Jill Kerby

When the squeeze comes we’re gonna party like it’s 1990

 

There is absolutely nothing any of us can do to prevent the spending cutbacks and tax increases that will be announced tomorrow and Tuesday.

How you endure them is another matter and I think the government believes there’s still plenty of ‘give’ in the incomes, savings accounts, pension funds and the other wealth assets of the Irish people.

We’ll keep giving, they believe…until we can’t, and since this is just the first of four austerity budgets the government has agreed to impose on behalf of their EU/ECB and IMF paymasters, the endurance game only ends in 2015.   

We’ll see. 

I think these technocrats may get their walking papers much sooner than 2015 if they can’t work out a way to prop up Europe’s insolvent banks and countries and “save” the euro.  In that case, we’ll be imposing austerity budgets of our own and paying our taxes with a new Irish punt.

In the meantime, if the Irish Taxation Institute’s recent figures are correct, the average Irish family is already €600 a month worse off from budget changes since 2008. If another €12.4 billion is extracted from the economy, the loss of monthly disposable income could double to €1,200 or €14,400 annually by 2015.

Welcome back to circa 1990, the year when a single family car – if you even had a car – was the norm, and few of them were brand new models.

Child benefit payments were just under €20 a month, not €140 and higher rates were only paid for the sixth and subsequent children instead of the third.

Mobile phones were still a novelty in 1990.There certainly wasn’t a smart phone for every member of the family. If you were lucky, ‘the pipe’ picked up the BBC and ITV but not 700 satellite stations along plus the internet and broadband.  

Package holidays were still in the Costas and Paris was where crooked politicians went to buy their shirts. Buy-to-let property was what professional landlords and moonlighting Gardai owned.

If you’re wondering how the government could possibly expect the struggling middle classes to afford any more tax, do the math. This is the post 1990 spending they expect you to sacrifice to pay back the bondholders and technocrats.

Safe deposits

 

Nearly every other letter or email I receive these days is from a worried reader who wants to know what they should do with their savings, just in case Ireland has to leave the euro, or the entire eurozone breaks up.

For all of you waiting for a reply, this is the same one I have been giving for the past year:

Keep your hard earned cash in a solvent financial institution, preferably in a solvent country.  At the very least, don’t leave more than €100,000 of your money – the deposit guarantee rate - in any bank or institution if you have any doubts about its solvency.

Be aware of the risks you take leaving all your wealth in any single asset – like cash or even in a single currency, especially the fragile euro. However, by shifting euro into other currency, you take on exchange value risk and the new currency could fall in value as well as rise.

Even if you do exchange euro for what you believe to be a better currency and hold it in a non-euro deposit account in your Irish-based bank, you need to make sure that the bank, whether Irish or foreign owned, will honour the foreign currency, even if we revert to the Irish punt.  The only way to safeguard against this risk is to move your money outside the Irish jurisdiction and perhaps outside the eurozone.

Commentators disagree on many aspects of the euro crisis, but they tend to agree that if we leave the euro and revert to the punt, it will suffer a sharp devaluation and a large part of the spending power of your savings could be wiped out, especially as the cost of imports soar. 

Finally, consider the risks you take leaving all your wealth in any paper and ink currency, backed by nothing but the faith and promise of their often hugely indebted state or states.

If you shift some of your paper money for real money like gold, which has a long tradition of at holding its spending value, especially during times of economic and political crisis, you may offset the terrible devaluation risk inherent in holding fiat currency.

Time would no longer appear to be on the ordinary saver’s side.  Anyone with large amounts of savings, whether in cash or tied up in pension funds, should consult and use the services of a good, fee-based advisor… sooner than later.

 

Up in smoke

Have you ever had a chimney fire?  They can cause considerable smoke damage - and worse - if the fire brigade doesn’t arrive promptly.

From next year, if you live in Dublin, a chimney fire callout will cost you €610 for the first hour. The first hour fee for a domestic fire will be €500 and the council will also charge €610 for the first hour cost of sending out emergency services to a motor traffic accident.

“Virtually every house insurance policy will cover the cost of fires,” Sean O’Connell of the Insurance Shop in Fairview told me last week, “though you want to make sure to ask for the chimney fire brigade – they do a lot less damage than the normal fire brigade team.”

Having the chimney’s cleaned is the obvious solution. But what you most certainly want to double check, says O’Connell, is the size of the cover your motor insurer allows for the cost of ambulance and fire brigade callouts if you have a serious motor accident.

