered with HMRC as a QROPS. Otherwise, it could result in UK tax charges of up to 55% of the amount transferred.

 

Pension Age:

The minimum retirement age on a QROPS is 55. You can only access your benefits before age 55 on the grounds of ill health.

 

Tax Residency:

If you have been a resident in the UK anytime within the last 5/10 UK tax years, you may be liable to UK tax on your QROPS at retirement.

 

Accessing your Pension:

For all transfers received into a QROPS, benefits can be paid if you;

  1. Are age 55 and over and,
  2. Have not been a UK tax resident for at least 10 UK tax years.

 

Overseas Transfer Charge:

There is a 25% overseas transfer charge on a QROPS unless the transfer is:

  1. To your employers occupational pension scheme, or
  2. To your country of residence, or
  3. Within the European Economic Area

 

Pension Limits:

There are limits in both the UK and Ireland as to how much you can save into a pension, outside of which you maybe liable to tax. In the UK this is referred to as the Lifetime Allowance. In Ireland, it is referred to as the Standard Fund Threshold.

 

It would be worth assessing the value of your pension with the Lifetime Allowance in mind.

 

Options at Retirement:

You can check with your UK provider on what type of pension you have and how you can access your money at retirement from that scheme.

 

 

It is safe to say that despite the few uncertainties regarding your UK Pension, there are already some options in place for Irish residents to avoid losing their well-earned benefits and, while it is a more complex process, we can help take the burden off your shoulders.

 

 

I want to transfer my UK pension to Ireland

 

What’s the next step?

Our Financial Advisors can facilitate QROPS transfers to bring your UK pension benefits back to Ireland (with an Irish registered life company) and into your own name. This is known as a QROPS Buy Out Bond.

 

Step 1:

Request your pension benefits statement and the transfer options form from your UK provider that includes the option to transfer overseas.

 

Letter of Authority

In order for our Financial Advisors to review your pension benefits and advise you on your options, complete the below form (using the “download” link) and send this to info@smartfinancial.ie.

 

 

 

 

 

In addition, make sure to submit your enquiry in the field below…

 

Step 2:

Our Financial Advisors will contact you to discuss your options and to make sure it is the right decision for you. We will  will complete the relevant paperwork with you for the QROPS Buy Out Bond, and ensure there will not be any UK tax implications.

 

Step 3:

The agreed upon Irish Pension provider will receive the transfer from the UK, convert it to Euro for you, and ensure your QROPS Buy Out Bond is set up. The Pension will now be in your name and in your control.

 

 

Speak with a Financial Advisor

Fill out your details and enquiry below, and one of our Financial Advisors will call you back to assist you.

Avoiding Inheritance Tax for Cohabiting Couples in Ireland

 

Today in Ireland, an increasing number of couples are taking the ‘cohabiting’ route, choosing to either postpone marriage or to not enter it at all. According to the Law Society, a 2016 consensus showed that of the 1.22 million families living in Ireland, over 152,000 couples are cohabiting, and that figure is up 6% since 2011. Of that number 75,587 reported cohabiting couples in Ireland are living with children nationwide – an increase of nearly 24% up since 2011.

 

That being said, where there are two cohabiting partners who own an assest of significant value, say a property, and one partner passes away, there would be significant tax implications on the surviving partner inheriting the property (Refer to “Inheritance Tax” below).

 

Who qualifies as a Cohabitant?

 

Cohabitants are regarded as two adults who have already lived together in a long-term intimate or committed relationship and splitting expenses, for two years where there are children in the relationship, and five years where there are no children involved. Non-traditional families were previously not provided with any legal status and so do not have the same legal rights as married couples as are provided under the ‘Marriage Act 2015’.

 

Enter the Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010 that has celebrated a milestone for cohabiting couples. This Act provides cohabitants with extensive information on further entitlements, such as maintenance, property, and inheritance rights. However, cohabitants still need to consider the important implications that arise on death of a partner (succession), and Tax liability.

 

 

Implications on death of a partner

 

Married couples or those in a Civil Partnership are governed by the Succession Act of 1965, allowing the surviving spouse a legal right to a share in each other’s estate. If you are in a Cohabiting relationship, without a valid will you would have no automatic right to any share in assets or the estate of your partner on their passing.

 

Since the Redress scheme for Cohabiting Couples was introduced, surviving cohabitants can be make an application to the court for the provision of the estate of the deceased partner (here, a court order is exempt from inheritance tax).

