The Gazette 1989

GAZETTE

FEBRUARY 1989

Advice on Investments

There is no simple, all embracing answer to that most popular

of questions "whe re should I put this money". Indeed before

attempting to answer any financial advisor worth his salt will

need to spend some t ime asking a lot of questions in return.

Does the investor need an income: does he or she need ready

access to the funds: what is his or her tax situation: what

is the attitude to risk: and even, is there any worry about the

t ax -man asking where the money came from?

There are no black and white

answers to most of these

questions. There are degrees of risk

aversion. There may be no need for

ready access to the money -

except an emergency arising. A

good financial advisor needs to

know his client and his or her

circumstances - one reason

indeed why solicitors can have an

advantage in this area. The advisor,

of course, also needs to have a

broad notion of the type of outlets

available. It is then a matter of

fitting the client to the investment

outlet.

There is a growing range of

investment possibilities - new

products being developed by the

increasingly competitive financial

services sector and the new found

option of investing abroad with the

easing of exchange controls. It

would take a book - even a few

books - to cover them all

adequately. For the purposes of this

article let us look at three make-

believe clients and some of the

investment options which might

suit them.

Client 1

- Mr X is self-employed

with a good income. He pays heavy

tax but has some spare funds

which are not needed in the

business. He does not need to

supplement his income and can

leave the money untouched for the

foreseeable future - certainly

some years. As a businessman he

is not adverse to risk.

The range of options here are

immense. But let us suppose that

Mr X wants something more

exciting than putting his money on

deposit with a bank, building

society or the Post Office and that

direct stock exchange investment

does not appeal to him. But he

would like the idea of something

"tax effective". Let us have a look

at some of the options.

Pension Scheme: if he has not

already set up a personal pension

scheme, then he should do so

without delay. He will get full tax

relief on annual contributions of up

to 15 pc of his income and will also

benefit from the fact that the

money in the pension fund builds

up free of tax. It can, in fact, be

by C o lm Rapp le

worth while to put in even more

than 15 pc of income for that

reason.

If Mr X is an employee of his own

company, the tax relief possibil-

ities are far greater since the

company can claim tax relief on all

its contributions provided the

scheme does not promise more

than the maximum benefits

approved by the Revenue

Commissioners. And they are very

generous.

Business Expansion Scheme: An

earlier article in this series looked

at the opportunities for setting up

businesses in the tourism sector

under this scheme. Any individual

can get tax relief on up to £25,000

a year invested in such a project. Of

course, the scheme also applies to

manufacturing ventures and stock-

brokers often have entrepreneurs

on their books looking for funds.

There are also funds which seek

investment from time to time and

spread the funds over a range of

ventures.

But be careful, the tax advantage

can often be largely offset by profit

sharing and share option schemes

which the promoters build-in for

their benefit. And there may be no

clear means of realising the

investment in the future.

Section 23 Apartment or House:

For someone with cash to invest for

at least ten years the purchase of

a new apartment or house for

renting can be a very attractive

proposition. Provided it falls into the

Section 23 guidelines, the rental

income can be collected tax free

until the purchaser recoups the

cost of the building in full. The cost

of the building can be reckoned to

be about 70 to 80 pc of the price

paid. The letting has to be to a non-

connected tenant for at least ten

years. Good conversions also

comply with the rules. Better still

the tax relief can be immediately

set against other rental income if

the client has any.

Unit Linked Funds: Since Mr X

does not want to invest directly in

company shares either at home or

abroad, a unit linked fund may be

an alternative. The entry cost is

higher than buying shares directly

but there is the benefit of

professional management of the

fund and the knowledge that the

investment is a spread of shares or

properties or whatever.

A unit linked fund is basically a

co-op of investors who pool their

money under the aegis of some

insurance company which provides

the professional management.

About 8 pc of the investment goes

in buying in. There is a 3 pc stamp

duty and there is usually a 5 pc

spread between the price at which

the units are bought and the price

at which they are sold. So someone

who cashed in their investment

immediately after making it would

lose 8 pc of their money.

Those funds which do not have

a 5 pc price spread usually impose

heavier annual management costs

and early encashment penalties.

Unit values - like shares - can

go up and down. Some perform

better than others. Some carry less

risk than others. The choice is wide.

Quarterly surveys of fund

performances are published in

some of the daily papers and can

provide a guide to future prospects.

Past performance is not always a