“I had a client who nearly totalled their car one frosty morning down the country,” he recalled. “Both passengers miraculously survived with barely a scratch but it took so long for the tenders to cut them out and get them to hospital that the bill was over €3.000.” 

Tweet

Employer sick-pay plan will only spread the malaise

 

I’ll bet the financial regulator, Matthew Elderfield is sorry now that he ever mentioned that the Irish banks needed to refrain from raising variable interest rates outside of ECB rate hike events.

He said this last summer, in reference to the impact that raising rates arbitrarily would have on the growing arrears problem, but the same principle applies – in reverse - now that the ECB rate has come down but hasn’t been passed on by all the lenders.  When most of the banks declined to drop the rates right away, all hell broke loose and Mr Elderfield came under pressure to force through the lower rates.

The state may own the likes of PTSB, EBS, Irish Nationwide, AIB and a large slice of Bank of Ireland, while providing deposit guarantees to Bank of Scotland/Halifax, KBC and NIB, but, so far, it doesn’t directly set the interest rates charged to borrowers and depositors.  Insisting that all banks pass on every ECB rate change to variable rate customers (as opposed to tracker ones who are contractually entitled to the new rate) also smacks of price fixing.

If it was the job of the Regulator to set the price of money in this state, then surely someone as conscientious as Mr Elderfield would feel obliged to do something about the mad anomaly that exists in our unprofitable, loss-making, zombie banks:  they way they pay excessively high deposits rates and excessively low interest rates, relative to the supply and demand of capital in this state.

There seems to be no shortage of household savings – over €90 billion - yet businesses and private borrowers cannot find a bank that will lend to them. Meanwhile, savers are enjoying extravagant interest while existing mortgage borrowers with some of the larger Irish owned banks like AIB, are paying as little as 3% for their variable rate mortgages.

One consequence of this madness is that just a few days after passing on the quarter percent rate cut, KBC announced it was lowering its loan to value requirement from 90% to 80% thus forcing up the amount of the required downpayment.

 

This bank clearly doesn’t want new business, at least not at the loss making interest rates they feel obliged to charge. Expect even more tightening up of lending terms from the others.

 

What a mess, and it isn’t going to get any better until interest rate manipulation ends and the real price of money can be determined, though neither depositors nor mortgage borrowers will probably be happy with the new, genuine rates.

 

Do you have an emergency savings fund or even permanent health insurance, also known as income protection cover?

Chances are you have answered “no”, to the second question, as would most of the working population.

According to a survey undertaken by Aviva Insurance a year ago, fewer than 10% of us have a proper income protection policy and only 15% of people with such cover will receive the benefit for more than six months. Even then, coverage usually only starts from week 13 or 26, depending on the cost of the policy.

Mostly, Irish workers rely on state sick pay benefits, especially for routine, short term illness, a payment that they are entitled to in exchange for their (and their employer’s) correct number of pay related social insurance premiums (PRSI).

Last week the Minister for Social Protection, Joan Burton, proposed that employers pick up the first four weeks of a worker’s illness claim, rather than her department.  Passing on this cost to employers will provide €150 million of the €700 million savings she must cut out of her €21 billion budget this year.

But it also – again - reveals what a pyramid scheme the PRSI system is:  the promises that have been made to its contributors cannot be met anymore.  And if the Minister gets her way employers will be obliged to meet the first four weeks of a sick pay claim, at a weekly cost of up to €188 per week for those who earn over €300 a week.  Multiply that by even seven or eight employees and this small business owner, who has an immediate production loss, has to potentially find another €6,000 a year on top of the 10.75% of their company wages bill that is PRSI. 

If the state can no longer meet this less valuable benefit promise for short term sick leave, why are they forcing workers, especially younger ones, to keep paying into a system that is even less unlikely to meet the really significant promise of the state old age pension?  This is a nearly €12,000 per annum benefit - for life – that is already unaffordable by our bankrupt state.

You may want to take this as a warning of what’s to come and act prudently – if you can.

Start a contingency fund, if you don’t already have one, to try and cover at least some of the wages you may lose if your employer cannot, on top of existing PRSI payments and mandatory holiday pay, also pay you directly because you are out for four days with the flu or four weeks with pneumonia before the remaining state benefit kicks in for a maximum of two years.

And don’t kid yourself that all employers will find a way to pay.

They won’t.

