It is estimated that Irish taxpayers fail to claim back hundreds of millions of Euro each year in qualifying tax refunds from Revenue.
And many more fail to beat the banks by switching their savings to competitors.
Or few take advantage of ways to grow their money by investing.
Unfortunately, it is never that simple. People make rational choices based on the information available to them. If that information appears complex, people will often avoid making any decision at all. So too is the matter of trust. While some options may have the appearance of offering simple solutions to saving money, trust gets in the way. This can be because of lower levels of financial literacy here, or it can also be because of experience.
Trust
This is a critical component of any transaction, especially where one appears to have an advantage over another. This can be in short supply at so many levels. For example, while Ireland has many new providers that offer access to a wide range of investments including shares, Exchange Traded Funds (ETFs), and bonds, lack of trust can be pervasive. And it is not just lack of trust in new arrivals, it can also be lack of trust of existing providers. The reasons are varied: lack of financial literacy, rise of fraud awareness and even legacy issues. Regardless, it means that people are often happy to leave their money in a low-yielding savings account than seek out more generous options.
Facts
This can be a minefield for many people. For example, if we consider switching a current account, savings or a mortgage, the facts are complex. If we take the humble current account, it is estimated that less than a few tenths of one percent of people switch provider annually. Speaking directly to families, the answers are revealing. Many either do not feel there is any value in switching and many more feel the hassle, and risks are too great. Some express concern their direct debits may go unpaid which might impact their credit rating. While untrue, it’s a fact in the mind of that individual that impacts their decisions.
Mortgage switching is also an extremely complex process that involves a root and branch review of their family finances. Here, the switch from one mortgage provider to another involves personal credit checks, income checks and verification, a solicitor, a property valuation and even review of mortgage protection cover. In some cases, mortgage holders may have an impaired credit history, or may no longer have the household income to support a new mortgage application than they did when they first took out their mortgage (someone may have exited the workforce).
Even switching saving providers is complex. While there are new EU-based providers available to Irish savers, the switching process is again not immediately clear when it comes to all the facts. For example, regulation, deposit protection and access if needed appear vague and mysterious when there is no face-to-face service option.
Tax
This plays a major role across a wide range of financial decisions. For example, Ireland has one of the most punitive tax systems when it comes to personal investing. In the UK, and the US, tax and tax thresholds are vastly different and more favourable.
For example, in the US, a single taxpayer with $40,000 of taxable income for 2023 that earns $20,000 in net long-term capital gains would pay relatively little. In this case, they would owe zero tax on about $5,000 of their gains and 15% on about $15,000 of the rest. In the UK, although not as generous as the US, it is still possible to invest profitably. For example, the tax-free threshold there is £6,000 (set to fall to £3,000 in April this year) and the tax is either 10% or 20% depending on income. In Ireland, the tax free threshold is €1,270 and above that, 41% applies.
Ironically, Ireland is the number one European domicile for ETF issuers and is home to almost 50% of all European ETF assets. Six of the top 10 European ETF issuers in Europe are based in Ireland, a further indication that Ireland is to the forefront of the European ETF market. So, while Ireland offers a generous welcome to ETF issuers, those investments are prohibitively expensive for taxpayers here.
Tax complexity, especially tax forms can also be confusing for many people. For example, when it comes to claiming tax relief on working-from-home qualifying expenses, some people feel the benefit is simply not worth the effort to fill out the Form 12. This is a contributing reason why hundreds of millions of Euro go unclaimed every year. This view is often shared when I discuss the process with families from all walks of life.
Conclusion
The personal finance system is complex. People know this. Many also know that to find value, it takes effort and a high degree of knowledge. So, while some people can do this on their own, others procrastinate. When it comes to switching, saving, and investing, people often write off the potential benefits before they even begin because of lack of trust, lack of facts or lack of favourable tax.
Frank Conway is the founder of MoneyWhizz.
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