Jill Kerby

PENSIONER’S BUDGET 2019 EXTRAS ALL ADD UP

 “Big deal. An extra fiver. And we have to wait six months for it,” the pensioner replied when asked by the radio reporter what he thought of Budget 2019 and his weekly pension going up to €248.30 next March.

It’s the same response from many after last year’s budget and 2017 and in 2016 when the seven year pension pay freeze finally ended and pensioners were awarded just a puny €3 extra a week.

Last week’s €5 hike is certainly a far cry from the pre-crash increases:  in 2007 pensioner’s pay rose by €16, in 2008 by €14 a week. The €7 increase in 2009 was met with derision, but it was paid just before the IMF and their other Troika partners arrived. The wonder is that they didn’t succeed in actually having the €230.30 weekly payment cut.  (Greek pension income continues to be plundered.)

Some other PRSI related pensioner benefits were partly clawed back in the post crash years, including the weekly winter fuel allowance, the telephone allowance for pensioners living alone and the bereavement allowance, which was worth €850 (it was only abolished after 2013.) The Christmas bonus was dropped in 2009 and only partly restored in 2015.  Meanwhile, pensioners on medical cards had to pay towards their prescriptions, even if the contribution was capped at €20 a month.

The seven year income freeze certainly took its toll for many as the cost of living rose sharply and austerity bit. Alcohol, tobacco were hit hard and the cost of healthcare, transport and energy rose. Meanwhile, deposit interest rates, on which may pensioner/savers have historically depended upon to boost low fixed their incomes virtually collapsed. 

For all the hardship imposed on the least well off pensioners, a number of valuable benefits remained, such as the free bus/train travel pass for all pensioners and designated companions (over 900,000 people, including those with disabilities enjoy this pass) and the Household Benefits Package for the over 70s and for many age 66-70 who live alone was mostly preserved.  

The package still included the free TV licence (now worth €160 a year) the monthly gas or electricity allowances worth €420 a year and the €2.50 a week phone allowance (€130) which was restored this summer for those pensioners living alone.

It has been estimated that the tax-free Household Package, free travel pass and Christmas Bonus (which will be fully restored in 2019) increase the value of the state pension (which will amount to €12,911.60 in the full year from March 2019) by as much as an additional 15% or nearly another €2,000.

Meanwhile, all over-70s – single or couples – are entitled in 2018 to a free GP card and can qualify for a full medical card with incomes of up to between €26,000 and €36,400 for a single person and between  €46,800 and €72,800 for a couple. No other assets are subject to means testing.

Ten GP visits a year alone can typically account for a €500 outlay; add five private consultant visits and the annual bill can easily amount to €1,000.

So in light of all these existing benefits, how did pensioners really fare in Budget 2019?

First, the extra €5 a week is worth an additional €260 over 12 months. The 2019 increase for a qualified dependent adult is €4.50 a week or €234 extra for the year.  

The full restoration of the Christmas Bonus this early December means that a qualifying single pensioner with a contributory pension will collect €486.60 or  €973.20 for a couple who each have the state pension. A pensioner with a qualified adult over 66 - a spouse or partner who does not have their own pension - will receive a double bonus payment this December of €922.60.

Assuming it is fully paid out again next year the full bonus week payment in December 2019 will be €492.90 (€985.80 for a couple).

For pensioners age 66-70, who are not automatically entitled to a GP card, dropping the income requirement by €25 a week or €1,300 annually could save them (if they qualify under the new income assessment) €500 a year, for example if they visit their GP ten times a year.

Prescription charges have been reduced by 50 cent per item. The maximum €20 a month charge still applies but this cut means that a pensioner with three prescriptions a week (or 12 a month) will see an annual savings of €84. The €10 reduction in the monthly Drugs Payment Scheme contribution (from a maximum of €134 to €124) means that pensioner households will save €120 a year.

All of these Budget changes add up.  State pension incomes may not have kept up with the rising cost of living and tax and levy increases since 2008, but small incremental improvements have been made each year since 2016.

Long may they last.

Letters to jill@jillkerby.ie  The TAB Guide to Money Pensions & Tax 2018 is available in all good bookstores. See www.tab.ie for ebook edition.) 

IT MAY BE MODEST BUT DON’T WASTE YOUR BUDGET WINDFALL

It would appear that the ‘squeezed middle’ may be a little better off in 2019, due to the Finance Minister’s modest adjustment to USC, income tax and DIRT reduction or the small changes to welfare payments. On balance, Budget 2019 is going to see most workers better, not worse off.

What you want to avoid is the temptation to say, ‘ah sure, it’s such a puny amount that it hardly makes any difference’ and just let your small windfall get swallowed up in everyday spending.  If that’s your first inclination you might be the idea candidate for a professional personal finance review – more on that later.

If you’re already someone who is keen to utilise any extra cashflow in the most positive way, then why not think of your Budget windfall (or tax refund for all the extra cash taken from at least five of the post 2008 budgets) as another opportunity to build on those positive personal finance habits. Here are some practical priorities to consider:

-       If you have any expensive debt – like a 20% credit card balance and you are not already paying it off every month but are only paying the minimum required payment (usually 5%), here’s a chance to whittle away faster at that debt. The Competition and Consumer Protection Commission (ccpc.ie) has a useful debt calculator that will show you just how much interest you can save by paying off your credit card sooner than later.

