Insurance companies have called on finance minister Pascal Donohoe to reduce the Life Assurance Exit Tax (LAET) in the forthcoming budget.
In its pre-Budget submission, Insurance Ireland contends that savers should be allowed to make choices based on underlying investment’s merits, rather than the tax treatment of that investment.
As the system is currently constructed, savers get better tax treatment by leaving their money in deposit accounts that yield no return. As a result, Ireland currently has substantial amounts of money sitting on deposit, which due to the low-interest environment in the past years have attracted little or, in some cases, even negative interest rates, says the body.
Deposits are subject to DIRT at 33% while the LAET rate is 41%.
Despite the increase in relative size of funds on deposit, the yield from DIRT has fallen from €473m in 2011 to €37m in 2020. In contrast, the return from LAET has increased from €43m in 2010 to €124m in 2020.
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The submission states: “We believe that a concentration of 80% of capital in on demand deposit accounts leaves a high level of households vulnerable to concentration risk.
“The fact that the issue of equalizing the taxation treatment of financial products is relevant only to a small cohort of the population - those individuals or households who have the ability to invest and who want to invest in deposit accounts or life assurance products – does not mean that it should not be addressed.”
The Tax Strategy Group estimated that if the rate of LAET was reduced to meet the current rate of DIRT,
the cost in real terms would be €24m.
Insurance Ireland argues that this cost could be offset by increases in LAET receipts as a result of attracting capital into LAET funds.
Insurance Ireland says Donohoe should assist people saving for their futures by equalizing the Exit Tax Rate (41%) with that of Capital Gains Tax (33%) and Deposit Interest Retention Tax (33%), even if the equalization might be implemented gradually in order to alleviate any potential impact on the Exchequer.
Insurance Ireland is also calling for a reduced rate of 33% to be applied to LAET funds which meet an agreed ESG standard.
“Insurance Ireland is of the opinion that a positive tax treatment for such investments would send a positive signal to the international community about Ireland’s commitment to use all levers to move our economy to a more sustainable footing,” the document states.
The insurance representative body also proposes solutions in order to transition towards a sustainable economy and society.
The submission details how government needs to make the necessary data available to comply with the new EU regulatory framework, assess investment and manage environmental risk as well as aim public investment strategies to comply with the EU sustainability framework in order to allow the industry to invest in the long term.
On the issue of pension auto-enrolment, Insurance Ireland CEO Moyagh Murdock noted that AE will increase pension cover to cohorts of the Irish population who traditionally would not have had ready access to pension cover.
“However, the devil is in the detail and more efforts are necessary to also include part-time workers in lower income groups to also benefit from the scheme,” he added.
“Government must ensure that the auto-enrolment scheme ensures fair treatment of carers, part-time and low-income earners, who are predominantly women.”
The government published a Sustainable Finance Roadmap with clear actions last year with a view to focusing on the acceleration of the sustainable financial agenda at a policy level.
