Posted July 15, 2022, 7:00 am
A Livret A by 2%. It’s been almost a decade since the main tax-free booklet figure has fallen short of this token level. Proposed on July 14 by the Bank of France and subject to approval by the Ministry of the Economy, this 1-point increase in the Livret A rate is more than symbolic. Its reward is 2% higher than the rate of 10-year OATs, the compass of bond yields, as well as endowment-guaranteed endowment funds.
In this context, is it a good idea to repatriate savings from a Euro fund into your Livret A or LDDS? Remember that the Booklet’s bid on sustainable and solidary development is structurally identical to that of Livret A.
Here are 4 comparison points to consider when making your decision.
1. Net profit
After annual inflation of 5.2% in May, the consumer price index rose by 5.8% in June. In this context, the increase in the Livret A rate does not really change the situation: its real yield, i.e. after deducting inflation, remains negative at -3.8%, taking into account inflation in June.
“The real yield of Livret A has never been so low,” says Vincent Cudkowitz, general manager of bieprévoir.fr and Primaliance. Although its calculation formula takes into account rising prices, “Livret A will always be late in an inflationary environment,” continues Vincent Kudkovic. Unless there are exceptions to the current rule, its rate is revised every 6 months and also takes into account the interbank rate, €STR, which remains negative.
But the situation is worse when it comes to Eurofunds, whose annual profits are reported to investors during the first quarter. As euro funds are invested in very low yield bonds with long maturities, their performance has not yet been affected by the recent sudden rise in interest rates. As a result, with an average return net of management fees of 1.30% for Euro funds in 2021, there is little doubt that their average return net of inflation will be largely negative in 2022.
According to Vincent Kudkovich, this gloomy picture should encourage investors to be more selective in choosing their life insurance and, in particular, the proposed fund in euros. He invites preference for envelopes containing guaranteed funds with more dynamic pockets that lend themselves to, for example, so-called infrastructure projects.
Some funds are posting returns in 2021 that have approached or even exceeded the 2% threshold. As part of legacy contracts, profit bonuses paid to clients who diversify their investment instruments can also allow for a Eurofund yield above 2%. But this type of solution is often reserved for customers with a very high saving capacity and outstanding funds invested.
2. Warranty and safety
In order to invest in a completely safe environment, savers should check the amount of guaranteed capital offered by their euro fund. This is due to the fact that more and more insurers offer a guarantee without a management fee, which in theory could lead to a profit, minus negative fees, if bond yields fall further.
Conversely, Livret A has the double advantage of being free to the saver and guaranteed. His remuneration, without deflation, cannot fall below 0.50% in accordance with current regulations.
Capital guarantee: the intrinsic quality of booklets?
Please note that the capital guarantee does not apply to all products referred to as ‘bankbooks’. “Crypto savings accounts” invested in bitcoin, ethereum or cryptoassets, in an attempt to replicate a common currency such as the euro or dollar, have borrowed this totem name without offering this characteristic usually expected of a savings account.
In the event of bankruptcy of the financial institution that holds your savings accounts, outstanding balances on regulated bank books and life insurance are covered, subject to other conditions. Thus, deposits on Livret A, LDDS and Livret d’épargne populaire are fully guaranteed by the state (the maximum amount of €100,000 exceeds the maximum amount that can be held on these booklets).
As for life insurance, it is the Personal Insurance Guarantee Fund, which compensates in the event of default up to a maximum of €70,000 per depositor and per institution. “Recently, our financial system has survived several crises and emerged strengthened. In my opinion, there is no risk that this guarantee fund will be activated,” reassures Vincent Kudkovich.
But for particularly concerned investors, “one solution is to take out several contracts with different insurers to have a maximum amount of €70,000 for each of them. From the point of view of inheritance, it is even a recommendation, because each insurer and each contract can benefit from their own interests,” insists the general manager of financial investment portals.
On the other hand, “what worries us more is the possibility, introduced by the Sapin Law 2, to block withdrawals from Eurofunds,” he adds. It authorizes the state, by decision of the Supreme Council on Financial Stability, to suspend, delay or limit the buyout or arbitration of life insurance in the event of a “serious and characteristic threat” to the financial system. This lock is renewable for three months, but is limited to six consecutive months.