-       Ditto for accelerating a mortgage payment.  We pay at least twice the rate of mortgage interest than other EU borrowers. Putting another few hundred euro a year against the outstanding capital – ideally on a weekly, let alone monthly basis if your lender will permit more frequent payments – will also save a significant amount of future interest and reduce the term of your loan. Again, check how much you will save by keying in your repayment details into the mortgage calculators on the ccpc.ie website.

-       Even if you already have one, open a new savings account into which you automatically direct your monthly Budget windfall for a specific purpose.  Young families may want to open a ‘back to school’ account that can help pay for books and uniforms or the not-so-voluntary’ contribution.  Sports club fees/uniforms might be paid a bit more painlessly if that’s what you need to save for. For many, any money you put aside for a holiday or Christmas may help reduce the shock of your January credit card bill.

-       If you can afford to, and you don’t have as many pressing debts to pay down perhaps this 10th year after the great economic downturn began is the year you can ‘pay yourself first’ again by building up a household contingency fund again - every household should aim to have at least three months of net spending set aside to meet emergencies. 

-       Or maybe this is the year that you can afford to use the Budget refund to rejoin a sports club, gym, class or hobby interest that had to be abandoned when times were particularly tough. It might be enough – over the year - to buy a pushbike and helmet that will help improve your fitness and cut back on transport costs or in the case of older people, to go towards a taxi account.  The point is that this money is now properly budgeted and allocated.

Which brings me back to people who scoff at the modest Budget windfalls of recent years.  2019 – again - is is an opportunity to take the financial bull by the horns and get it under control by hiring an independent financial planner (one who is not commission-remunerated) to give you a proper financial review.

Regular readers will know that one of the most common queries this column receives is from people who are looking for an independent, impartial financial adviser who will hopefully earn their trust and ideally becoming a life-long family adviser, just like their GP, family solicitor or insurance agent. 

I recently addressed the annual conference of the Society of Financial Planners of Ireland about my decades-long view that nearly every financial scandal in this country – from the misselling of expensive endowment mortgages and whole of life insurance policies, one-size-fits-all pensions, payment protection cover and the property crash – finds its way back to commission rewards and a lack of independent advice.

There are now over 620 qualified (to third level international training standards) Irish certified financial planners. Not all of them work in independent practices – those employed by banks, life companies, stockbrokers cannot give truly impartial advice. Not all are exclusively fee-based – you’ll need to ask - and won’t be until commission sales are finally outlawed.

Even so, check out the interactive map of members at www.sfpi.ie.  And put your Budget refund towards where it will make a real difference:  a proper, fee paid, professional financial review.

Letters to jill@jillkerby.ie  The TAB Guide to Money Pensions & Tax 2018 is available in all good bookstores. See www.tab.ie for ebook edition.) 

WILL YOU BE BETTER OR WORSE OFF THIS BUDGET DAY?

The day after the Budget, which is next week, on November 9, tens of thousands of people who long ago stopped buying the print version of a national newspaper will pick one up at their corner shop.  They will do this because of the tax case studies that appear in all the papers that work out how better or worse off they will be as ‘the single worker’, ‘the lone parent’, ‘the married couples with/without children’ and ‘the pensioners’.

This month also marks the beginning of the great financial crisis, and during the immediate post-crash years the Budget supplements should have incuded a banner headline over those pages warning readers, ‘Give up hope all ye who enter here’ such was the depressing outcomes.

From 2009 to about 2013 income thresholds fell, landing many more earers into paying more income tax on lower incomes. The emergency tax, then the universal social charge (USC) was introduced that slashed average gross incomes by another c7%  and all sorts of discretionary taxes and sneaky levies were added.

Some levies weren’t very sneaky at all, like the higher pension contributions that public service workers had to make and the private pension fund levy which permanently confiscated  €2.6 billion worth of retirement savings from nearly 800,000 private pension fund holders. (Is it any wonder pension membership has been falling steadily since then?)

Next Tuesday’s Budget isn’t expected to be a slash and grab one, but with a budget deficit to clear and with Brexit on its way, there probably isn’t as much leeway for tax cuts and welfare giveaways as the Finance minister (or his backbenchers) would have liked. 

With local elections coming soon and maybe even a general election on the near horizon, buying votes via a tax cut and lobbing a few more euro onto old age pensions and child benefits is an essential re-election tool.

I’m certainly looking forward to seeing how the Minister for Finance fulfils that unofficial mandate. He has already made clear that he has more pressing bills to pay – like health service overruns, and pay equalisation for civil and public servants.  He and the Taoiseach also keep repeating that they don’t plan to make the same stupid spending and fiscal policy mistakes that has scuppered growth periods in the past.

So what should we expect next Tuesday?

I don’t have a crystal ball, and there haven’t been as many leaks as in previousyears (though the hospitality industry is probably going to lose their 9% VAT rate) who why not just remind ourselves how much tax we do pay and who pays the most.

‘Widening the tax take’ is an expression that is gaining traction. Even the government’s advisors on the Fiscal Council and ESRI keep reminding them that while the Irish tax system is very distributive, with higher rates ot income tax payable at one of the lowest earning thresholds in the EU of just €34,500, the numbers of earners outside the tax net is much larger than in other countries. USC also rises substantially for higher earners moving up to 8% and 11% on incomes over €70,044 and €100,000 (only for the self-employed) respectively.

An excellent pre-Budget submission by the Irish Tax Institute last month and is well worth downloading if you really want to put the Minister’s speech next week into context. (See www.taxinstitute.ie  Budget 2019 Submission, Chapter 5).

The report shows just how much of their incomes Irish workers are still handing over to the State a decade later. Despite what has been celebrated internationally as the most successful economic recovery of all time…

-       Every single category of income earner has lower take-home pay in 2018 than in 2008 when the crash happened or in 2012.

-       Tax increases have lowered take home pay between 2008 and 2018 between -3% for people earning just €18,000 to -10% for someone earning €150,000.

-       Someone earning €55,000 is still €1,550 worse off in 2018 than they were in 2008.

-       The top 26% of earners, with incomes over €50,000 will pay 85% of all the total income tax and USC collected in 2018.

-       The top 7%, with incomes over €100,000 will pay 53%; while the top 1% with incomes over €200,000 will pay 28% of all the income tax and USC.

-       The Tax Institute estimate that in 2019, 941,600 people, or over a third of income earners (35%) will pay no income tax and 28% of them will be exempt from USC;

-       Only 1,781,500 people will pay income tax in 2019:  595,900 will pay tax at the marginal rate of 40% and 1,186,000 at the standard rate of 20%.

Letters to jill@jillkerby.ie  The TAB Guide to Money Pensions & Tax 2018 is available in all good bookstores. See www.tab.ie for ebook edition.) 

SHOULD PENSIONERS PAY NO PROPERTY TAX?

A decision is expected shortly on how local property tax will be revalued and assessed from next November when the current valuation period, which was introduced in May 2013, expires in November 2019.  

The Taoiseach, Mr Varadkar is reported to have said that he prefers that the overall 15% threshold to raise the valuation bands be retained, but that they should be allowed to be lowered by a higher percentage.

Pressure is already mounting on the government from opposition parties to exclude some homeowners altogether, specifically pensioner homeowners who live on low fixed incomes and people with disabilities.

Currently, a single person who has no mortgage on their home and has income of €15,000 a year or less is entitled to fully defer the LPT or a 50% partial deferral if they earn up to €25,000. (For a married couple with no mortgage their income limits are €25,000 and €35,000 for the full or partial deferral.)

Single persons/couples with mortgages can qualify for the same income deferral plus the value of 80% of their gross mortgage interest.

The deferral can also be claimed by people who are insolvent or are experiencing a period of serious hardship until their circumstances improve or the property is sold.

Annual interest of 4% applies to the LPT arrears.

The Independent Alliance party’s call to exclude pensioners and people with disabilities would significantly increase the number of people who are already deferring the tax.  (People who bought a new or second hand home from a builder or developer between May 2013 and 2016 are already exempt from LPT until November 2019.

According to the Revenue Commissioners, there are nearly 1.7 million residential properties in the state and in 2017 approximately 30,600 homeowners sought a deferral.

About €500 million tax will be collected in 2018. Even if every one of the 30,600 properties fell into the lowest tax valuation band (€0 - €100,000) and didn’t pay the €90 due, the foregone revenue would only amount to €2,754,000 in revenue. But what if the majority of those homes fall into the €100,001 - €150,000 valuation band, which carries a €225 annual tax? The deferred revenue now jumps to €6,885,000 plus interest.

The dilemma the government now has is how to set a fair tax rate next May that acknowledges that the initial valuations were set in May 2013 when just about every residential property in the state had fallen to its lowest post-2008 value.

To compound the problem, instead of property values being reassessed in 2016, as intended, the government extended the same terms and tax payment thresholds for another three and a half years, to November 2019.  Today, with higher employment numbers, strong inward migration and a serious house shortage, many areas especially in greater Dublin and adjoining counties have seen property prices recover to pre-2008 values.

If the new LPT assessment remains based on market value and not on the percentage increase in value since 2013, there will be very few areas of the country where property taxes will not go up.

For example, a very nice family home was worth just €200,000 in 2013, even though it had been valued at €360,000 at the peak of the property boom.  This represents a nearly 45% drop in value. Today, because the house is within easy commuting of Dublin, Cork or Galway it has recovered its 2007 value of €360,000.

The LPT bill is currently €315. If the local council has reduced it by the maximum 15%, it could be as low as €276. However, if there is no change to the current assessment system, the same house, now €360,000 again, will end up with an LPT bill next year, 2020 and 2021 of €675 because this is the tax payable on properties worth between €350,001 and €400,000.

