Your financial questions answered with our Kildare finance column

Question
Liam. I invested €54,800 with my bank back in April 2021 and the value now stands at €56,676. I’m not sure if the return is great. The risk rating I’m told is a four and the annual management charge is 1.65%. I’ve been told by the bank that if I close my account there will be an exit penalty of €2,833, which would leave me with €53,843. Just wanted to get your views as I’m not sure what to do.

Answer
Your gain on this investment to date has been 3.42%, which is very poor. It’s effectively 1.14% per year and is far less than inflation so your money is not even holding its value.

I looked at other funds that had the same risk rating as yours and I was able to find two without any difficulty that were much better. One delivered a return of 9.53% and the other 11.01% over exactly the same time period as your investment.

So, one was 2.78 times better than yours and the other 3.22 times better.

And in monetary terms, if you invested in the lower performing fund (9.53%) you’d have €3,346 more in your account than you now have and if you invested in the higher performing fund (11.01%) you’d have €4,158 more.

The purpose of telling you about two other accounts was to show you that there isn’t just one account that was better than yours, there are many. I could tell you about other accounts where the risk rating is lower than yours and their return is still higher.

The problem with arranging the account through your bank is that they are tied agents, and they can only offer you products from one provider which is fine if that provider is producing great returns and is better than anyone else, but not so good when they’re at the bottom of the pack which seems to be the case with you.

And I don’t like telling you but the annual mana

ement charge that is being applied to your account is incredibly high at 1.65%.

The two accounts I was telling you about have management charges which are 1%, so not only are they delivering much higher returns, but their charges are a lot lower as well.

In relation to the exit penalty you are being charged, this is something you should never have agreed to.

And again I hate to say it, but the two accounts I’m comparing yours against don’t have any exit penalties whatsoever. And my advice with anyone setting up an investment account that doesn’t offer a guaranteed return and doesn’t have an explicit lock in period, is never agree to exit penalties, ever.

The reason why is because if an account is performing badly and you want to invest in other accounts with other providers, you don’t want to have to pay an exit penalty to be able to do so. By agreeing to an exit penalty you could end up having to pay to get away from your bank's poor returns, which is mad.

Unfortunately, and I don’t want to be the bearer of bad news, you invested in an account that had three things wrong with it (1) it’s performing badly (2) it has very high charges and (3) you will be charged an exit penalty of 5% if you want to close the account.

So, what should you do?

First thing is I’d ask your bank to lower the management fee.

Second, ask them do they have any other accounts they could recommend that are performing better than your existing one. But make it clear that you don’t want to take on any more risk if there are.

Third, ask them is there anything they can do with the exit penalty.

If they don’t, the % they’ll charge should reduce each year, but I personally wouldn’t pay the 5% exit penalty right now because it’s just too high and if you moved, you’d end up with less than you invested despite the fact they had your money for the last three years.

Question
Liam, my employer has sent me an email advising that there is going to be a change to our employee share purchase program as result of changes made in last year’s budget. I think it’s something about how it’s being taxed but I’m not sure and I’m confused and so are my colleagues. If you’ve come across this before, could let us know what’s happening and what we can expect please.

Answer
I have come across this and I’ll explain exactly what’s going to happen.

When it comes to an ESPP program, from a tax perspective the gains are divided into two parts.

The first is the 15% discount you receive on the market share price, which is chargeable to income tax as a benefit derived from your employment.

And it’s this particular tax that has been impacted in last year’s budget announcement.

The amount of tax charged in this instance is the difference between the market value of the shares when they are purchased on your behalf and the amount you paid for those shares.

You will pay 52% on the difference which is made up of income tax at the marginal rate, USC and PRSI.

The change that was made in last year’s budget has nothing to do with how much tax you’ll end up paying, the change is in relation to how this tax is going to be collected.

You see prior to this change, you paid the tax due under the self-assessment method whereby an employee is required to submit a form RTSO1 along with payment of the relevant taxes within 30 days of the shares being exercised, and what I mean when I say exercised, I mean when the shares are purchased for you.

And you may not sell them immediately but once they are purchased at below market value, this income tax event occurs.

But now going forward the taxation of any gain realised when the share options are purchased is moving away from an individual self-assessment return, and to a real time payroll withholding system.

Which means, your employer is now responsible for collecting income tax, USC and PRSI from their employees and remitting those taxes to Revenue as part of their payroll process.

Because an ESPP programme runs over a six month period, there will be two months in the year where your employer will collect the tax withholding to cover your ESPP chargeable gain, which means that your take-home pay will be reduced in these pay-cycles.

So, as I said already there are no changes to how the withholding tax is calculated, the change is how it’s collected that’s all.

And I guess Revenue introduced these changes in order to (a) collect the taxes due quicker and (b) perhaps they weren’t confident that people were making the self-assessment return themselves and paying the withholding tax due.

But with the changes now being made, there’s no escaping or putting off the payment of this tax, because it’s being done at source so to speak.

This new system is a bit like interest earned on savings accounts. The DIRT tax is applied at source by the bank and remitted directly to Revenue, so the amount leftover is yours to keep and you are tax compliant.

And the same will now happen with this new method of payment with an ESPP program which is no bad thing either.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie