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Money Times - April 17, 2018

Posted by Jill Kerby on April 17 2018 @ 09:00

WE’RE ALREADY UNHAPPY ABOUT THE WAY OUR CARS ARE TAXED…

 

A recent survey by the tax refund company, asked 3,000 adults what they thought about motor tax.

Not surprisingly, 83% of respondents to Taxback.com said they’d support changing it or abolishing it. I expect the same might happen if 3,000 people (or 300,000) were asked their views about property tax and how it is already being predicted to be one of the most contentious issues next year when it is scheduled to be reset by the government. 

The motor tax survey results broke down this way.

27%    -   Those buying 2007 car should not have to pay up to 3-4 more for road tax than someone that buys a similar brand new €100,000 car
25%    -    I think the tax systems should be overhauled completed – scrap motor tax, increase tax on fuel so those who use their car pay more
17%     -   Motor tax should be based on the cost of the car
16%     -    I think that the current system is perfectly fair
15%      -   The system should be changed as CO2 is no longer the best measure of what’s good for the environment

Taxback’s director Barry Flanagan’s take on these findings focussed on what he thinks is really bothering the majority of the respondent’s – that basing the car tax on the emissions level is unfair.

“The emissions-based motor tax bands might bring cost efficiencies for drivers of [post July 2008] newer cars, but drivers who are just outside the cut-off point, are perhaps understandably frustrated by having to pay up to 3 times more tax than for a model just a year or two older.”
 
He noted that the road tax on a 1.2 Volkswagen Polo diesel/petrol car registered up to 01 July 2008 would cost €330 a year while the tax for the same diesel model registered in 2011, however would fall into motor tax band A2 and cost just €180 annually, a difference of €150. Someone with a 2008 BMW 525D (3.0 diesel) would currently pay €570 in motor tax while someone with the same 2007 registered car would pay €1494 a year in tax.

“It would appear, from these simple examples that, in effect, the current tax system rewards those with higher incomes, as they can afford post-2008 cars, and penalises lower income earners,” said Mr Flanagan.”

“Almost a quarter of respondents said that they believe motor tax should be scrapped completely in favour of tax increases on fuel so those who use their car pay more.

“The merits of this are not altogether difficult to see…a person who commutes by public transport during the week, only uses a car on weekends and clocks just 3,000km per year, pays the exact same amount of motor tax as a person with the same car, but who uses their car seven days a week covering huge distances, racking up 60,000km per year.”

This motor tax survey is worth noting because a far bigger debate – on the way property is taxed – is inevitable.

Should we tax residential properties at all given that they’ve been purchased with after tax income, interest-bearing loans (that do not attract any or much tax relief anymore) and for many who bought pre-2008, huge stamp duty charges?

Is it fair that owners of the same size property, but a very different value, pay the same rate of tax, and average of 0.18% of market value?  Should our homes be taxed on their size or their market value, regardless of their location? 

Should only properties that enjoy significant local services and benefits – mains water and sewerage, proper roads and street lighting, easy access to schools, shops and other amenities – pay property tax?

As the 2019 reset deadline approaches, all of these questions are circling political meetings at local and national level; they’re beginning to be raised by community groups and homeless services and charities, and by the thousands of homeowners who have ‘warehoused’ half their mortgage debt, but could see their tax double on a property that might even still be in negative equity.

Many city houses or apartments that were worth between €300,000 - €350,000 in 2013 have doubled in value since then, report Daft and MyHome. If the LPT is not reduced or revised next year, tax bills will at least double to €1,125 - €1,215.

The stakes are considerably higher on getting a property tax right than they are for getting a motor tax right. The tax issues are also at the heart of the ongoing ‘have and have-not’ property crisis. And it isn’t just the LPT that will be under the microscope, but all the other taxes associated with home ownership, from mortgage interest and capital allowance relief to our generous capital gains tax and inheritance tax rates and the subsidies that people with no property are paying to those who do.

The TAB Guide to Money Pensions & Tax 2018 is available in good bookshops. See www.tab.ie for ebook edition.

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Money Times - April 10, 2018

Posted by Jill Kerby on April 10 2018 @ 09:00

 

TIME TO TAKE SIDES – CASH OR CASHLESS?

 

It has been some time since I opened The Child’s backpack and found a note from the teacher instructing me to send him back to class with €5 or €10 or €20 for to pay for the latest school outing, or for vital class printouts/books/plants/charity collections / sports day prizes…etc.

We’d then go through the same process with the Scouts.

Either the school/Scout envelope included cash notes or a cheque. But those were the days when everyone still used cheques and the banks didn’t look upon them like used tissues to be processed by a machine in their increasingly empty lobbies.

On February 28, the National Payments Plan, an agency set up by the Central Bank of Ireland five years ago to help ease us into electronic payments and a future cashless society, announced a pilot project for schools that would see the end of cash payments like those above.

 “About time too!” I can hear parents saying everywhere. With cheques being rapidly phased out and parents resorting to rummage around the bottom of handbags and down the side of sofas to find the right number of notes, this is a win-win for schools and parents.