Only homeowners living in areas of the country where house prices have increased by a very slight percentage in value since 2013 and still fall within the existing valuation band – places like Leitrim and Roscommon where prices have moved the least in the past five years - may end up with little or no rise in their LPT bill. In Dublin, where many house prices have more than doubled since 2013, many people are going to struggle to pay their new tax rates.

It is estimated that nearly half of all pensioners depend on the state pension of €12,650 a year as their only source of income and already qualify for the LPT deferral. This doesn’t take into account any other assets they own – such as cash in the bank or even the value of the property itself.

But if the revised  LPT system again favours market value over the percentage rise in value since 2013, it won’t just be low income pensioners who will be aggrieved if they don’t qualify for a deferral or outright exemption.

Letters to jill@jillkerby.ie  The TAB Guide to Money Pensions & Tax 2018 is available in all good bookstores. See www.tab.ie for ebook edition.) 

THE STATE IS A BIG WINNER ON THE PROPERTY TAX FRONT BUT CONFUSION REIGNS ON TAX FREE INHERITANCE RULES

One of the great ironies of our perpetually dysfunctional property market and the housing/rental crisis into which it has morphed, is that the state is reaping a very tidy tax windfall out of it.

So far this year, according to the latest, pre-Budget Exchequer tax estimates, capital acquisition tax, or inheritance tax has come in at came at nearly €500 million. 

This is twice what was raised in 2010 when the inheritance tax exemption levels were about €100,000 higher between parent and child and the great property value slide was underway. (Before the property crash the parent/child tax-free limit was c€550,000.)

All the government would have to do now to make a real killing on the property market would be to re-introduce the sort of eye-watering levels of Stamp Duty that applied before the crash and/or hike property tax rates. Even doubling the ludicrously low original 0.18% rate (which has been reduced by many local authorities and is only going to rise in 2020) would add many extra hundreds of millions of euro to the Exchequer’s coffers. (About €460 million will be raised this year; many valuations date back to 2013.)

Today, the surge in property values, especially in Dublin and the other cities and their suburban orbits means that the state is again raking in a fortune -  a fortune that most property owners would prefer to leave to their children and grandchildren, according to Irish Life, which has also just published the results of their latest survey into our attitudes towards inheritance.

According to the life and pensions company, 20% of over 55’s expect to leave at least €500,000 in assets – mostly property as well as qualifying pension funds and cash to their families. 50% expect to leave assets worth at least €100,000.

The current inheritance tax rate is 33% of any value that exceeds the three tax-free thresholds: Group A between parents and children - €310,000; Group B between lineal descendents such as brothers, sisters, nieces and nephews at €32,500 and Group C - between strangers, €16,250. 

With house prices in the Dublin area nearly back to 2007 levels this is where the windfalls are the most substantial for families and the state.

Which is why a review and some forward estate planning isn’t a bad idea before next month’s Budget, when it is anyone’s guess whether capital acquisition tax (CAT) thresholds will be further adjusted upward to reflect the continuing rise in property and per capita household wealth, not set at €151,650 by the CSO.

A surprise that emerged from Irish Life’s timely survey is that the vast majority of participants (up to 84%) have no idea what the tax-free thresholds are or the tax rate. Up to 50% mistakenly believe that the family home is exempt from CAT.  

Only a spouse inherits entirely tax-free, but under what it known as ‘Dwelling House Relief’ anyone who has lived with the owner of a property continuously for the previous three years as their main residence and who has no other interest in any other property may inherit it tax-free so long as the disponer has made a legal will naming them as the beneficiary. They must also keep the property for at least six years, but should they sell it before then only the proceeds that go towards another residence will remain tax-free.

Property can be a very tricky asset to pass on, especially if you haven’t made a will but your intention may have been protect the interests of someone who may have been living with you or you may have only wanted to have a lifetime’s interest in the house after your death.

Dying ‘intestate’ means the Succession Act 1965 prevails and your family home, along with the proceeds of life insurance policies, pension funds (like an ARF – Approved Retirement Fund), cash and any other property or valuables will be subject to those rules.

Specifically where there are no children the entire estate goes to a spouse; where children are present, 2/3rds goes to the spouse and the remaining 1/3rd equally to them.

Parents are the sole inheritor where the deceased is single if they haven’t made a will, and then their siblings if there are no parents, and nieces and nephews if there are no siblings, etc.

Disinheriting a child where there is a will, can throw up all kinds of difficulties, but a more common problem say financial advisers are the tax complications that arise quite frequently in the estates of Irish people who may have lived abroad and may still have some financial interests outside Ireland. 

Pensions, investments and property still held in the myriad of countries where the Irish diaspora worked or even retired to, could end up subject to very different disposal rules and taxes.

If any doubt, consult a good solicitor and knowledgeable tax adviser.

(Letters to jill@jillkerby.ie  The TAB Guide to Money Pensions & Tax 2018 is available in all good bookstores. See www.tab.ie for ebook edition.) 

BANK SCAMMERS TARGET THE VULNERABLE:  COLLEGE STUDENTS

Bank fraud is so common that nearly everyone who uses the internet and has a bank account has been targeted.

Today, the fraudsters are members of international gangs and use the information we voluntary post on our social media sites to target the most vulnerable. And no one is more vulnerable (or bigger users of social media) than young people and students, including the tens of thousands of foreign students, who are struggling to find accommodation, let alone pay for soaring rent.

Next month [OCT] the Irish Banking and Payments Federation Fraud Alert section will launch an anti-fraud campaign as third level students return to college. It will warn them of the dangers of being caught up in money laundering scams and identity theft that could result not just in considerable financial loss, but also possibly being charged with money-laundering. 

Two such elaborate frauds making the rounds right now involve outright theft using fake invoicing and the other involving the use of student’s current accounts by foreign money laundering gangs.

I heard about the first one from a reader whose son, a second year medical student in Dublin who was sharing a leased house with other students, ended up being scammed out of €10,708 this summer. 

After deciding to return home to work for the summer to help pay for this next year’s expenses, the son, ‘Sean’, decided to sub-let his room in his shared house on a popular Irish-based property rental website. The rent was €1,708 but the English woman who answered his ad, and with whom he was in touch, sent him a paper bank draft drawn on a Lloyds Bank account for €10,708, not €1,708. 

After quickly contacting her - she claimed she thought he was ‘sub-letting’ his room for the remainder of his lease and not just for the summer - he naively, but promptly, transferred back her €9,000 ‘overpayment’ via an electronic transfer, but this time to a bank in Turkey.

Within a few days of the draft being deposited, €1,708 worth of rent and utilities at his rented house had also been drawn down. A few days later, the bank, which had told him the payment could take “a number of days to clear”, informed Sean that the draft had been returned unpaid.  His account was now ‘overdrawn’ for the entire €10,708.

The banks’ investigators subsequent found that the original bank draft was a counterfeit; it also reported that the Turkish bank to which the €9,000 was transferred refused to cooperate with their investigation.

Sean is now taking an official complaint to the Financial Ombudsman on the grounds that his bank facilitated the drawing down of the funds to both pay his outstanding bills as well as the electronic transfer of the €9,000 ‘overpayment’ before the foreign draft was cleared.

Does he have a case?

Two years ago, in May, 2016 the IBPF published an article on their website about how small Irish merchants had been targeted with a similar version of this scam: a new overseas customer sends the merchant a paper cheque or draft payment to pay for an order. Their payment is a multiple of the correct amount. Once contacted, the buyer apologises for the ‘overpayment’ and suggests that the merchant refunds it by electronic payment.  A few days later, the bank reports that the original invoice payment has effectively ‘bounced’.

According to the IBPF, the Irish banks have reported ‘hundreds’ of such cases of this sophisticated, international fake invoice clearing scam to them over this past summer alone, many of them now involving student account holders. But had the banks learned from their 2016 experience and taken proper preventative measures – say, a software programme to stop on-line customers from accessing funds before they cleared, or to alert them by SMS, a text or email when they did clear, none of these frauds could have happened.

The other major scam that involves the student community, and that will feature in the IBPF’s anti-fraud campaign in October is being dubbed ‘The Money Meal’. 

This time, the international fraudsters identify Irish and foreign students here via their social media sites on which they reveal a great deal of personal information. The fraudsters might claim to be a member of an agency or organisation that is helping support the student community but haven’t yet finalised the setting up of their office or bank. Could the student let them use their account to bring funds to Ireland, for which they will receive a small reward, say €50 or €100? The student is then as ked to transfer the balance to another account, but as with the other scams, the banks pay out before the money from the original transaction has cleared.

The October college information campaign by the IBPF will be warning students that anyone making their account available for such transactions could end up being prosecuted.

But as one banker told me, “Rents are so high now and students are so desperate for money. The scammers know what they’re doing.”

(Letters to jill@jillkerby.ie  The TAB Guide to Money Pensions & Tax 2018 is available in all good bookstores. See www.tab.ie for ebook edition.) 

WORKERS AND EMPLOYERS: WILL THEY BE READY FOR PENSION AUTO ENROLMENT?

Last week, the government finally published its proposal for an auto-enrolment pension plan with a 2022 target date. It it goes ahead it will mean that the c65% of private sector workers who have no pension savings other than the State Pension will be on their way to building their own, work-based nest eggs.

Four years is a tight deadline, so good luck on that front. Yet everyone acknowledges that pension coverage is still falling and how as the population ages, future generations cannot count on the €12,650 State Pension to meet their retirement needs.

This new auto-enrolment pension is therefore aimed at the c410,000 workers between the ages of 23-60 who earn between €20,000 and €75,000, but do not belong to a company scheme or have a private pension like a PRSA. 

The new scheme is compulsory for employers, but not for workers who will be able opt-out with seven months of their auto-enrolment.

So how will it work?

From 2022, the worker and their employer will contribute 1% of the worker’s gross salary in that first year to their new pension fund.  This contribution will go up 1% each year until year six, when worker and employers will each be paying 6% of gross salary, or a total of 12%, into the fund. Meanwhile, for every €3 the worker contributes, the government will pay in €1. This works out as an additional 2% of their salary.