 

 

Inheritance Tax

 

In the case where a married or civil partner inherits from the surviving partner, there would be no inheritance tax considered. On the other hand, and for the purposes of Capital Acquisition Tax (CAT), cohabiting couples would have to pay inheritance tax as they would be seen as ‘strangers’ in the eyes of Revenue.

 

On receiving a gift or inheritance surviving partners are provided with the Inheritance Tax threshold of up to €16,250, however, generally given size of the gift or inheritance value such as property, this could result in an particularly unfortunate Tax bill, as anything in excess of this threshold would be taxable at a rate of 33%.

 

 

Protecting against Inheritance Tax

 

For cohabitants additional Life insurance is the smartest way to reduce Inheritance tax. Many cohabiting couples that have Mortgage Protection in place may not fully understand how Revenue will treat the inheritance of the property of the surviving partner. If structured correctly, taking out a life insurance policy on a ‘Life of Another basis’ will help to remove any unexpected tax concerns. There are various conditions that must be in place such as who paid the premiums on the policy, who owned the property, and how the policy was set up. 

 

This process is assisted by a Single Life Mortgage Protection where both parties will take out two Single Life, and a Life of Another basis Insurance Policy on each other’s lives, and each partner must pay for the premiums on the each other’s policy (and visa versa) which runs for the same length of time as the mortgage.

 

Switching Mortgage Protection Cover

 

Let’s look at the below example that illustrates a cohabiting couple:
 

Sarah and Alan are cohabiting together and buy a house in their joint names valued at €400,000.
Each contributed to paying for the deposit of €50,000.
 

They take out a Dual Protection policy for €350,000 to pay off the mortgage, should one of them pass away. Both Alan and Sarah are working and the mortgage protection premiums are paid from a joint bank account.
 

In the first year Alan dies and the mortgage protection policy clears the mortgage:
 
o Sarah already owns 50% of the property, so she will inherit Alan’s half of the property.

– 50% X €400,000 = €200,000 (since its dual life, she will pay the total amount of the inherited value as she is benefitting from it).
 

o Sarah must therefore pay 33% of any inheritance over the threshold of €16,250.

– 33% X (€200,000 – €16,250) = €60,638. (Sarah’s Tax Liability).
 

As we can see, the mortgage protection policy has cleared the mortgage, however, since Sarah has technically inherited Alan’s half of the property she is now left with an unfortunate tax bill.
 

Here is where the Life of Another Solutions comes in handy:

 

 

1. Two Single Life Policies – Both earning an Income

 

Each partner sets up their own Single Life Mortgage Protection Policy, insuring each other’s life for the full mortgage amount of €350,000 (purchase price of the property less the deposit). This would be referred to as a “Life of Another” policy.
 

For the policy to be structured correctly, they would need to ensure that the premiums paid on each policy comes from each of their own bank accounts funded by their own earnings, and NOT a joint account. Therefore, referring back to the example above, should Alan’s premature death occur in the first year, the benefit paid out would belong to Sarah as she is the owner of the policy on his life and paid the premiums (this is very different to a joint policy) and would ensure that Sarah’s inheritance would be reduced in the event of Alan’s death (and visa versa).
 

So as we can see, Sarah would thereafter inherit the mortgaged portion of the house and be exempt from paying for Inheritance tax on that portion. However, she would still have to pay for the mortgage-free value that she inherits.
 

Mortgage free value:
 

o Sarah inherits the remaining 50% of the free value on the property.

– 50% X (€400,000 – €350,000) = €25,000.
 

o Sarah will have to pay 33% Inheritance tax on the amount inherited over €16,250.

– 33% (€25,000 – €16,250) = €2,887.50

 

When organizing two Single life Insurance, and “Life of Another” Mortgage Protection Policies paying for the premiums from their own separate accounts will make sure that potential tax liability will be significantly reduced.

 

 

2. Dual Life Cover increase – One partner earning

 

In cases where only one of the partners own the property, their situation would be slightly different.
 

Assuming Alan owns the property outright, and is the sole owner, he paid for the deposit, currently pays for the mortgage repayments and the premiums on their Mortgage Protection policy, there would be a potential Inheritance tax Liability if Alan should pass away.
 