But how far should cashless transactions go?  Have we become so enamoured with the idea of not having to use notes and coins anymore that we lose sight of the bigger picture of loss of privacy (hello, Facebook!) and the further encroachment of Big Brother – the state and its agencies – into our lives. And what about how much power this gives Bigger Brother, the private banking

Contactless purchases have become so commonplace – one in every four payments now - that I find myself (unfairly) bristling at retailer who don’t feed my little purchases under €30 (and soon to be €50). People with proper Smart-phones use tap-on debit apps, instantly bypassing their debit card and the need for printed sales receipts.

Interestingly, as the use of cash continues to fall - Banking and Payments Federation Ireland (BPFI) expect that cashless transactions will surpass the use of cash and cheques here in just two years - a country that has been at the forefront of the cashless revolution for the past two decades, Sweden, is starting to have serious reservations about the consequences of being entirely cashless.

Last February, reported The Guardian, its central bank governor, Stefan Ingves warned that soon all payments for goods and services by Swedes will be controlled by their four private banks.  He wants new legislation to secure public (ie government) control over the payments system.

 

“Most citizens would feel uncomfortable to surrender these social functions to private companies,” he is quoted as saying. “It should be obvious that Sweden’s preparedness would be weakened if, in a serious crisis or war, we had not decided in advance how households and companies would pay for fuel, supplies and other necessities.”

 

Anyone whose bank account has been hacked, or their on-line service interrupted – Ulster Bank customers went weeks without proper access to their money a few summers ago – knows first hand how vulnerable they would be it a there was a focussed, technological attack by dedicated criminal, especially if they were sponsored by a hostile government.

A former Swedish police commissioner Björn Eriksson, 72, who leads a group called Cash Rebellion, or Kontantupproret, which had been dismissed as a bunch of old cranks has also warned about living so close to Russia and in having too much faith in the banking system to always do the right thing.

In Ireland we neither trust in the banks or government as much as Swedes do, but like the Swedes we’ve enthusiastically embraced the convenience, simplicity and lower costs associated with contactless payments and on-line spending.

GPs, taxi-drivers, pharmacists, petrol stations and soon, even primary schools (and of course the Revenue) will mainly see the security upside of this remarkable technology.  One of the main arguments that governments use for the use of less and less cash is that it makes illegal transactions less attractive, presuming of course that they, and their tax authorities will always be able to check everyone’s bank account records and spending activity.

Central bankers assure us that cash transactions aren’t going anywhere. (Really?  Their statistics show an exponential fall.)

How would you feel – how would I feel - if some day we could never again move our wages or savings into cash, because you wanted to make a perfectly legal, transaction that would be completely private?  Or you had nowhere to safeguard your money from being monitored, traced and ultimately, accessed by the agencies that control the power switch.

I no more want to exclusively return to paper money and metal coins than I fancy writing this copy on a manual typewriter.

But that doesn’t mean we shouldn’t be having a serious conversation about a cashless society, before it happens. 

The TAB Guide to Money Pensions & Tax 2018 is available in good bookshops. See www.tab.ie for ebook edition.

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Money Times - April 3, 2018

Posted by Jill Kerby on April 03 2018 @ 09:00

NERVOUS ABOUT THE STOCK MARKETS? DO SOMETHING ABOUT IT

 

Anyone who nervously watches their stock portfolio or pension fund value, checking daily unit-prices in the papers or on-line, is probably feeling a little uneasy.

They might not even be sleeping very well, depending on the kinds of stocks and funds they own.

And if they also follow Donald Trump’s tweets, which regularly include the president taking credit for any and all improvement in the US economy and especially about how well the stock market has done since his election, might be doubly concerned.

With the US markets having giving up all growth since last December, Trump  has become remarkably tight-lipped about the trillion dollar losses that have been racked up by American corporations.

For someone like Trump, for whom ratings are everything and big numbers constitute success, the reverse on Wall Street will be ignored until and if the Dow, NasDaq and S+P 500 pick up again.

And that may not happen too soon say some pessimistic commentators, at least not until everyone is clearer about the outcome of his latest tarriff war, his lack of progress on delivering infrastructure promises, the consumer spending slowdown and the worrying growth in the US budget deficit.  Had he simply stepped back and after getting his tax cut bill through and waited for the impact of the repatriation of billions of corporate dollars held offshor, recent headlines might have been more positive.

However, the markets have an uncanny knack of shadowing the political world and as one long deceased British prime minister once put it, that world is determined by “events, dear boy, events”.

If you, like Donald Trump, think every little surge or fall in share prices deserves attention, then you’re going to be on a perpetual roller coaster ride that is going to end in tears for you too.

Instead, you need to be asking, so what if the Dow is down nearly 3.5% since the start of the year?  Or the S&P 500 is down by nearly -2.3%, the FTSE 100 by -8.36% and the EuroStoxx 50, DAX and Nikkei by nearly -8%.

Apple and Facebook share prices – no doubt to the chagrin of their thousands of employees in Ireland who own some – have hit some volatility in the last month in particular (Facebook down by c5%).

But that shouldn’t matter a toss unless you’ve chosen to invest all your savings or especially pension fund money in any single share or market, despite the fact that last year the Dow jumped by 25%, the S&P by 19% and the high tech market, the NasDaq by 28%. (Even with big tech firms taking a hit, the NasDaq was still up just over 1.5%, year-to-date, at time of writing). 

Analysts and commentators are just as split in trying to explain what’s been happening in the Spring of 2018 as they were in the Spring of 2009 or 2010 when some predicted that it would take decades to restore the confidence and wealth that was lost after the 2008 crash of the financial sector.

The worst fears – that it was 1929 all over – never materialised of course. Bankrupt banks were bailed out, central banks forced interest rates down to zero levels to prevent mass corporate, state and individual bankruptcies and the bill was passed onto future generations.

Since then the debt mountains have just got higher, and the new normal is a mixture of low growth, uneven employment and a huge widening of the wealth gap.

And so it will continue so long as the money markets and their players (including pension funds) continue to be favoured with a regime of low interest rates and access to cheap finance from central banks. If market corrections are a natural part of investing, then we shouldn’t be in the least surprised at what has happened this Spring.

If you have a financial plan – and you should – then stick with it (my financial adviser keeps reminding me.) If you’re anxious about the markets…stop listening to the business news or reading the daily market reports.

If your plan is properly comprehensive and includes savings, protection insurance, modest debt, prudent spending and there is an investment strategy in place that you understand and can live with… then you’ve done what you can. 

The markets produce daily price snapshots. No one can accurately predict tomorrow’s price, let alone next months’. But if you do want to be pro-active and say, you belong to an occupational pension fund, and are getting closer to retirement request a meeting with your pension administrator or trustee. 

Don’t just ask about past performance, or how they think the fund will do for the next year. They don’t know.  Instead, get them to explain how widely – or narrowly - your assets are invested. 

And if they’re really doing their job, they’ll also explain the impact of all the fees, charges and commissions you’re paying, no matter how the markets perform.

 

The TAB Guide to Money Pensions & Tax 2018 is available in good bookshops. See www.tab.ie for ebook edition.

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Money Times - March 27, 2018

Posted by Jill Kerby on March 27 2018 @ 09:00

Will You Outlive Your Pension? Let’s Hope Not

 

I once knew an elderly man who said one of the great delights of his old age was that his teeth would outlive him. He was someone who had survived the Great Depression, the Juno Beach landings and was born long before the marvels of modern dentistry (especially in rural Quebec and fluoride-free Montreal).

 I hope my pensions – my private one and the State one - outlive me.

The government’s intention, as laid out in the most recent report on the state of pensions in this country (I’ve lost track of how many there have been over the past 27 years since I’ve been reporting them) is that the broad changes  proposed in the Roadmap for  Pensions Reform 2018-2023 will do just that and make the three pension pillars – the State Pension, Private Pensions and Public Sector Pensions – affordable and sustainable.

Last week this column looked at how a new SSIA-like auto-enrolment pension should increase pension coverage from its current low rate of just under 50% and how by linking PRSI contributions to years worked will provide people with a better idea, at any stage in their working lives, of the kind of total retirement income they can expect.

The PRSI changes are especially critical given the wholly unsatisfactory treatment of workers – most of them women retiring since 2012 - who were forced to or voluntarily gave up employed work for a number of years, only to return to the workforce.

The annual averaging of their PRSI contributions over their lifetime has worked against at least 42,000 people who have been shortchanged. The anomaly was finally recognized and ends officially on March 30. Those affected will be returned to their full pension entitlements by the first quarter of 2019 and can expect a benefit refund for post-2012 loss of income. 

The restoration was necessary if only to ensure that the ‘total contributions approach’ could be included in the just published Roadmap which states that

in the future a minimum number of payments – still undisclosed – will be necessary to qualify for a full State pension and pro-rata pensions will apply for everyone else.

The government will also consider allowing workers “without a full social insurance contribution record increase their retirement provision by choosing to continue making PRSI contributions beyond State pension age and up to the actual date of retirement,” something that already happens in the UK.

This is an important development since the Roadmap also makes it clear that compulsory retirement dates need to go, especially the traditional 65 birthday which then results in workers having to apply for Jobseekers Benefit until they reach age 66 and can claim their State Pension. (Anyone retiring from 2021 will need to be 67 before their state benefits can be claimed so could end up on a Jobseeker’s payment for two years if forced to retire at 65.)

Not only are most Irish workers (outside of heavy industrial or farm sectors) more than capable of working well into their 60s, many people in our post-industrial society only start their full-time working careers in their 30s after years of graduate education, training, internships and contract employment. 

For them, a compulsory retirement in their mid-60s is unlikely to ever produce sufficient combined private/State pension income.

The Roadmap also sets out reforms to public sector pensions, but mostly enshrine changes that have already happened – like the extra Pension Related Deduction that was introduced as a consequence of the post 2008 financial crisis; from January 2019 it will be turned into a permanent Additional Superannuation Contribution.   

Also, public servants hired before April 2004 will have a new compulsory retirement age of 70 (though any 23 year hired by the government in March 2004 is unlikely to be surprised to find that all their friends in the private sector will also be retiring at 70 by 2054.)  

Are these two changes enough to guarantee the sustainability of this pension pillar?  Both the State and Public Service pension systems are woefully underfunded at the moment and future unfunded deficits are already reckoned to be in the hundreds of billions of euro.

The Roadmap claims, at least for public service pensions, that these measures will be enough. But success – the continuation of indexed, service-related pension of up to 50% of career-averaged earnings – will still be entirely dependent on pay-as-you-go general taxation. There is no mention of a new, invested, National Pension Reserve Fund.

The Roadmap for Pensions is an ambitious document and worth reading, (see www.social.ie ) all the more so since it will need a steady stream of taxation to keep funding our State and public sector pensions,  and positive global investment returns to support private sector pensions.

If only for these reasons, if you haven’t made any provision for your retirement yet, the best response of all to this Roadmap…is to hire a good, independent, impartial pension adviser. 

Time may not be on your side.

The TAB Guide to Money Pensions & Tax 2018 is available in good bookshops. See www.tab.ie for ebook edition.

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Money Times - March 20, 2018

Posted by Jill Kerby on March 20 2018 @ 09:04

THE PENSIONS ROADMAP NEEDS MORE SIGNPOSTS

 

The Beast from the East upstaged one of the two big policy announcements the government made at the start of the month – the Pensions Roadmap.

Like the ambitious National Development Plan 2040, The Roadmap for Pensions Reform 2018-2023 includes multiple threads for the reform of private, state and public service pensions, but a much shorter time-frame:  by 2021, all private sector workers – and their employers – who do not already participate in an occupational pension scheme are going to be signed up for an auto-enrolment scheme that will involve contributions from worker, boss and a top up from the government.

The State Pension will also be reformed in tandem with the the introduction of the auto-enrolment one, making it more fair, transparent and sustainable, claims the government.

With a public consultation process about to begin, The Roadmap is “ambitious but achievable”, said Mairead O’Mahony, of Mercer consultants. It is also very necessary given that fewer than half of private sector workers are saving for retirement and Mercer research shows that  “70%...expect to live past 80, yet only 24% feel they will be able to afford to live comfortably for that length of time.”

O’Mahoney especially welcomed how the PRSI funded state pension is to be redesigned, with the number of lifetime contributions reflecting the final income (currently a maximum €12,663 or c34% of the average industrial wage).This simpler, more transparent ‘Total Contributions’ approach will allow workers to easily calculate what their combined final state and private pension income will be when they retire.  It’s also been suggested that workers who defer taking their state pension at age 66 (or 68 by 2028) will enjoy a higher income when they do finally decide to take it.

What the Roadmap hasn’t definitively determined is exactly how much worker, employer and state will have to pay into the new scheme, nor how tax relief will work. Government is understood to be considering a flat-rate tax relief of 30%, halfway between the current standard 20% people earning under €34,800 now get on their pension contributions and the marginal 40% rate relief that people earning over that amount receive.

Getting the tax incentive right will be important: in Ireland we don’t tax income diverted into a pension or any growth in the fund. The tax is paid when the fund (less a tax free amount) is turned into retirement income. (In other countries, like Australia it is the reverse and the pension income is entirely tax free.)

Will higher earners balk at being signed up to a pension that not only taxes a portion of the savings they contribute at 40%, but also taxes – at 40% - pension income that exceeds the lower standard income limit? The current system avoids this kind of double taxation by not taxing contributions, but it is extra generous if the pensioner’s total income ends up only attracting a 20% tax rate.

Pension advisers worry about another anomaly: what happens to people earning more than €34,800 who are self-employed, company directors with private pensions or have a PRSA – a personal retirement savings account - because their employer doesn’t operate an occupational scheme?  Will the 40% tax relief they currently get on their pension contributions be reduced to 30%?

The other concern about the Roadmap’s proposed new private pension – aside from the reluctance of employers to have to pay into it (at the moment no employer is compelled to provide any retirement provision for their workers) – is how the new auto-enrolment funds will be administered and invested. Will workers have a choice of investment provider or fund, or will there be a ‘default’ strategy? Part of the reluctance of many people to take out a pension, whether they are employed by a company or work for themselves, is the element of chance involved in the putting money into investment markets, and the notoriously high and the still opaque charges that too many investment firms and their agents apply to Defined Contribution pension plans.

This question of safeguards, not just to guarantee the honest and efficient administration of the money but to actually provide a positive return after decades of saving – is going to have to be addressed.

What workers want are Defined Benefit pensions – a pension that reflects the worker’s final income and years of service. But these are few and far between outside a select number of private and semi-state companies and the civil service, the latter whose indexed, DB pensions are paid from direct taxation.

But without those DB safeguards, the auto-enrolment pension being proposed in this Roadmap is going to a hard sell to many people who may have little spare income and have other saving priorities, like buying a home.

Next week: how the Pensions Roadmap proposes to change the State old age pension and public service pensions.

The TAB Guide to Money Pensions & Tax 2018 is available in good bookshops. See www.tab.ie for ebook edition.

 

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Money Times - March 13, 2018

Posted by Jill Kerby on March 13 2018 @ 09:00

FAMILY HEALTH INSURANCE PLANS BECOME MORE AFFORDABLE

 

The first quarter of any new year is the busiest for health insurance renewals with about half of the entire c2.2 million members of the three private healthcare companies deciding whether to keep their existing plan, and as so often happens, pay the inevitable increased premium.