(Currently, private pension contributions result in 20% or 40% income tax relief depending on whether they you pay tax at the lower or higher rate. For every €100 saved into their pension, the 20% taxpayer will pay €80 and the 40% taxpayer, €60. Employers can also claim tax relief. Under this new system, the government’s 1:3 contribution will the equivalent of a flat 25% income tax credit, regardless of their earnings.)

By the end of the six year roll-out period, by 2027-28, the target of 14% of the employees gross salary as a total pension contribution will have been met. This is the annual percentage that pension experts suggest is the level needed to provide an income that is about 50% of the worker’s final salary when added to the State Pension.

So how much will each of the parties end up contributing each year for those first six years of the scheme?

Let’s use two examples:  a worker who earns €25,000 a year and one who earns €50,000, and let’s assume for simplicity’s sake that their income stays at that level.

In year 1, the worker and employer will each contribute 1% of gross salary, or €250. The state will contribute €62.50. The total contribution is €562.50.

In year 2, the annual contributions rise to 2% or  €500, €500 and €125 respectively.  In year 3, the contributions rise to 3% or €750, €750 and €187.50.  In year 4 they rise to 4% of gross salary or €1,000, €1,000 and €250, and in year 5 to 5% or €1,250, €1,250 and €312.50 respectively. 

By year 6 (and subsequent years) the worker and employee will each be contributing 6% of gross salary – 12% in total - or €1,500 + €1,500 and the state €375, or 2%. This amounts to a total annual contribution of €3,375, or 14% of salary. 

At the end of those first six years, a total of €11,812.50 worth of salary contributions will have been put into the worker’s fund. This figure doesn’t include any potential growth in the fund.

For someone earning €50,000 a year, you just have to double all these figures: in the first year the worker and employer will each pay in 1% of salary or €500 and the state just €125 (ie €1 for every €3 the worker contributes). But by year six, the worker and employer will be each contributing €3,000 each and the state, €750 for a total of €6,750.  This too amounts to 14% of gross salary.

At the end of year six, a grand total of €23,625 worth of pension contributions will have been invested in their auto-enrolment fund.

There are going to be lots of political and financial stumbling blocks before the final plan is launched. Unions, employers and the Department of Finance will all have to reach agreement. A new agency, the Central Processing Authority, will have to be set up, funded and the proposed four plan providers mentioned will have to agree to keep their costs to just 0.5% per annum.

And the tax relief anomaly will have to be sorted out. This pension scheme will only provide a flat 25% government subsidy, yet existing personal pension schemes like the PRSA, awards 40% tax relief on contributions on earnings of more than €34,500.

There’s still much detail to be thrashed out. Or watered down.

(Letters to jill@jillkerby.ie  The TAB Guide to Money Pensions & Tax 2018 is available in all good bookstores. See www.tab.ie for ebook edition.) 

PARENTS STILL STRUGGLING TO PAY FOR ‘FREE’ EDUCATION

Parents are preparing for the imminent return of their children to school and college. New uniforms are being bought, school books are being salvaged and recycled or a new set are being bought for children moving up a grade.  (The Department of Social Protection has allocated nearly €50 million this year for the means-tested Back to School Clothing and Footwear allowance.)

Family budgets are also being scrutinised, especially in an effort to find the €100-€200 worth of ‘voluntary contributions’ parents are expected to hand over – described to me by one neighbour with three small children recently as “the educational equivalent of mafia protection money – pay up or else”.

Junior education budgets, which were cut after the crash are rising slowly, but not quickly enough to meet the catch-up required for new school infrastructure, restoring post 2011 teacher’s pay to parity, hiring more teachers.

Our primary and secondary funding problems, for anyone who cares to look, have been measured by the OECD and are in a Department of Education and Skills report, Education at a Glance 2017, OECD Indicators.

The figures are based on 2014 data, but Ireland underfunds and/or is middle of the expenditure rank, coming 19th out of 32 countries for primary education spending per student; 16th out of 30 for lower secondary students; 14th out of 32 for upper secondary students and 16th out of 31 for third level spending.

In 2014, our total spend on education was 4.8% of our gross domestic product (also the OECD average) but was we allocated 12.9% of total government spending to education compared to the OECD average of 11.9%.

One big difference between Ireland and other OECD countries, is the amount we pay teachers. Teachers salaries account for an average 62% of most OECD countries’ education budgets; here they account for c71% of the budget allocation. Meanwhile, we allocate much less than the OECD average for non-teaching staff at primary and second level: 11% and 9% of our budget respectively compared to 16% and 15%.

Which brings me back to how to reduce the costs that parents have to allocate to their children’s education or pre-education care (“an extra mortgage” according to my neighbour.) 

Everyone wants well-paid teachers and support staff in our schools. We want attractive, up-to-date school classrooms and decent books and gym equipment, music rooms and science labs and a budget for extra curricular events and outings.

Is this going to happen for every school, anytime soon? No.

So here are a few random, practical ideas that emerged over coffee and carrot cake during a recent conversation I had in my back garden with my neighbour. We’ll leave the costings to the Ministers for Education and Social Protection:

-       A properly state-sponsored and co-funded crèche system with appropriate, proper, civil-service salary scales for crèche workers, that charges a scale of fees based on income and family size… like in so many other OECD countries. 

