Savings & Investments: Core Principles for the LIA Exam
The building blocks
Candidates must be comfortable with the distinction between saving (short-term, capital-secure, low-return) and investment (longer-term, capital-at-risk, higher expected return). Know the main asset classes - cash deposits, government and corporate bonds, equities, property and collective funds - and how each behaves in relation to inflation, interest rates and liquidity.
Risk and return
Understand the risk/return trade-off, the difference between systematic (market) risk and specific (unsystematic) risk, and the role of diversification in reducing the latter only. Be able to explain volatility, real vs nominal return (real return ≈ nominal return − inflation), and the concept of time horizon matching the investment to the client's needs.
Taxation and products
Irish exam questions frequently test the tax treatment of savings and investment products: DIRT on deposit interest, the exit tax regime on life-assurance investment policies (typically 41% on gains, with the 8-year deemed-encashment rule), and CGT at 33% on disposals of assets such as shares and property. Know that the first €1,270 of an individual's annual CGT gain is exempt, and that deposit interest for individuals is generally taxed at source.
Traps to watch
- Confusing exit tax (life policy funds) with CGT (direct assets).
- Forgetting the 8-year deemed disposal on life-wrapped funds.
- Ignoring inflation when comparing a deposit to an equity fund.
- Assuming diversification removes all risk - it does not remove market risk.
Worked example
A client invests €50,000 in a life-assurance fund. After eight years it is worth €70,000. The €20,000 gain is subject to exit tax at 41%: €20,000 × 0.41 = €8,200 tax, leaving €61,800 net. Contrast this with a direct share portfolio, where gains would fall under CGT at 33% after the annual exemption - a common exam contrast.