Not so this year.

According to health insurance adviser Dermot Goode of TotalHealthCover.ie the three insurers, VHI, LayaHeath and IrishLifeHealth have begun reversing the cost of premiums on a significant number of their plans, a process that finally recognises the financial health of their companies – and from April, a reduction in Health Insurance the nation.

For VHI, the state-owned insurer, dropping the cost of plans has been justified by the fact that they are in profit and have sufficient reserves in place (something that was not the case for many years). Like many publicly owned companies (owned in this case by the people of Ireland) it is now in a position to properly reward its shareholder/customers.

The ongoing difficulties in the management of the public health service – long waiting lists for diagnostic and treatment services, a shortage of hospital beds, poor access to timely out-patient treatments continues. 

For many parents, who may now have the extra money to add their children to their own policies it is access to out-patient services that are often the most important: being able to afford to bring their children (over the age of 6) to the GP or a specialist quickly; securing tests when worrying symptoms appear,  avoiding multiple doses of antibiotics while waiting to see for example, if a safe, effective tonsilectomy operation will ‘cure’ their child.

With all three insurers having announced significant price reductions, I asked Dermot Goode to list his top family plans. You don’t have to have your children on the same plan – a different plan might be apppropriate, but the family ones will often include added discounts.

 

VHI Healthcare

“VHI reduced most of their plans by 5%-7% from March 1,” explained Dermot. “They are also continuing with their 50% discounted offer for child cover on plans such as One Plan Family (€149) and Parent & Kids Excess (€155).  We prefer the latter plan as the excess is only €75 per private hospital stay.

“The One Plan 250 scheme from VHI has now been reduced from €916 to €855 per adult and this offers reasonably good hospital cover with the first two claims subject to a €250 excess (€150 for day-case).  This plan has shortfalls on certain orthopaedic and ophthalmic procedures when carried out in private hospitals which needs to be noted.

“A family of two adults on One Plan 250 and the kids on Parent & Kids Excess will cost €2,108 for the year.”

 

Laya Healthcare

“Laya Healthcare offer free cover for the second and subsequent child under 18 on their Essential Health 300 and Essential Connect Family schemes,” said Dermot explained, adding that “on the latter plan, you pay €239 for the first child and the remaining children are insured free of charge.

“For young adults thinking of joining, the Essential Health 300 offers good value at €895.  This plans covers all public and private hospitals with a €300 excess payable on the first two admissions per person.  This excess reduces to €125 for each day-case procedure in private hospitals.”

A family of two adults and two children, “will cost €2,025 for the year on the Essential Health 300 scheme, but I understand that Laya will be replacing this deal with a better offering from April 1 in that they will be giving free cover for the second and subsequent child on seven different plans with the best of them being the Flex 125 Choice.”

 

Irish Life Health

“Good news from Irish Life Health is that they have just announced that they will be reducing the cost of many of their public hospital (level 1) schemes from April 1 in line with the health insurance levy reductions,” Dermot told us.  “The company is also still offering discounted rates for children under 18 on their Select Plus (€180) and Nurture Plans (€179).  

“It has also launched a new range of Benefit Plans with Benefit 2 – well priced at €875 per adult – covers most public and private hospitals with a €300 excess per private hospital stay, reducing to €150 for day-case procedures.”  However, this plan, he added also has some orthopaedic and cardiac procedure shortfalls at  private hospitals. A family of four on the Nurture plan will pay €2,108.

Finally, he listed his recommended ‘Corporate’ Adult plans:

VHI Company Plan Plus Level 1.3 at €1,128 per adult (includes day-to-day);

Laya Simply Connect at €1,180 per adult (includes day-to-day) and

Irish Life Health 4D Health at €1,045 per adult (day-to-day cover not included)

 

The TAB Guide to Money Pensions & Tax 2018 is available in good bookshops. See www.tab.ie for ebook edition.

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Money Times - March 6, 2018

Posted by Jill Kerby on March 06 2018 @ 09:00

THE MORTGAGE ARREARS CRISIS ISN’T OVER…BUT THE CHAOS IS COMING TO AN END

 

A decade ago I attended a conference about personal insolvency hosted by the management and accountancy consultants Grant Thornton, who also happened to be one of the biggest personal insolvency practitioners on these islands.

The conference pre-dated the new insolvency and bankruptcy laws that were being planned by the government but it was clear that the main causes of the surge in personal insolvency and bankruptcy cases was the collapse of property prices and a surge in unemployment. The best solution then came from a Norwegian speaker, recalling their own property crash in the early 1990s: deal with the arrears quickly, he said. (They set new mortgage values for such cases at 100% plus 10% of the new market value. Insolvency regulations allowed people with overwhelming debts a quick, fresh start.)

Fast forward to 2018 and the disastrous Celtic Tiger property bubble that took a decade to inflate (from 1997) is still floundering pathetically, in full view, a decade later. 

Instead of coming up with a humane, realistic solution for distressed home owners in tandem with the bank rescue (controversial as it was), mortgage arrears were allowed to build up, empty or abandoned homes were left idle (and still are) and a proper,comprehensive strategy to deal both with strategic mortgage defaulters and those who were always going to struggle with their excessive debt, was never undertaken. 

