2017 brought with it a novelty of some importance for the world of investments in Italy: i PIR, Short for Individual Savings Plans, which became reality thanks to the Budget Law.
The PIRs channel investments towards the shares and bonds of Italian SMEs, and offer a significant tax advantage to those who subscribe to them - I have spoken about it extensively in this post, to which I refer so as not to bore you.
Here I would like to answer a frank and direct question: to what extent are PIRs convenient compared to other “non-PIR” investments?
TAX LIBIDO, SPECULATING LIBIDO AND PIR
PIRs are "fiscal containers" (mutual investment funds, asset management, securities dossiers, life insurance policies) which, provided certain conditions are met, grant total tax exemption on investment income itself and from the inheritance tax in the event of the subscriber's death. It is worth refreshing your memory on the main rates linked to investments: Government bonds issued by Sovereign States (which are included in the White List) are taxed at 12,5%, supplementary pension schemes (such as pension funds) are subject to a rate of 20%, while other non-PIR financial instruments (for example current accounts, deposit accounts, mutual funds, ETFs, shares, bonds) are subject to a rate of 26%.
On the other hand, a rate of 0% is applied to PIRs. In short, no taxes. This fact, together with the characteristic of investing in SME securities, perhaps an expression of the mythical Italian excellence, produces a cocktail of ingredients powerful enough to make the average Italian saver spin his head. In fact, the PIRs titillate two very sensitive points: first, avoiding taxes and, second, obtaining a superior performance. That is, "fiscal libido" and "libido speculandi" in a splendid and dangerous convolution.
Thus, to help you make rational and non-hormonal investment choices, I have aseptically investigated the convenience profile of PIRs compared to possible alternatives.
PIR VS NON-PIR
If you have savings to invest, it is quite likely that some bold salesman will come and wave the extreme fiscal and financial convenience of PIRs under your nose. Don't take anything for granted, but act rationally. Let's leave aside the issue of country risk for a moment (PIRs have by definition a strong exposure to Italy risk), and imagine that the PIR is part of a balanced and adequately diversified asset allocation in terms of risk. First of all, the commission issue should be investigated.
That is: since PIRs are tax-free, up to which commission level (TER) is a PIR convenient compared to a competing investment? The following graph answers this legitimate question.
The variables involved are:
– the commissions (simplifying a bit, the TER) of the PIR;
– the commissions of the hypothetical alternative;
– the gross performance, ie pre-tax, of the investment (which we will assume identical, to focus attention only on taxes and commissions).
On the horizontal axis, find the difference between the commission of the hypothetical PIR and that of the other investment. Thus, when the number is negative it means that the PIR fee is lower than that of the other investment, and vice versa when, moving to the right, it becomes positive. On the vertical axis there is instead the net performance difference between the hypothetical PIR and the alternative: if the value is positive, it means that the PIR wins; vice versa if it is negative.
There are two lines: one for a hypothetical annual yield (gross, ie pre-tax) of 5% and the other corresponding to a yield of 10%. The convenience profile in fact depends on the gross performance. The reason is intuitive: the tax rate is applied to the earnings, therefore the higher it is, the greater the tax savings associated with the PIR, and the more convenient the PIR is.
Let's read the graph together.
For both levels of returns, the lines are downward sloping: this means that the higher the PIR commission is, compared to the hypothetical alternative, the more the extra-performance of the PIR itself is reduced (with the same gross return , of course). Pretty obvious. But when does the alternative become preferable to the PIR? To understand this, it is necessary to identify the point at which each line intersects on the horizontal axis, and then read what commission difference it corresponds to[1]. Let's look at a couple of examples:
– with a gross return of 5%, if the commission of the PIR is 2,5% it is necessary that the alternative has a commission of about 1% lower to be cheaper than the PIR; if the PIR fee drops to 1,5%, to “beat the PIR”, the non-PIR must have a fee of 0,30%;
– with a gross return of 10%, the PIR advantage increases, and the PIR commission can be about 2% higher than the alternative and still be cheaper; that is, even with a PIR commission equal to 3,1% (high), the convenience remains even if the alternative has commissions of 1%. If the PIR commission is 2%, with a gross return of 10% the PIR is practically unbeatable.
It goes without saying that, in the event of a negative performance of the PIR, there is no tax advantage, given that taxes are paid on earnings. In short, PIRs objectively have a good margin of convenience. But it is also evident that if they ask you stratospheric commissions for the PIR you have to think carefully and do the calculations. Also because it is by no means certain that the gross performance of the two possible alternatives is the same.
On this point, it is difficult to say what the prospects are in the immediate future of the Italian financial market (on which the RIPs focus) or of the other markets. However, what we can analyze are the historical data, and more precisely the real yields (ie corrected for the erosive effect of inflation) – see the following graph – in different periods, all very significant from a statistical point of view.
History tells us that, while the Italian bond market has generated real returns overall in line with the rest of the world, the Italian Stock Exchange has been decidedly more disappointing. This is by no means the case for the future (although I suspect that equity performance in Italy is well in line with the country's fundamentals – but, I repeat, it is only a depressing suspicion). Also because, on closer inspection, the Italian stock market is not only the FTSE MIB index, dramatically dependent on our battered banking system, but there are other segments, different and interesting, more related to the industrial landscape.
However, the fact remains that, before investing in a PIR, it is necessary to make sure that the management skills of those proposing it are well founded, and that therefore they have credible positive performance prospects. Don't be naive, don't let your mind be clouded by "fiscal libido" and "libido speculandi"...
