Long-term investment product (LTIP) to motivate saving for old age

What is DIP and why it was created

Since 2024, a new concept has appeared in the Czech legal system – the long-term investment product (LTIP). It is a state-supported instrument whose main objective is to motivate citizens to save and invest for their retirement in the long term.

The DIP allows investment in various financial instruments, with the main advantage being tax benefits. If someone invests in this way, he or she can deduct part of the invested funds from the tax base and thus reduce his or her tax liability. However, the condition is that strict rules must be met, especially regarding the length of the investment.

The DIP is enshrined in the Income Tax Act and related regulations. The product can only be offered by regulated entities, i.e. banks, securities dealers, investment companies or insurance companies that meet the legal conditions.

The DIP is supervised by the Czech National Bank, which has the power to control the provider. Clients can turn to a financial arbitrator in case of a dispute. The DIP provider must always have clear contracts and tell the client clearly what the costs and risks of the product will be.

What products can be included in the DIP

A long-term investment product is not just one specific account, but rather a framework within which an investor can choose from a range of financial instruments. The advantage is that everyone can adjust the composition of the portfolio according to their strategy, some will prefer conservative savings, others dynamic investments.

In particular, the following products can be included in the DIP:

• Shares and mutual funds – allow long-term growth of funds, the investor participates in the profits of companies or the development of stock market indices. In addition, mutual funds provide broader diversification and professional management.
• Bonds – both government and corporate bonds can be used if they meet the legal requirements. Government bonds tend to be considered safer, while corporate bonds can offer higher returns but also higher risk.
• Savings accounts and time deposits – these are suitable for the conservative part of the portfolio. They provide stability and predictability, although the returns tend to be lower than for equities.
• Exchange Traded Funds (ETFs) traded on regulated markets – this is a popular modern instrument that makes it easy to invest in entire indices, sectors or commodities. Due to regulation and broad diversification, they are considered a relatively safe investment vehicle within a DIP.

On the other hand, the law clearly states that risky or unregulated products are excluded from DIPs. This includes, for example, some corporate bonds of smaller companies without sufficient supervision or complex derivatives designed mainly for speculation. These instruments could jeopardise the core objective of the DIP, which is long-term and stable investment for old age.

This combination allows people to compose their own investment mix through the DIP, so that they can, for example, have part of their funds safely stored and part invested in more dynamic instruments that have the potential for higher returns.

What are the tax advantages of the DIP?

The biggest attraction of a long-term investment product is undoubtedly the tax breaks offered by the state as an incentive to save and invest for the long term. However, these benefits are not unlimited and are bound by clear rules.

Tax deductions on deposits

Each taxpayer can deduct up to CZK 48,000 per year from the personal income tax base. However, this limit applies collectively to all tax-advantaged products, i.e. long-term investment products, supplementary pension savings, life insurance and long-term care insurance. This means that if you are already taking a deduction for pension savings or life insurance, you need to add up all your contributions to fit into the overall limit.

Exemption from income tax

Another big advantage is that investment income from a DIP (for example, dividends, interest or gains from the sale of securities) is tax-free if the legal conditions are met. This means you can achieve a higher net return than if you invest outside the DIP.

Employer contributions

Your employer has the option of contributing to an employee’s DIP in a similar way to pension savings. These contributions are exempt from income tax for the employee and they do not pay health and social security contributions. For companies, this is an interesting employee benefit that is a tax deductible expense.

However, the state only provides these benefits if the investor meets the time test:

• the funds must remain in the DIP for at least 10 years after the first deposit,
• and can only be withdrawn after the age of 60.

If you did not meet these conditions and withdrew the money earlier, you would have to pay back all the tax benefits, including taxation on the proceeds. There are exceptions only in the event of disability, death or transfer between DIP providers.

How it works in practice:

An employee with an income of £40,000 a month puts £3,000 a month into a DIP. In a year, he deducts CZK 36,000 from his tax base, which reduces his income tax by CZK 5,400.

A self-employed person can save CZK 4,000 per month. With an annual deduction of CZK 48,000, he saves CZK 7,200 in tax.

However, only those who actually pay income tax will benefit. Thus, the DIP may not be attractive for low-income groups.

DIP has its risks and disadvantages

A long-term investment product can be an interesting tool for saving for old age, but it is certainly not without risks. Those who enter it should be well aware of the benefits as well as the potential pitfalls.

Legislative uncertainty

The rules for the DIP are set by law and, like any legislation, can be changed in the future. While the state has introduced the product to encourage long-term savings, the tax relief can be adjusted at any time – either the amount or the eligibility itself. Similarly, the conditions for choosing or selecting investment vehicles may tighten. As an investor, you have to take into account that what looks good today may not necessarily be the case in ten or twenty years’ time.

Investment risk

Unlike a traditional savings account, the funds in a DIP are not guaranteed. If you choose to invest in stocks or mutual funds, for example, you must expect market fluctuations. The value of an investment can go up or down, even over the long term. In an extreme case, you may lose part of your investment. This is the price you pay for the opportunity to earn a higher return. The DIP is therefore particularly suitable for those who have a longer time horizon and are willing to accept fluctuations in the value of the portfolio.

Limited liquidity of funds

One of the main disadvantages of a DIP is the limited access to money. Deposits must remain in the product for a minimum of 10 years and also until age 60. This means that funds are not available in the event of an emergency – for example, a job loss, a major life event or an investment opportunity outside the DIP. Should you wish to withdraw the money earlier, you will face back taxation on all benefits and often additional penalties or charges from the provider. A DIP is therefore not suitable as a provision for unexpected expenses.

Fees and costs

Each DIP provider has its own fee schedule. These may include fees for account maintenance, for buying and selling securities or for managing the investment fund. For long-term investing, these costs can significantly affect the final return. It is therefore important to compare the offers of each institution and not be tempted by tax advantages alone. Even a small difference in fees can represent a loss of tens or hundreds of thousands of crowns over decades.

Summary

The Long-Term Investment Product (LTIP) is a new government-backed instrument designed to encourage people to save and invest regularly for old age. It allows money to be invested in a variety of financial instruments, from shares and mutual funds to bonds, savings accounts or ETFs, with the main benefit being tax advantages. Investors can deduct up to CZK 48,000 a year from their tax base (cumulatively with pension savings and life insurance), investment returns are tax-free if the conditions are met and the employer can contribute in the form of a tax-advantaged benefit. To retain the tax benefits, the funds must be retained in the DIP for at least 10 years and withdrawn only after age 60. The product can only be offered by regulated institutions under the supervision of the CNB and the client must be clearly informed of all costs and risks. However, a DIP is not without its drawbacks – it carries the investment risk of portfolio value fluctuations, limited liquidity due to the long tie-up period, the possibility of changes in legislation in the future, and various fees that can significantly affect the final return.