Instead, too many ‘solutions’ were adopted in a piecemeal fashion: to this day the terrible post-Tiger debt creature keeps getting little pumps of oxygen demanded by politicians, housing and homeless charities, the media. Judges side with homeowners who show any initiative to try repay their property debt.

Last week’s stay of execution on the sale and disposal of another 20,000 of the so-called ‘non-performing’ mortgage loans owned by PTSB and Ulster Bank is the latest iteration of this decade-long debacle.

Will the vulture funds that want to buy the billions of euro worth of cut-rate mortgages have to become regulated bodies like the middle-men credit service agents they employ? At time of writing the Finance Minister has asked the Central Bank to ‘review’ the current mortgage arrears regulations to see if this is entirely necessary, as the opposition parties and debt charities insist.

What does appear to be happening is that anyone shown to have declined to engage with Ulster Bank or PTSB and have paid nothing against their mortgages (in some cases for up to seven years) may find they have run out of road,  With no deal on the record, and no appearances before a judge to plead their case for more time, such people will finally hand back the keys.

According to the banks, some of the owners have simply been unreachable, having moved out, emigrated or simply disappeared. Others, who are still living in the property will, if they qualify, have to seek to be re-housed by their local authority.

But other homeowners, who have forbearance arrangements in place – like reduced payments or interest only loans or even split mortgages – are also included with the defaulters because technically, their loans are also ‘non-performing’ compared to their original loan agreement.

The risk, say those opposing the sale of these loans to the unregulated vulture investors, is that replacement forbearance deals (if the one made with PTSB or Ulster Bank runs out, say after a 5 year term) may not be forthcoming and the newowner may set new repayment terms that can’t be met.

Forcing these vultures to come under the regulation of the CB, warn the banks, may scare them off or produce a worse sale price which may weaken the banks’ balance sheet.

Either way, this is one of those ‘rock and an even harder place’ for customers with so called, non-performing loans they are now diligently paying. Unless they have a cast iron contract that states that their forbearance measure is permanent and can never be altered, they may have to live with a certain amount of uncertainty, regulation or no regulation, and regardless of who owns their loan.

For those PTSB and Ulster Bank customers who haven’t engaged with the lender, and who simply don’t have the money to make any reasonable payment, they need to contact the Insolvency Service of Ireland. (www.isi.ie). There is no cost now for their services or for engaging a Personal Insolvency Practitioner (PIP).

Mortgage holders with any bank or lender (even a vulture investor) who finds themselves unable to pay their mortgage and/or other debts, should contact their nearest MABS office which runs Abhaile, the highly successful mortgage arrears service which provides a range of free support services and has kept many people and families in their homes.

The mortgage crisis isn’t over, far from it. But the chaotic phase appears to be.  And for that, I suppose we should be grateful.

The TAB Guide to Money Pensions & Tax 2017 is available in good bookshops. See www.tab.ie for ebook edition.

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Money Times - February 27, 2018

Posted by Jill Kerby on February 27 2018 @ 09:00

RABO DIRECT PULLS OUT LEAVING 90,000 SAVERS IN THE LURCH

 

Something is very, very wrong in the banking system when you deposit €10,000 with a lending institution (a bank, building society, credit union) for 18 months and they repay you – at the most – a 0.65% return. (Five years ago you could get a 3% gross annual return, 10 years ago, as much as 4.5%.)

Once the government takes its pound of flesh, aka DIRT tax of 37%, you are left with net interest of c€41 from that €65. Meanwhile, the bank could be charging someone who borrows your €10,000 up to 10% compound interest.

Well, that ‘Something’ just got worse.

On May 16, RaboDirect, the Dutch A+ rated bank and still considered to be one of the safest banks in Europe, will shut its doors - and vaults – for good to its remaining 90,000 retail customers who collectively have €3 billion under deposit.

The Dutch have been winding down their activities here for the last few years – I used to have a current account with them -  and now Rabo’s depositors are being turned away.  But where will they go?

With such a limited field of deposit takers, anyone with a large sum of cash that they especially need for boosting their income, should be checking all their options, or resign themselves to guaranteed losses once DIRT and inflation is factored in. (Over 65s whose gross income is less than €18,000 a year or €36,000 for a couple are exempt from DIRT.)

If you are happy to make your own arrangements, then the least you should do is consult a good on-line comparison site like www.bonkers.ie which provides up-to-date tables of deposit accounts and breaks down those choices according to the type of account you want – easy access (ie, a demand account), a notice account (in which you must give say, 30 days or 60 days notice for withdrawals) or a term deposit account of, say, one to five years.

You can further narrow the result according to whether you have a lump sum to deposit or are a regular saver. Bonkers even gives you the banks’ credit rating, if that is important to you – and it should be. The only A, let alone A+ rated bank in Ireland has, up to now, been RaboDirect;  all the others are B-rated, ranging from BBB for Ulster Bank, BBB- for KBC Bank and Bank of Ireland, BB+ for AIB and BB- , the lowest rating, for PTSB. 