Is the current period of inflation and rising interest rates a threat of this kind? “If the 10-year OAT is permanently set above 1.50% to 1.75%, life insurance will enter the risk zone,” said Cyril Chartier-Castler, founder of the Good Value for Money website, in the Les Echo columns in late June. Since then, the 10-year rate has climbed above 2%, falling to 1.85% on July 8. The worst-case scenario is not yet in sight.
Except for the application of Sapin’s Law 2, life insurance is a liquid envelope, contrary to the accepted idea that money is locked in for 8 years. However, it usually takes a few days to get a refund. The Insurance Code is also generous to insurers, giving them two months. “In the event of a party’s request to withdraw from the contract, the insurance or capitalization company shall pay him the surrender value of the contract during a period that may not exceed two months,” thus provides its article L132-21. In addition, the insurer must pay late payment penalties indexed to the legal interest rate.
As for Livret A, there is no such friction. To return your savings, you just need to make a transfer to your current account. This is immediate if the final destination account and regulated bank book are opened at the same institution.
“Livret A is a pocket for unexpected expenses. Life insurance has a more legacy purpose, while at the same time offering a certain flexibility when the saver wants to finance an important project, such as the purchase of real estate,” emphasizes Vincent Kudkovic. This means a life insurance advance, which is similar to a loan given by an insurer, the amount of which depends on the outstanding balance of its policy.
4. Taxation and succession
“If an investor is disappointed with his life insurance contract, he should not close it. Having an old contract that has reached the tax deadline, even if it is poorly financed, is an asset in your assets,” also reminds Vincent Kudkovich.
In addition to social security contributions from the Euros collected each year, life insurance proceeds are taxed when the depositor returns all or part of his money. And after 8 years, the interest is taxable after the annual allowance of €4,600 for a single person. Thus, regular withdrawals can be exempted from income tax.
Arbitrage from your own Eurofund on Livret A requires this tax subtlety to be taken into account so that the small extra interest earned is not wiped out from the possible taxation of withdrawals from the Eurofund.
The question of time should also be asked from the point of view of legal succession. Life insurance is a cut-out envelope for passing on your inheritance. Capital paid to a designated beneficiary is exempt from inheritance tax up to €152,500 per beneficiary for payments made before the subscriber reaches the age of 70. It then applies a fee of 20% up to €700,000 and then 31.25% above.
For insurance premiums paid after age 70, the death benefit is subject to inheritance tax at the appropriate rate depending on the relationship between the insured and the beneficiary, but after a general reduction of €30,500 for all beneficiaries and all contracts combined. In this sense, if an investor enters into a contract with the purpose of transferring his savings to his heirs, it is better not to touch him, and even more so if he is already about 70 years old.
In the case of Livret A, after the death of the saver, the amounts held in regulated savings accounts are included in the estate. Depending on the relationship with the beneficiary and the amounts transferred, the heir may be subject to a very high inheritance tax.
Make the right decision
What is undeniable is that in an environment of uncertainty and volatility, the rise in Livret A is good news for investors, who can take advantage of it to temporarily hold onto their savings while finding new investment opportunities.
At 2% pre-tax, the return on Livret A is certainly lower than inflation, but it is higher than most other guaranteed investments, including most euro life insurance funds.
On the other hand, the possible arbitrage of the Eurofund with respect to Livret A should be evaluated in view of the maturity of the tax contract, the age of the depositor and the goal he pursues by opening life insurance.
To improve the performance of your life insurance, Vincent Cudkovic, CEO of bieprévoir.fr and Primaliance, calls for a greater departure from classic Euro funds and investing in units of account (UC), which represent a moderate risk but potentially more profitable. In particular, it offers stone-paper invested units that benefit from potentially higher returns as rents rise.
For the record, and to measure this reward level, the 2% Livret A is the same as the unsecured Bitcoin cryptocurrency booklet Coinhouse launched this week. As a reminder, investing in the cryptocurrency, which is currently in disarray, has historically been presented by its advocates as a more effective way to protect one’s savings against inflation than Livret A.