-       Instead of the “daft” €1,000 ‘Granny Grant’ idea – which could cost c€200 million according to some reports – how about an income tax deduction for a maximum of three years for parents with children in authorised crèches.  In an effort to avoid fees being raised, parents who use crèche operators who raise their fees by more than say c5%per annum will not get the tax deduction.

-       Ireland needs more children if we are to meet the cost of state services like education, health, pensions in 2050. So from 2020, first time parents get a tax-free baby bonus of €1k, €2k when they produce child number two, €3k for child three and €4k for child four or for a set of twins. Tax-free Child Benefit payments end with child number four; CB payments for subsequent children become taxable.

-       Mandatory school uniforms in state funded schools are abolished, saving the €50 million a year. Schools are encouraged to introduce a universal classroom uniform: clean jeans/tracksuit bottoms, coloured plain short/long sleeved t-shirts (no logos, pix, lettering), runners and plain shorts for PE.

-       All schoolbooks and copies are provided free. A €50 refundable deposit applies when returned in good condition at year-end. Books are recycled until they wear out or the curriculum changes.

-       A nationwide, adopt-a-school Angels pilot project is launched with corporate and individual ‘angels’ funding (to start) the most deprived/needy schools. Angel donations replace the hated ‘voluntary contribution’ payments that pay for many teaching materials, activities, repairs, etc not covered by the state allocation. The scheme could be operated like a ‘Peer-to-Peer’ lending operation with corporate donors ‘bidding’ online to fund projects that schools put forward. Operated by a not-for-profit schools co-op, seconded staff from the Dept of Education would assist the agency in a book-keeper capacity only; school Principals and parents would deal directly with the donor angels. To work, the government would agree to ring-fence existing annual funding.

(Letters to jill@jillkerby.ie  The TAB Guide to Money Pensions & Tax 2018 is available in all good bookstores. See www.tab.ie for ebook edition.) 

THIS HOUSING AND HOMELESS CRISIS AFFECTS US ALL

Just up the road are two Victorian terraced houses just like mine, with about 1,700 square feet of space and three or four bedrooms, depending on whether you squeeze someone into the box-room or not. There are two reception rooms, a kitchen of varying size and usually 1-2 bathrooms.

These two terraced houses were originally private homes, then bed-sits, then not very well-run private/public emergency-style bedsits when the absentee landlord came to a vague sort of arrangement with the city housing authorities.

After too many years of having to put up with episodes of anti-social behaviour, noise, general mayhem and on-going rat and refuse problems, the houses were put up for sale and sold to the city of Dublin as emergency accommodation.

Once the people in the white ‘hazmat’ suits (aka hazardous material) got finished with them, the building and renovation teams went in; they now provide safe, suitable, supervised emergency accommodation for mainly homeless families.  Most late nights that I walk the dog before we turn in I see taxis arriving with distressed parents and their sleepy children, the youngest clutching teddies; the older children carry their backpacks and pull their small suitcases up the path to the brightly lit entrance.

The Dublin Region Homeless Executive deal with families like this every night.

Last Thursday morning social media with full of pictures of six small children aged 1-11, who were sleeping on plastic chairs at Tallaght Garda Station. (A seventh, ill child was staying with others) They appeared to have slipped desperately through the net.

On the RTE 1 o’clock news, the DRHE spokesperson claimed that this was the only family of 10 in total who had dealt with by their Family Homeless Action Team but ended up without beds. All the others were either found shelter for the night, returned to their home areas (outside Dublin) or failed to make final contact with the action team.

A report in the Irish Times stated that this family of settled Travellers from Tallaght had been referred to the Garda Station by Focus Ireland and that they been homeless and for the past year after their rented house had been repossessed. The young mother told the paper that she had yet another appointment the next day with South Dublin County Council City but wasn’t very hopeful – they kept telling her they don’t “have any homes big enough… no hotel rooms big enough”.

That a family of this size has to wait “another four or five years for a house” isn’t acceptable, but there is more at play than just a shortage of suitable, affordable social housing. Our economy is still coming to terms with a crash that happened eight years ago and a much longer state policy to reduce social housing funding and rely on the private sector to fill practically the entire public and private housing demand.  

The government’s most recent policy, undertaken at the behest of our international paymasters, has been to instruct NAMA and the state owned banks to sell off the properties and so called un-performing mortgages it owns to large foreign vulture funds and domestic consortia of investors (who prefer to buying entire apartment buildings, swathes of housing estates). These properties are now rented to the highest bidders. Housing charities say they are unable to compete with the vultures or REITs (Real Estate Investment Trusts) for these assets.

But still, bricks and mortar remain Ireland’s favourite investment. Fortunes have been made and lost and are being made again, mostly by individual professional landlords and the gombeen ‘stack-em-high’, ‘cash only’ versions who don’t pay their taxes. Even many amateur, ‘this-is-my-pension’ landlords cash in on the misery of working families, modest and low earning workers, and students, especially the tens of thousands of foreign students and immigrants who are viciously exploited by demanding huge rent increases.