Credit ratings agencies like Standard & Poor’s, Moody’s and Fitch were all discredited for their role in the 2008 financial meltdown, so even these ratings need to be taken with a pinch of salt. However, in the next banking crisis, depositors will be expected, like bank shareholders, taxpayers and bondholders to contribute to any “bail-in” to save the banks. They remain “too big to fail”, no matter the cost.

The €100,000 bank deposit guarantee still applies, and no one should leave more than that amount on deposit in any institution, but as the Cypriots, and later, Greek depositors discovered, when a catastrophic banking failure occurs, all the conventional practices – like ‘easy access’ to your savings and capital bank guarantees - are only worth what the central bankers say they are worth.

Having the deposit rate facts before you – via up-to-date tables – is important and will help you squeeze every available cent of interest out of your savings. But until the interest rate cycle turns in the eurozone even this effort will be very limited.

Interest rates are finally turning upward in the United States, Canada, Australia and the UK because the cost of living and wage inflation is beginning to tip over the 2% mark – that so-called perfect, Goldilocks figure to which central bankers (easily the most discredited economic forecasters after credit rating agency analysts) are so devoted. Raising interest rates, they claim, will stop these economies from overheating, stalling and falling back into recession.

Really?  Many commentators think rising interest rates are more like to cause another downturn (as debtors find themselves unable to meet higher repayments.)

Instead of trusting these Masters of the Universe (again) to protect your financial interests you need to act in your own interests.

To depend on a single asset – like cash – for long-term financial security is as much of a mistake as putting your faith in the stock market or becoming an amateur property investor or landlord.

If you are worried about your shrinking deposit options, engage an independent financial adviser to help you improve your savings yield, reduce any deposit or bank security risk, explore safe investments with risk levels you can live with.

A good adviser even ensure that you are not paying unnecessary DIRT (or income tax) and that you have claimed all your tax deductions and refunds. And don’t be surprised it they recommend the tax-free Rent-a-Room Scheme as the single, least risky income booster of all.

The TAB Guide to Money Pensions & Tax 2017 is available in good bookshops. See www.tab.ie for ebook edition.

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Money Times - February 20, 2018

Posted by Jill Kerby on February 20 2018 @ 09:00

CAN MERGING THE USC WITH PRSI SAVE THE STATE PENSION?

A government working body is considering merging the much-detested USC with the pay related social insurance that workers and employers pay.  Do you know how much USC and PRSI you pay?  You should.

At the heart of this consideration is the urgent need to reform the multi-pillared pension system in this country, each part of which – state pensions, private pensions and public sector pensions, is unsatisfactory and economically unsustainable.

With private pension membership falling every year – it stands at only c40% of adult workers, while it remains at nearly 100% in the civil and public sector – the government claims to be committed to the idea of introducing an auto-enrolment private pension scheme by 2021.

If it is modelled on similar schemes like Nest in the UK, it will involve signing everyone up in companies that don’t already have an occupational pension scheme in place. Opting out will be permitted, but only about 10% of workers ever do so. In the UK workers and employers also continue to pay social insurance contributions and collect the state old age pension.  

Contributions to auto-enrolment schemes – in the UK and other countries where similar ones operate, like Australian (‘the Super’) and New Zealand (‘KiwiSaver’)  - start off very low with a tiny percentage of salary paid in by the workers, employers and state. Savings rates have increased over the years and so far have provided their citizens a decent retirement pot.

Here, plans are still at embryonic stages and no one knows what kind of soft-mandatory pension scheme will emerge or how much it will cost.  Recently however, the Minister for Finance, responding to a suggestion that the new pension might incorporate the existing contributory state pension (now worth  €243.30 a week or €12,636 per annum) said he was committed to keeping the old age pension a separate entity.

We’ll see.

The government does know it has to boost the value of the Social Insurance Fund (SIF), worth just over €9.2 billion a year, out of which more than half is drawn down to pay for the state old age pension. It is on course to have a massive annual funding shortfall of c€21.2 billion by 2066, just as today’s youngest workers will retire.

The latest idea is that the USC, the much detested universal social charge that was introduced on January 1, 2011 (and replaced an emergency income tax levy from January 2009) will be merged with PRSI, increasing the SIF by c€4 billion.

The fund currently pays – just about – for the weekly pensions that retirees collect, as well as unemployment benefits, child benefit, family income support payments, parental leave benefits, disability payments, etc .

USC is not a single rate, but five different rates, 0.5%, 2%, 4.75%, 8% and 11%, paid on escalating bands of income. The 11% rate only applies to income over €100,000 earned only by the self-employed.

No one who earns less than €13,000 a year pays USC. Pensioners over the age of 70 whose aggregate earnings are under €60,000 pay at reduced rates of 2% ad 4% as does any full medical card holder, aged under 70 with income of less than €60,000. (Pensioners do not pay PRSI.)

A worker on a €50,000 income pays about 3.3% USC or €1,662 a year.  Unlike the c4% of €2,000 worth of PRSI contributions that they also pay, USC is only paid by workers and not by employers: they pay PRSI of c10.85% of their employee’s earnings into the Social Insurance Fund.

USC was supposed to be abolished when the economy ‘recovered’, but that was always unlikely. Inevitably, the government has found a new purpose for the tax – to underpin the shaky Social Insurance Fund and especially the surge cost of old age pension claims.