Judging by last week’s reaction from small firms and their trade bodies, some will cut out other benefits, like pension contributions; others who can, will reluctantly reduce working hours or even let a worker go. I heard one say he’d shut down entirely if he was “forced to pay on the double”.

Not one said they’d be hiring anytime soon.

Rentals Joy

 

Residential property prices may still be declining sharply this year, but at least landlords are enjoying some stability. 

The last Daft.ie rental report for the third quarter of the year shows a tiny 0.1% rise in rents. The margin of error is too small to read anything into the figure, but a far more substantial sign is that the stock of properties to rent is down by 9.3% since last year.

The overhang of empty rental properties has to keep clearing that this rate if rents are ever to reward heavily indebted investors, but it seems this is happening, especially in some urban areas, especially in Cork where rents are up 6.25% year on year. 

Overall, the Daft figures are a modest improvement, but these days property owners will understandably celebrate good news, wherever it comes from.

 

 

 

 

 

 

Tweet

You must ensure against forgetting an insurance claim

Have you ever forgotten to mention a minor insurance claim that you made, say, five years ago, when applying for a house or car policy with a new provider?

That simple slip of the mind could turn into a financial disaster, I was told last week.

According to a general insurance broker I know, home and motor insurers are now taking a zero tolerance approach to claims assessment.  If they find out that you failed to disclose any claim in the past five years, they are likely to reject the current claim and nullify the contract. “You’ll be lucky to get an affordable policy from any other insurer, but more importantly, you could have a huge damages or repair bill to pay yourself.”

 For example, you have a smart phone, worth, say €400, that is stolen soon after you renew your house insurance policy. You make a claim and after the inevitable excess is deducted, you get a cheque from the insurer for, €250.

 You keep renewing the annual contract, but at the end of year three you decide to move your business to another company. Your spouse fills in the new proposal form this time and forgets to mention the claim for your stolen phone.

For two years you happily stay with the new insurer, but that winter, pipes burst in the attic and cause €30,000 worth of damage to the house. To your horror your claim is rejected because the insurance company has checked with InsureLink, the claims data service for the industry that lists all insurance claims and they discover you didn’t disclose the €250 you got for your stolen phone.

 This draconian response, the broker told me, is because of their huge weather claim losses of recent years but also because during a recession, the number and value of claims go up.

 “Non-disclosure could be more of a disaster than the claim event” he warns.

 

Count the costs

This is a question that has certainly made the rounds: How far should the government go to support people with serious mortgage arrears?

 We may get the answer shortly if, as expected this month, the government announces its response to the final report from accountant Declan Keane and his expert group.

 Top of the list of the recommendations is expected to be broad personal and corporate bankruptcy reform, including non-judicial version for people with mortgage arrears and other personal debts. The report will also suggest that bankruptcy discharge is also be reduced from as much as 20 years at present, to just three.

It is also expected to recommend that the banks be forced to write off mortgage debt in some circumstances; that homeowners be given a chance to become tenants of their property as ownership reverts to the lender; and that potentially thousands of repossessed homes be leased to local authorities and housing associations.

The report commissioned by the Waterford MABS office and the Citizens Information Board, which was presented to the the Minister for Social Protection Joan Burton on September 29 came up with similar recommendations. 

It summarised the problem very well and the various responses, including the crucial role that MABS has played. By interviewing the people in arrears and including their stories, it also put a human face on the distress and anxiety that MABS clients experience.

Where the Keane report will fall down, is if, like the MABS one, it doesn’t properly cost all its recommendations.

“Doing nothing will be expensive,”  suggest the UCD academics Michelle Norris and Simon Brooke who authored the MABS report, especially if homes are repossessed and the state has directly house, or subsidise the rents of the ex-mortgage holders.

I think whatever the state decides to do, it’s going to be expensive. It always is.

Overhauling archaic bankruptcy laws isn’t going to come cheap once the billing hours or the bureaucrats, lawyers and accountants are totted up, but extending mortgage subsidies from two to seven years, forcing banks to forgo interest payments for that long and shifting loss making mortgages and properties from the banks to already cash strapped local authorities or housing agencies smacks of just more deckchairs being arranged on a sinking ship.

Bankruptcy reform has to be prioritised, but the authorities also have to work out the cost of so many losing homes to the banks and to the taxpayer, rather than automatically assuming that the subsidies must continue to pay, regardless of the effect on market prices.

 It sounds logical to me to work out the immediate and longer term costs first, but this is country where we never miss an opportunity to break the ‘law of unintended consequences.’

