In today’s market, the vast majority of people’s investments are made for very specific purposes. Whether it’s planning for retirement, saving for your children’s education costs or just accumulating funds for future use, there is usually an end goal behind every investment we make. However, with market fluctuations and movements sometimes difficult to predict, investors can find consistent positive returns hard to come by, meaning that the end objective is harder to achieve within the planned time parameters.
Using an investment structure, where contributions qualify for income tax relief, is a simple, smart way to improve your net investment gains without having to take any additional risk, and it greatly increases your chances of meeting future goals.
In Cyprus, investors may claim income tax relief for contributions made to unit-linked investments held inside a specific Life Insurance ‘wrapper’ when additional death benefits are selected. Depending on individual circumstances, this may allow investors to deduct 100% of the premiums paid from their taxable income. The maximum amount of tax relief available for any one person is 1/6th of total income, net of deductions, as the following example illustrates:
A 40 year old male wishes to retire at 55. He earns €50,000 annually and decides to invest €1,000 per month into a qualifying investment structure with an additional death benefit figure in the region of €150,000. Under Cypriot tax law (assuming he has no other deductions from earnings and is not making any contributions to alternate qualifying investments), he is eligible for Tax Relief on €8,333 of his annual premiums (1/6th of his €50,000 annual income). This reduces his total taxable income to €41,667, meaning that the income tax payable (based on Cypriot tax rates as at 01/09/2016) will be €5,385, instead of the €7,885 he would normally be required to pay.
The man will thus have a tax saving of €2,500 in just one year by using an investment structure that qualifies for tax relief. In effect, his annual investment of €12,000 is a net outlay of only €9,500 – meaning that even if he decides to only invest in cash, he will still get a 26.31% uplift on the returns simply due to the tax saved!
By investing only €1,000 per month over 15 years it is possible to generate investment funds of €250,000+ (based on only 5% annual returns), and additionally experience tax savings of up to €37,500 over the same time frame as shown by the figures above (based on current tax rates).
Investment planning in this way can help provide substantial additional returns on your money, making it easier to reach specific financial goals within shorter time frames.
Such investment structures are common in Cyprus but most of them have a very limited range of funds and restrictive flexibility. Venturing into the offshore providers of qualifying contracts and investment vehicles allows investors access to a much wider range of funds from the likes of Fidelity, JPMorgan, etc. The offshore institutions that provide these structures for residents of Cyprus are internationally recognizable names and the investments generally come with an extensive range of funds, often 200+, meaning that they can be managed in line with your personal preferences and attitude to investment risk, and this approach to investment management brings its own additional rewards.
All too often, investment structures provided by local banks or fund houses are very rigid, offering investors over-simplified and generic structures which often do not align closely with people’s attitudes to risk or investment requirements. The fund baskets provided by the offshore institutions are much more flexible and allow investors to create their own balance of funds, meaning they have the choice of which type of fund, as well as which geographical and market sectors to invest in. For optimum results, structuring of the investment allocation should be carried out by a qualified independent financial advisor with the relevant market knowledge who can construct a carefully chosen portfolio based around your personal input.
The end result is a combination of an investment qualifying for substantial tax relief with investment funds chosen purely with the client’s end goals in mind, meaning your money is working harder for you, so you don’t have to work harder for it.
Info: Ian Woodcock is an Investment Consultant at Chase Buchanan