Quickly bringing more social housing into the market is a big part of the solution, but so is pursuing the owners of vacant, derelict properties and sites to do rent or sell them or face bigger levies.

Better tax and rent incentives should be offered reluctant amateur landlords to lease their properties under existing schemes to local authorities managers who in return will pay them a steady, fair rent for the agreed term. Illegal overcrowding – where 10-20 people are packed into ordinary private houses/apartments (some sharing double beds) needs to be ended by city authorities, fire and safety authorities and the owner/landlords pursued by flinty eyed investigators from the Revenue Commissioners.

And finally more good, decent, honourable people with a spare room in their homes should be urged to consider joining the tax-free, Rent-a-Room scheme and ask for a reasonable, as opposed to vastly inflated ‘market’ rate, to someone who is desperate for a room (and bed) of their own.

(Letters to jill@jillkerby.ie   The TAB Guide to Money Pensions & Tax 2018 is available in all good bookstores. See www.tab.ie for ebook edition.)  

A TAX-FREE PENSION GIFT IS JUST WHAT YOUNG WORKERS NEED

Will your children or grandchildren enjoy financial security in their old age? Is there anything practical you can do, right now, to give them a leg up on the pension ladder?

As I have written many times before, the government is perfectly aware that there is a massive, growing pension problem in this country and have produced numerous reports over the past three decades that keep reaching the same 25 solution: the introduction of a soft-mandatory, auto-enrolment pension scheme for the private sector. It now claims that such a scheme will be in place in Ireland by 2023.

Whatever about their good intentions, I think the 2023 target date is over-optimistic.  Workers, employers, unions, the Revenue Commissioners, pension companies, fund managers, administrators, trustees and regulators all have to be singing off the same proverbial hymn sheet before it will happen. The economy has to be in healthy, growth mode and vested interests have to be over-ruled. 

Ireland is not unique. Other countries like Australia, New Zealand, Chile and more recently (but after about 12 years of planning) the UK, have dealt with met these challenges and introduced auto-enrolment schemes to ensure that all private workers are covered and will not be wholly reliant on the unsustainable state old age pension.

We’ll be coming back to this pension impasse in future columns, but anyone waiting another five years for the possible introduction of a mandatory occupational pension is very foolish.  Time, lots of it, is one of two essential ingredients in an orderly, affordable retirement. The other is the amount you/your employer contribute.

A recent Irish Life survey (reported here three weeks ago) showed that the average age that pensions are started is now 37, giving the worker a mere 28 years to help fund 20 years of retirement (from age 65.)

The reality is that most workers today will have a number of jobs over their lifetime with varying degrees of pension coverage, or none at all.  Few will enjoy the consistent, steady, annual, tax deductible, low cost pension contributions that are needed to produce a decent retirement income by today’s standards. 

But there is a way to help give our young people (from age 18) a big pension leg-up. And that is via one of the few remaining tax-free opportunities still available (along with pensions and the Rent-a-Room scheme): the €3,000 capital acquisition (CAT) tax-exempt gift which is put into their first personal retirement savings account (PRSA).

A little background may be useful: anyone with €3,000 to spare can gift another person up to that amount every year and it doesn’t matter what their relationship: they can be close relatives, friends of even complete strangers. The recipients get the gift entirely tax-free and these annual gifts are not taken into account in determining any lifetime AT liabilities.

This CAT-exemption is commonly used as succession planning device by older family members who want to give away their wealth tax-free when they believe they loved need it most.

In the case of pension funding, the €3,000 annual gift goes into the young person’s PRSA because it will have fantastic, long term financial impact.

First, you don’t need to have a job to set up a PRSA, but without taxable income you won’t be able to claim pension income tax relief of 20% or 40%. However, once the young person does start working – and for many that isn’t until age 24 or 25 after the complete third level studies - the gifted contributions in their PRSA can be offset against any income tax they do pay and that offsetting continues until the pension contributions are all used up.

Irish Life’s recent pension report included a table that showed the difference between starting a pension at age 25 instead of at 35, 45, or 55. The starting salary (indexed at 3%) was €51k. Salary contributions were a consistent 11.4% and annual fund growth was a 4%.

The 25 year old retired at 65 with a gross fund worth nearly €463,000. The 35 year old with nearly €311,600; the 45 year old with c€187,00 and the 55 year old with just €84,470.

Irish Life told me that the 25 year old whose generous relative had put €3,000 into her PRSA for seven years (from age 18), could expect a gross pension fund at 65 of €563,500 instead of €463,000 and that was even before any investment growth over the seven years had been taken into account. 

This is a great example of the practical pension / inheritance options that a proper fee-based financial adviser can recommend to both older, well-off relatives who want to help, and to every young worker.

Waiting for the government to provide solutions is not advised.

Their [tax] policies, declared a certain Jean-Baptist Colbert “consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

(Letters to jill@jillkerby.ie   The TAB Guide to Money Pensions & Tax 2018 is available in all good bookstores. See www.tab.ie for ebook edition.)