Many pension experts believe that an ideal pension income of 2/3rds of a person’s final salary – whether from one or multiple sources - needs to be an annual salary contribution of at least 20% (or €10,000 a year if you earn €50k.) Can the combination of PRSI, USC and any soft-mandatory private pension contributions meet that benchmark?

This debate is finally – I hope – getting underway. It won’t go away, no matter how badly politicians, employers and workers (who always have other spending priorities) want it to.

Adding another €4 billion of funding will certainly more than meet the state pension cost at today’s values for many years into the future, but not out to 2066, especially not at the rate our population is ageing and living longer.

This PRSI/USC merger is essential, but it won’t be enough to ensure a sustainable state pension.

Anyone interested in exploring just how precarious the state pension and Social Insurance Fund is – especially if you haven’t started a private pension yet - can download an excellent review done by KPMG for the Department of Social Protection that was published last September. http://www.welfare.ie/en/downloads/actrev311215.pdf 

The 2018 TAB Guide to Money Pensions & Tax is on sale in all good bookshops and on-line. See www.tab.ie for ebook edition.

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Money Times - February 13, 2018

Posted by Jill Kerby on February 13 2018 @ 09:00

PART TWO: MORE CAPITAL, MORE INCOME NEEDED TO GET ON THAT LADDER.

 

In this column last week I highlighted a number of the factors that are working against first time home ownership - from the mortgage debt legacy and tighter bank lending for both developers and buyers, to the negative impact of politically motivated tax and planning policies, and general incompetence at all levels of government

We seem to be particularly bad in Ireland at devising sensible, workable policy and administrative solutions to social problems like the shortage of affordable housing. But first time buyers in other places are also finding it hard to afford their own home, not just because of the lingering impact on the great financial crisis on the availability of mortgage loans, but because of the wider impact of globalisation on their working experience and their future incomes.

Very simply, the job security, affordable housing, pensionable employment and huge stock market returns that today’s 65-70 year olds have benefitted from is not the reality for today’s younger workers. This generation is also now competing on a global front for jobs at rates of pay that are slowly but surely converging with what the equivalent worker is earning in developing economies.

Unfortunately, we have a big jump on these countries when if comes to debt accumulation. We’re all hopelessly addicted to cheap credit in the West, the growth of which outruns productivity or surplus savings. Ten years after the great financial crisis, the steady flow of credit and debt is all that keeps the entire system from unravelling.

If you don’t think so, consider last week’s global stock market ‘correction’. The US Fed’s decision to finally raising its base interest rate resulted in both the price of stocks and treasury bonds to drop dramatically (and bond yields to soar). What it means is that debt becomes more expensive to service (including mortgages) and credit (which has been flowing into the stock markets for several years) tightens up.

Is it any wonder that the post-2000 generation, with their historic levels of student debt (especially in the US and UK), insecure employment contracts and snail-like wage increases are floundering financially?

The real solution of course is the end to the vast wages and earnings gulf between the asset holders -  especially the giant multinationals and financial institutions at the top of the earnings chain – and the vast majority below.

So what can be done for our struggling millennials? More overtime? A second job? A couple of years working in tax-free Abu Dhabi or Dubai?  Should we be encouraging even more immigration to richer countries with more amenable wages, living conditions and state subsidies (Anyone for Canada? Norway?)

Family dig-outs – the Taoiseach’s other solution - still happen in middle Ireland, but financial advisers warn about the risk of using pension lump sums or retirement incomes to help out their children.

“Someone in their 60s or 70s needs to think very carefully about messing with their lump sums, or with their ARFs [approved retirement, post-pension investment funds from which income growth and capital can be taken.] “ARF draw-downs are taxable and you may need this money far more than your kids some day.”

Selling other assets – shares, investment funds, land or a second property - will release cash, but may also trigger unwelcome capital gains tax or gift/inheritance liabilities. Parents or grandparents who can afford to gift or even lend cash earning nil to low deposit interest “would be far better to do this than to draw down higher yielding and taxable investments or ARFs,” said the adviser.

“There are other ways a parent can raise money to help their child or children get on the property ladder. If their children are gone – the parent could rent out spare rooms and earn up to €14,000 tax free a year which they could then gift to their offspring. It might be a better solution than having the adult child move back in so they can save on rent.”

Finally, the question has to be asked: is the nuclear family model outmoded in this post- modern world? Should we be revisiting a collective family arrangement that allows uncertain, casual and contracted incomes stretch further, even beyond one or two generations?

The last financial crisis fuelled the idea of building financial ‘arks’ by the older generation of asset owners of pension funds, paid off properties, stock portfolios and bank cash.

A variation on the ‘family office’ trusts that wealthy families operate, the Ark can be a more modest operations in which grandparents, parents, siblings and even godparents can combine surplus income or cash which can then be lent to the next generation of to help finance education fees, house down-payments and even business through a seed capital for businesses.

And in a financial crisis, the Ark might even keep more than just the struggling house hunter afloat.

The 2018 TAB Guide to Money Pensions & Tax is on sale in all good bookshops and on-line. See www.tab.ie for ebook edition.

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