Will Ireland’s new personal investment accounts make us wealthier?

Is the promised new personal investment account going to make us any money? Not unless we can shake up our attitude to risk. With €175 billion languishing in cash deposits, earning little or no interest, excessive caution with money seems to be a national trait. With the new personal investment account (PIA), the Government wants us to do something we don’t seem comfortable with: take a little more risk with our money. Investing instead of saving will give Irish people a better chance of growing our wealth over time – that’s the play. It could make households here wealthier and more financially resilient, Minister for Finance Simon Harris hopes. But getting people to open one of his new investment accounts is only half the battle. If we continue to our form to date, opting only for the lowest risk investment option, are we simply moving our money from one low-growth home to another?How does it work?The new PIA is billed as making it easier and more tax-efficient for more of us to invest. The scheme will allow you to invest up to a certain maximum amount each year into an investment account, with no minimum figure. READ MORESo instead of saving money into a low-interest savings account, as most of us are currently doing, we could instead put some of it into this. [ New Government investment scheme: Here’s what we know – and don’t knowOpens in new window ]You can invest your money in lots of different ways from this one account. Options will include investing directly in shares in listed companies or investing in bonds available on the markets, which could mean lending some of your money to a company or a country at a specific interest rate. You could opt to put your money into an investment fund; these are invested in a wide range of companies, meaning less exposure to the fate of individual companies. You could also choose an exchange traded fund (ETF). These invest across a range of assets such as stocks, bonds or commodities like oil or gold, so investors benefit from diversification and lower risk. Riskier derivative and crypto investments will not be available under the scheme. The normal taxes charged in a complicated way on investments here – capital gains tax and income tax on dividends in certain scenarios and exit tax/deemed disposal in others – will not apply. Instead, when the fund reaches a certain threshold, amounts above this will be subject to what we are told will be a “small annual charge”, based on the total size of the fund.So you will not be taxed on the “profit” your fund makes in a year but on the size of the whole fund. This could mean that you have to pay a tax charge even in years when you are losing money.Reporting and payment of this charge will be looked after by the fund provider – so you won’t have to go through the hassle of making a tax return. This tackles some of the administrative barriers to investing.You can get immediate access to your money when you want, though, as with all investments, the amount you invested may have gone up or down in the period.The investment account will be available to Irish tax-residents aged 18 and over who hold a PPSN, with one account permitted per person. As some commentators are pointing out, to what extent the new account rewards long-term investing will depend on four parameters still to be set – the tax-free threshold, the flat rate of tax, the annual contribution limit and the charges imposed by the companies offering the investment options. Risky businessThe Government is hoping the new account will make it easier and less scary for us to give investing a go. We’re enthusiastic about the new scheme, according to Banking and Payments Federation Ireland (BPFI) research published in June. Despite knowing little or no detail about the new accounts, almost eight in 10 of us said we wanted one. Maybe the penny is dropping with us that more investing and less saving is probably a good thing? But when it comes to investing, not to mind taking some risk, Irish people are starting from a low base.We lage behind our European neighbours in investing. We rank low on ownership of investment products, such as funds, stocks or bonds, at just 18 per cent compared to the EU average of 24 per cent, according to a financial literacy Eurobarometer survey published in July 2023. This compares to 46 per cent of Swedes, whose investment scheme we are in large part copying. Just 44 per cent of us say we hold any investments, according to the BPFI research. And most of that is related to pensions. [ Missing details on personal investment accounts leave consumers in the darkOpens in new window ]Our aversion to investing is multipronged. Two-thirds of people say they do not invest because they don’t have enough money or can’t afford to – fair enough. But 49 per cent say they are too afraid of losing money to invest. Some 48 per cent say they don’t invest because they don’t know how to. This all points towards a very risk averse cohort of people. No pain, no gainBringing this new account into existence and getting us to sign up for one is only half the battle. Educating us about investing and how to gauge risk to maximise the chance of returns is where the rubber will hit the road. “There is a real danger that many, perhaps most, will automatically choose the lowest-risk investment options on offer and end up disappointed with the results,” says Jason Walsh, fund proposition lead at Royal London Ireland.People can assume that choosing the lowest-risk investment is always wisest, he says. In reality, it can mean giving up much of the growth available when markets are rising. First-time investors may simply choose the option that feels safest, without understanding what they may be giving up, he says. Royal London’s five-year figures for one particular fund illustrate the difference between choosing low and high risk options, he argues.Someone who invested €10,000 in its lowest-risk Multi-Asset Fund in August 2021 would have had a pot of €11,253 five years later. Investing the same amount in its highest risk option would have seen it grow to €15,586, he says. Both figures are gross, not factoring in taxes and charges. The average yearly returns over five years were 2.4 per cent for the lowest-risk option, and 9.3 per cent for the highest risk option. Two other investment options in between the lowest and highest risk returned 4.1 per cent and 6.5 per cent. The reason is straightforward, he says. The highest-risk fund has about 80 per cent of its money invested in company shares, compared to about 20 per cent of the lowest-risk fund.