The Maturing Deposit: Wrapper Choice and the €100,000 Question
Sinead, 58, is a PAYE employee taxed at the higher rate. A €180,000 deposit with a single Irish bank matures next month; it currently earns 2.10% gross. She has no other savings, a fully funded pension, and expects to need the money in roughly six years to help her daughter buy a house - she is flexible on the exact date but not on the amount. Her broker proposes three routes: roll the deposit over with the same bank at 2.10%; buy a global equity index fund wrapped in an Irish life assurance policy; or buy a physically-backed UCITS ETF tracking the same index. Both market routes have a gross expected return of 4.5% p.a. and negligible product charges for comparison purposes. She has made no disposals this year and has used none of her annual capital gains exemption.
1. Before comparing returns, what is the immediate structural problem with rolling the full €180,000 into the same bank, and what would you do about it?
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The deposit is only protected to €100,000. The Irish Deposit Guarantee Scheme covers €100,000 per depositor per institution. €80,000 of her money - 44% of her entire liquid wealth - sits outside that protection and is an unsecured claim on the bank.
This matters more than usual here because:
- It is her only savings, so a bank failure would be a life-changing loss, not an inconvenience.
- The excess return on offer for taking that credit risk is small: the difference between 2.10% at one bank and a split across two institutions is typically a few basis points.
Practical response: split the balance so no single institution holds more than €100,000 (e.g. €90,000 + €90,000 at two unrelated banks - check they are not under the same licence, since a branch of a foreign bank operating under passporting may share a guarantee scheme and a cap). Alternatively use State Savings products, which carry an Irish Government rather than a bank guarantee and have their own per-product limits.
The judgement point: the guarantee is a concentration limit, not a return consideration. It must be resolved before any wrapper comparison, because a decision to stay at one bank for 2.10% is really a decision to lend €80,000 unsecured for six years to earn an extra basis points-level premium.
2. Compare the after-tax value of the three routes after six years. Assume DIRT at 33%, exit tax on both the life policy and the ETF at 41%, CGT on direct shares at 33% with a €1,270 annual exemption, and ignore charges. Then state which wrapper is most tax-efficient and why.
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1. Deposit (DIRT deducted annually, so it compounds net)
- Net rate = 2.10% × (1 − 0.33) = 1.407%
- €180,000 × 1.01407^6 = €195,700 (gain €15,700, of which DIRT already paid)
2. Life-wrapped equity fund (exit tax at 41% on the gain at encashment)
- €180,000 × 1.045^6 = €234,400 (gain €54,400)
- Tax = €54,400 × 41% = €22,300
- Net = €212,100
- Advantage: no annual tax event, so the full 4.5% compounds; tax is deferred to year 6 and the Revenue Commissioners' 41% is collected at source by the life company.
3. ETF (exit tax at 41%, self-assessed, no annual exemption, no loss offset) - sold in year 6, before the 8-year deemed-disposal anniversary
- Same gross value €234,400, same 41% on the €54,400 gain = €22,300
- Net = €212,100 - identical to the life policy, but Sinead must file and pay herself, and cannot use losses on the ETF against gains elsewhere.
4. Direct shares (CGT)
- Gain €54,400 − €1,270 exemption = €53,130 × 33% = €17,530
- Net = €216,900
Ranking: direct shares (€216,900) > life policy = ETF (€212,100) > deposit (€195,700).
Why: the wrapper tax rate matters more than the wrapper. The 41% exit-tax regime on funds is eight percentage points harsher than the 33% CGT regime on direct shares, and the fund regime offers no annual exemption and no loss relief. The fund wrapper's compensating benefit is deferral and administrative simplicity - worth real money only if the deferral is long or the portfolio is actively traded.
Verify current rates and reliefs with the Revenue Commissioners before acting; rates and the deemed-disposal rules for ETFs have changed before and can change again.
3. Given the purpose of the money, what do you actually recommend, and what would make you change that recommendation?
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Split by purpose, not by return. The €180,000 has a hard nominal floor requirement (a house deposit) and a soft date ("about six years"). That is a capital-certainty problem before it is a return problem.
Recommended structure:
- €100,000–€110,000 in deposit/State Savings, split to stay inside guarantee limits. This is the money that must be there. Return ~1.4% net, real return negative against 2.5–3% inflation - accept that as the cost of certainty.
- €70,000–€80,000 in the growth asset, since a six-year horizon with date flexibility can absorb a drawdown. Within that, prefer direct shares or an investment trust over the 41% exit-tax wrapper only if she will accept the administration, self-assessment and single-stock concentration risk; otherwise the life-wrapped fund is the pragmatic choice and she should be told she is paying ~8 percentage points of tax for that convenience.
What would change the advice:
- A firm date inside four years - move almost everything to deposits; six years is the threshold at which equity risk starts to be compensated.
- A larger required sum than €180,000 - she cannot take equity risk with money she does not have.
- A fall in the deposit rate below ~1.5% net - the real cost of the "safe" sleeve rises and the case for holding only three years' worth in cash strengthens.
- A change in her employment or health - she is 58; a redundancy would convert this from a five-year pool to an emergency fund.
Document the trade-off explicitly, because the client will remember the return she was quoted, not the guarantee limit.