Wealth in Practice - January Edition

Moneycube's Wealth in Practice newsletter provides insights, resources and tips for professional advisors in Ireland. From the financial experts at Moneycube, it features opinions, technical updates, and a focus on wealth and pensions to help you advise your clients.

This month:

>> 2 changes to pensions in the Finance Act

>> What will drive markets in 2023?

Finance Act 2022: changes to PRSA funding and foreign lump sums

The Finance Act was signed into law on 15 December 2022 and made two significant changes to pensions in Ireland – none of which had been flagged in October's Budget.?

The biggest change is to PRSAs.?Since 1 January, employer contributions to pensions are not considered part of the age-related contribution limit.?Until last year, for example, the total amount a 40-year old could add to a pension was 25% of salary - including both employer and employee contributions.

In fact there seems no legal reason why an employer couldn’t fund up to the standard threshold of €2 million in a single payment.

Now, no limit applies to employer contributions to PRSAs. This offers scope for very large one-off contributions to pensions.?In fact there seems no legal reason why an employer couldn’t fund up to the standard threshold of €2 million in a single payment – perhaps in the event of employees exiting businesses on sale, for example.?

The biggest beneficiaries of this change will be employees who use PRSAs and are seeking to max out their own pension contributions, and those who control a company and can aggressively fund their pension in a short time.

You can read all you ever wanted to know about PRSAs but were afraid to ask here.

The second change concerns the taxation of lump sums from foreign pensions.?Now, lump sums taken from foreign pensions are treated in the same way as Irish pension.?

That means that for people in Ireland the first €200,000 taken in lump sums from all pensions, foreign and Irish, is tax-free.?The next €300,000 is taxed at 20%.?You’d generally be unwise to take any more a lump sum, but if you do, it’s taxed at your highest marginal rate, and USC also applies.

You can read about moving UK pensions back to Ireland here.

What will drive markets in 2023?

2022 has been a year to forget for the vast majority of investors.?And while the wider economy might look challenging in 2023, there are rays of light in investment markets, which have already priced in much of the downside.?So what should investors look out for in the markets in 2023??Here are five trends to consider.

Inflation and interest rates: is the end in sight?

The rise in inflation was becoming clear when we wrote last year’s?investment outlook.

But few could have seen the impact that war in Europe has made to energy costs and global supply chains, pushing up prices in a big way for billions in developed markets.?2022 was the year central banks got serious about getting on top of it.?Led by the US with (so far) six interest rate rises this year, western central banks have continued to hike rates.

As we near the end of the year, the rate of increase in inflation is in fact reducing, and central bankers are?starting to indicate?that future increases will be smaller in nature.

Fact is, the inflation bear is being slain. It’s not going to happen overnight, and there is no going back to the prices of eighteen months ago. But it seems likely that in the US and Europe, inflation will fall from the 8-10 per cent range to a more manageable 4-6 per cent range in the foreseeable future.

Earnings holding up, and valuations looking more sensible

There’s no getting away from it: many investors will have been on the receiving end of significant paper losses during 2022. From problems in the bond market to volatility in share prices, not to mention rocketing inflation devaluing your cash, there were few places to hide this year.

As we close out the year, in many cases company valuations are now in line with or below historic averages.?Amazon shares, for example, are now at the same price as mid-2018.

What’s more, in general, corporate earnings have remained strong. Remember that although the pace of growth slowed during 2022, the global economy is?still looking at 2022 growth of around?3.2 per cent.

There’s no doubt that there will be more ups and downs to come: inflation, war, recession risk and many other headwind’s haven’t yet gone away.?In fact, most investors anticipate recession in Europe is already here, and will continue at least for the first part of 2023.

But many of those fears are now priced into the value of assets.?That provides a basis for investors to see material returns over the medium term by easing into markets in 2023 in a gradual way.

Cost control in the tech sector

Although many of the leading tech firms have come out of the US, they have only recently begun to adopt a US-style approach to shrinking their workforce. Unlike, say, manufacturing or industrial companies, they are learning to right-size their business for the economic environment we’re now in.

By December, for example, both Meta and Stripe had announced plans to lay off more than one in eight staff globally.?That particularly?affects Ireland?where many people will be affected personally.?(Although IDA Ireland?announced?in December that overall more than 24,000 jobs had been created by foreign direct investment companies in 2022).

But from a global investor’s perspective, getting control of cost structures for the environment we are in is the foundation of a recovery in valuations in markets in 2023.

Bond market reset

Although equity markets grab the headline, the bond market is bigger, and saw some of the most dramatic changes in valuations this year.?This was particularly hard on supposedly balanced-risk investors, who were hit with a double-whammy of rising interest rates pushing down bond valuations, and an equity markets selloff.

Bond markets in 2023 offer some grounds for hope.?The US Federal Reserve is beginning to wind down the cycle of rising interest rates.?That offers a path to greater price stability, with valuations reset at a new level, making bonds more attractive to hold.

China: the big unknown

Lastly, there’s the question of the world’s second-largest economy. China is finally unwinding its zero-Covid strategy, with major implications for its economy.

The abandonment of China’s zero-Covid strategy is a double-edged sword. Without western vaccines – and with low vaccine take-up generally, the people of China seem set to endure further hardship as we enter the New Year.?And its property sector faces some fundamental questions.

But a gradual reopening in Chinese society also offers the prospect of greater production and demand which will provide a spur to global growth, as can already be seen in late 2022.

We would be happy to meet with you to discuss ways in which we can support you and your clients with their wealth. Drop us a line at [email protected].