 

 

Pension Problems

 I’m not a fan of wild rollercoaster rides, which is what the average Irish managed pension fund has become since 2008.

The latest performance statistics show how far returns have plunged this year to date – over 9% - but some advisors say now is the time to steel your nerve and opt to get back into stocks and shares which haven’t been so cheap for three years.

That’s easier said than done.

Timing the markets may be a mugs game, but the importance of matching your age, years to retirement and income expectations hasn’t changed.

Find a good advisor who understands this. 

Time is running out if you’re still planning to make a pension contribution by the pay and file deadlines of October 31 and November 16 for ROS, the Revenue Online Service, users.

 

 

 

Tweet

Private properties put at disadvantage if Nama plan proceeds

 

“Stop queering the market” said Askaboutmoney.com founder and consumer advocate Brendan Burgess last week to the property price setting mechanism that Nama is proposing:

 

Nama is reported to have up to 8000 residential properties on its books and

it wants to shift them, Burgess pointed out.  Offering a mortgage that

eliminates the risk of negative equity – it adjusts to the market price of

the day – sounds like a winner, but it also puts every privately listed

house at a complete disadvantage.

 

“If there was a Nama house worth €20000 for sale and your house next door on

sale for €200,000, why would anyone buy your house?” Burgess asked.

 

The simple truth – and it is unpalatable for politicians, central bankers

and everyone else who lives in denial about the catastrophic debt crisis

that exists in this country and so many other western, ‘developed’ economies

is that a “Correction is usually equal and opposite to the deception that

preceded it.” 

 

Irish house prices are continuing to fall for the very good reason that we

are entering the end-game of our own debt crisis and Europe’s. The

correction is happening in the price of all assets – incomes, stock market

shares, sovereign debt of defaulting countries and yes, property – because

the law of physics cannot be wished away: what goes up, comes down. No one

can live beyond their means forever, and that includes countries.

 

Back in early 2006, in this column, I wrote that the property bubble was

dangerously close to popping and that if I had my way I would sell my house.

 

By that summer, the price of the exact same terrace houses on my Dublin city

street sold for €1,000,000 or 1,000% up on its price in 1995.

 

Today, asking prices are now in the mid-€400,000 range and there are still

no buyers.  When they fall to between €250,000-€300,000 I reckon we will

have hit the bottom. Why?  Because, as I wrote back in early 2006, rental

income has remained stable at between €1,600-€1,800 a month and that

translates into asking prices of €249,600 - €280,800 or rental yields of

just over 7%.  Throw in Victorian charm, the close proximity to Luas stops

and the largest hospital in the city, and €300,000 might be reasonable

asking price some day.

 

Nama and the government are not doing anyone any favours by ‘queering the

market’ or by believing that they can somehow stop a global correction with

a life of its own.

 

They should be spending their energies preparing contingency plans to ensure

that Ireland has a head start in rebuilding the economy and society when the

depression finally ends.

 

Everything else is just noise.

 

 

Pension justice

 

Two directors of a construction company have been sent to jail for not

passing on their worker’s contributions to the Construction Workers Pension

Scheme.

 

It’s hard to know why this case was any different from all the others – the

pension deductions in question amounted to just €11,781.51 between November

2008 and December 2009, far less than past cases involving some of the

biggest players in the industry, and the loss of benefits to the workers

were presumably no less or more serious.

 

Nevertheless, I suppose it’s better late than never that the state should

start pursuing employers who steal their workers’ deferred earnings, though

this case won’t be much consolation to the hundreds of other construction

workers who have lost their money for good because the law has permitted

their phoenix-like employers, as the Pensions Ombudsman Paul Kenny describes

them, from going bust, then restarting their businesses “under a new guise”

after walking away “leaving a trail of debts”.

 

No reason was given in the Pensions Board press release for why the owners

of the small development company concerned failed to remit their worker’s

contributions to the pension scheme for that year.

 

This doesn’t justify theft, but I know that desperate people sometimes do

desperate things to keep their businesses going and pension fund

contributions, like VAT payments, might be a tempting source of money when

bank overdrafts and finance has dried up.

 

Too bad then that an ad hoc government advisory group on pensions has

recommended against allowing distressed mortgage-holders – and presumably

small business owners - to access their pension savings to reduce their

indebtedness, or use as a source of finance.

Cutting off access to a legitimate fund of pension savings could end up

driving legitimate employers out of business and their unfortunate workers

out of a job.

