Government incentives for long-term savings welcomed

 In News, Savings, Savings bonds, Securities

Measures proposed by the government to encourage long-term savings have been welcomed by analysts but they say it needs to create a fairer and more competitive tax system regarding investments.

According to ECO online, successive Portuguese governments have had a hard time persuading people to save more and invest in instruments over the past two decades as levels of savings have fallen by around 50% from 12.9% of gross national income in 2003 to 6.3% now — a historic low since 1995.

Portugal also has the lowest level of savings in the Euro Zone as well as being adverse to risk-taking when applying funds, the Portuguese preferring to invest in government bonds than in shares, for example.

Savers in Portugal allocate around 48% of their financial assets in fixed-term deposit accounts which in the long term give back negative real returns in interest.

In order to counter an environment of low levels of savings and low diversification of assets, the government recently advanced with a Law Proposal approved in the Council of Ministers on 27 May which contains a series of measures to encourage long-term savings, essentially through tax cuts on capital gains from investment funds, shares and other assets traded on the capital markets.

According to the President of Euronext Lisbon (Lisbon stock market), Isabel Ucha, the proposal is a “positive step” in the right direction. Isabel Ucha says that in the last 20 years there has been a significant reduction in incentives to investment to the detriment the capital markets which have a vital role in attracting family savings.

“This proposed law recognises the importance of the capital markets in supporting digital transformation and climate change”, says Isabel Ucha, adding that it aims to provide incentives to save mid and long term in capital market instruments such as shares, bonds, green bonds, investment and pension funds, among others.”

The proposed government incentives would mean: For investments for 2-5 years, 10% of the income made is tax free, corresponding to a total tax rate of 25.2%.

For investments of between 5-8 years, the proposed law would exclude taxes on 20% of the income made, corresponding to a total tax rate of 22.4%.

For investments between 5-8 years, the proposed law would exclude 20% of the income made from taxes, corresponding to a total tax rate of 22.4%.

For investments over eight years, 30% of income made is tax free, corresponding to a total tax rate of 19.6%.

However, the tax incentives proposed by the government are still not as attractive as those for pension savings plans (PSPs) and unit-linked insurance policies.

The Portuguese Association of Investment Funds, Pension Funds and Patrimony (APFIPP) has, however, been critical believing that the option for a difference in treatment with regard to income arising from investments for a period of over 8 years is strange, since the exclusion from taxation provided for the capital gains referred to, is half of what is applied in the case of income arising from life insurance, and that the difference needed to be eliminated. Instead, a regime of relative tax neutrality needed to be created.

That said, the tax incentives for small investors on capital gains were welcomed by Mário Freitas, commercial director at IMGA, the second largest asset management company in Portugal with over €4.2Bn of assets under management.

However, Freitas suggests several additional measures like creating a level playing field between Portuguese and international investment companies, more incentives on individual long-term savings by, for example, allowing investment transfer between funds, as happens in other international markets, allowing no taxation to be applied at the time of redeeming a fund to make a new investment in other national funds (e.g., Spain and other European countries).

Overall, the experts contacted by ECO applauded the government’s initiative, but the message is that the government needs to be more ambitious by creating a fairer and more competitive tax system in relation to other savings instruments like life insurance to encourage new incentives that really do stimulate savings in an effective way.