In this case, we observe an alternative solution that would provide for Sarah should something happen to Alan. They could make an agreement with the lender to apply for the increase in the cover amount of their Dual Life Mortgage protection so there would be enough money left over to pay for the inheritance Tax bill.

 

Here is how this would work:

 
Instead of just taking out the €350,000 to clear the mortgage, Sarah and Alan increase the amount of cover on their policy by €189,012, bringing the total sum assured to €539,012. The additional cover of €189,012 would be enough to cover the cost of the inheritance tax based on the current tax rules and the value of their property; €350,000 + €189,012 = €539,012.

 
If in the first year Alan dies, the Mortgage Protection policy would pay out the proceeds of €539,012 to the Mortgage Lender. Sarah is legally entitled to the balance of the proceeds (€189,012) by the lender after the €350,000 has been cleared.

 

Thereafter, Sarah would inherit the property under the terms of Alan’s Will that was drafted up for the amount of €400,000. Since Alan paid all the premiums of the policy, the amount of €189,012 would also be considered an inheritance.

 
Sarah’s total Inheritance amount’s to: €400,000 + €189,012 = €589,012.

 
o Sarah will pay 33% Inheritance tax on the amount inherited over the threshold of €16,250.

– 33% (€589,012 – €16,250) = €189,012 (Sarah’s tax Liability).


Taking out the additional cover of €189,012 means that Sarah would have enough to cover the Inheritance Tax Liability on inheriting both the value of Alan’s property and the balance of the Mortgage protection policy proceeds.

 

 

Other ways to Reduce Inheritance Tax Liability

 

Section 72 Life Assurance policy

This is a very useful and widely available Revenue approved whole-life Insurance policy product that is specifically designed to deal with inheritance tax, for example, when parents bequeath property to their children. It works similarly to regular Life insurance where you would pay the premium on your policy, and on death, in return, your beneficiaries would receive a tax-free Lumpsum to cover the tax bill. Revenue will not charge Capital Acquisitions Tax (CAT) on the proceeds if the money is set to pay for the Inheritance Tax itself.

 
To qualify for Section 72 cover, the below are just a few of the main qualifying criteria:

 
– The person who owns the plan must pay the premiums.

– A joint-life plan can only be taken out by a married couple or registered civil partners.

– The plan holder must continue to pay the premiums of the policy for at least eight years.


Small Gift Exemption

This comes in very handy if one party is not earning an income and can’t afford to pay for the cost of the insurance premiums themselves. One could consider benefiting from the annual Gift Exemption which is currently €3,000.

 

As an illustration, we can apply this exemption in the first case study Single Life, Life of Another mentioned above; If Alan did not have enough funds to pay for the premiums on the Insurance policy, he could then receive a gift tax free of up to €3,000 annually from Sarah, and use the money to pay the insurance premiums on his policy.


Dwelling house Exemption

There are ways that one could inherit a house without actually having to pay any inheritance tax (or Capital Acquisitions Tax). The Dwelling house Exemption in circumstances where couples are cohabiting could be deemed very useful. There are, however, conditions to qualify for this exemption as set out by the Finance Act of 2016. In order to qualify, and be exempt from Inheritance Tax completely, the following must be met:

 
1. The house was the only or main home of the person who died (this condition does not apply if you are a dependent relative).

2. You lived in the house for three years before the person’s death.

3. You do not own, have an interest or a share in any other house, including one you acquired as part of the same inheritance.

4. The house continues to be your main or only home for six years after the date of inheritance. This does not apply if you are over the age of 65.

 

 

In Summary

 

There are many strategies one can consider in reducing potential Inheritance Tax, however not all cohabitants financial circumstances are the same. It is importance to seek advice from a Qualified Financial Advisor who will assess your current circumstances, and help put together suitable solution tailored to your specific needs, thereby helping you make an informed decision and giving you peace of mind.

 

 

Letter of Authority:

 

In order for our Financial Advisors to review your protection plans & policies and provide recommendations, complete the below form (using the “download” link) and send this to info@smartfinancial.ie.

 

 

 

 

 

In addition, make sure to submit your enquiry in the field below…

 

 

 

Need to speak with a Financial Advisor?

Fill out your details below, and one of our Qualified Financial Advisors will get back to you shortly.

DD/MM/YYYY
Select 'Smoker' if you have smoked tobacco products in the last 12 months.
You need to cover the amount you are borrowing. Input the current amount outstanding on your loan.
Selected Years: 10
Select the amount of years you need the cover for.