“When markets rise, the fund holding more shares is generally in a much better position to benefit,” says Walsh.The trade-off is that the highest risk option can fall furthest when markets decline. In 2022, following Russia’s invasion of Ukraine, soaring inflation and falling bond markets, the lowest risk fund fell by 9.4 per cent, while the highest risk fund fell by 10.6 per cent, he says.[ Personal investment accounts likely to engage 85 per cent of Irish adults – surveyOpens in new window ]When markets started to recover, the highest risk fund returned more than the lowest over the same period of time. The question with the new Government investment account is, if first-time investors are simply shown a list of investment options running from “low risk” to “high risk”, will many just choose the option that feels safest without understanding the potential returns they might be giving up? Irish people describe their approach to financial and investment decisions as “conservative” or “very conservative” and were willing to accept little or no risk, according to the BPFI research.The largest group, 49 per cent, describe themselves as “very conservative”. They say they try to minimise risk entirely and avoid the possibility of any loss.Most of us are uncomfortable with investment risk. The biggest psychological barrier is the potential for losing money – 76 per cent say they are uncomfortable with this. The lack of guaranteed returns is a big concern for two-thirds of us, according to the BPFI data from June. Keeping our money in low risk places such as banks, however, doesn’t mean no risk, says Walsh. You can still lose money. “If you were looking at cash, you would be doing well to get 1 per cent or 1.5 per cent on a lump sum – and that’s gross. You need to take Dirt into account too,” he says.“You face the less obvious risk that your savings grow too slowly to meet their long-term needs, or keep pace with inflation. “The most important thing about this new personal investment account is getting people comfortable with what investing entails.”Time frameWhen deciding the level of investment risk to take, your financial goal for your money, your time frame for achieving it and your capacity for loss are the parameters to consider, says Walsh.“If you want to invest in single stocks, that’s a much bigger risk because ultimately you could make a lot more, but you could also lose everything as well.” ETFs provide diversification, spreading the risk a bit more. Walsh describes investing your money into one of these as like betting on the Grand National, a race with 40 horses. “What you are doing with your investment is actually backing every single horse.”You are spreading your bet. “The bigger the spread of investments you have, or the more diversification you will get, but the better the return over cash.” Budget day is the big reveal for the full detail of the PIA regime and accounts should be available by the middle of next year. It’s likely there will be a rush of sign-ups, though the danger is we may plumb for a risk level that leaves us not much better off. Remember the old SSIA accounts? Well, the new account will be nothing like that. With the old Special Savings Investment Account, all that most of us had to do was set up a direct debit for the maximum contribution of €254 a month – there were no other decisions to be made. Risk wasn’t a consideration. For every €4 we saved, the government generously added another €1. Growth was guaranteed, risk-free, like magic beans. “That’s not the case with this new account,” says David Funcheon, an investment adviser and financial planner with Ask Acorn. “With the new personal investment account, you are only getting less tax on the growth of your investment up to a certain threshold – but you still need to make the growth.”About 80 per cent of people default to a low-risk investing strategy in his experience. They are fearful of loss, but are not seeing the opportunity of compounding.“I can see a lot of people who are probably in the space where they have worked hard, they are looking to put away between €400 and €800 a month, saying: I really don’t want to take a whole lot of risk with this, but I’m happy I don’t have to pay a whole lot of tax on the growth,” says Funcheon. People will need to ask themselves what is their expectation, or goal, for their money, what is the time frame for achieving it and what is their capacity to absorb a loss, he says. If the individual is some years out from their goal – for example, saving for a child’s college education, a little bit of risk in the early years can do them no harm, he says. “When you have longevity on your side, and you are not looking to access your funds in a relatively short period of time, take the risk then.”A risk level of five or six can be appropriate. As the child is getting closer to Leaving Cert, a parent will want to have the capital security of these funds, he says.“Allow your investment to accumulate over a designated period of time. You could then look at derisking that accumulated capital wealth [closer to when you need the money],” says Funcheon, “maybe even moving then moving it out of a unit-linked fund and into a deposit fund because it is going to get used in real time.”People who have a long-term financial goal should be cautious about being too cautious from the get go.