 

 

Buy on the dips

 

At $1,635 an ounce (as I write) the price of gold is at an eight week low,

down from a brief high of $1,900 back in August, but still $300 an ounce

higher than it was a year ago.

 

Will it reach the $2,000 mark so many goldbugs predicted it would this year,

or will it give up all its price growth, as stocks and shares have in 2011?

 

No one knows for sure, but I stand by my long held view that gold is

reverting to its historic position as a form of sound money in a world of

debased fiat currency. Its 10 year bull run looks set to continue because

the great debt crisis, which accelerated over the decade, is still not over.

 

Perhaps the real question should be, is the price of gold being manipulated?

I’ve seen the Federal Reserve, gold speculators and derivative traders and

even the Chicago Mercantile Exchange, which set higher margin calls for gold

traders last week, being blamed the sharp fall in the gold price.

 

That may be, but so long as central bankers keep printing trillions of

dollars and euro thinking it will contain the consequences of mass

insolvency, gold will shine.

 

Buy on the dips.

 

Tweet

Still no relief to restore confidence in our pensions

 

I am worried about my retirement.

 

Stock markets are behaving like roller-coasters these days as they react negatively to the global slowdown in demand for goods and service and to the slow motion train wreck that is the eurozone.

 

The ride is especially wild in the pension fund markets of so-called ‘developed’ economies, where too much debt has finally caught up with the falling spending capacity of consumers.  With no consumer demand, there is no corporate growth; with no growth, there are no profits and no earnings for pension fund holders.

 

Here in Ireland, 0.6% of the value of private pension savings will be confiscated for the next four years by the government, but there is still a big question mark about whether the tax incentives that encouraged workers to defer a portion of their income for up to 40 years, will be clawed back starting next year.

 

Last week, at a pensions policy conference held by Irish Life, the minister responsible for pensions, Joan Burton, was unable to confirm if the top rate relief was to go or not, which is very unfortunate given how the tax relief was the only thing to offset a decade’s worth of investment losses for the average Irish managed fund holder.

 

The loss of tax relief, should it happen, is sure to impact on jobs in the pension industry itself where hundreds of Aviva jobs are now at risk.

 

According to data collected for Irish Life by consultants Amarach, the vast majority (85%) of private pension fund holders are people who earn less than €70,000 a year and who are unlikely to have full, 40 year service contributions because they either started saving too late or changed jobs too often. Without a private pension, someone earning €60,000 a year, they said, would face a drop of between 60% and 80% were they to depend only on the state pension at retirement.

 

The potential loss of top rate tax relief, the pensions levy and the uncertainty in investment markets is doing nothing to encourage them to keep saving for their retirement, the conference was told.

 

The Minister at least had the decency to admit that the 0.6% pension levy has ‘caused damage’ to pension savers, and how ‘frustrated’ people are about the uncertainty over tax relief.  But the onus is also on the pensions industry, she said, which needed to cut its own charges, something she will help them do by publishing a comparative study of charges in other jurisdictions that is being prepared.

 

It’s good to know that her officials have time to do such important research, but it would be more helpful if all the pension reforms and proposed changes announced by the previous government and noted in the Programme for Government could be advanced.  I expect this isn’t happening because there is no money to introduce a major reform like the universal mandatory pension and not enough political will to cap taxpayers' subsidies or to restrict pension incomes, especially in the public sector.

 

I’m not losing any sleep yet over my pension because I still have at least a decade of work ahead of me and I’ve been maximizing my pension contributions for many years.  But I know plenty of people whose pension funds have lost thousands of euro just this summer, and they are tossing and turning, wondering how they will ever be able to afford to retire.

 

Nothing anyone said at this latest pension conference will provide them with any relief.

 

Bargain property

 

A very brave friend of mine has bought a very old house. 

 

It also need a great deal of work, but she was able to not only convince her lender to give her a mortgage at a very desirable five year fixed rate, but once the building surveyor made his report, she also convinced the seller to drop the price by another €12,000.

 

There is a lot to be said about executor sales, said my friend. 

 

The elderly bachelor who owned the house died, leaving it to his relatives.  At first, they tried to maximize the price – it is a choice south Dublin location – but once it finally dawned on all the them that the market was still falling, and once their agent was confronted by the surveyor’s report, they sensibly decided not to risk losing the sale over a mere €12,000.

 

Executor sales often produce bargain basement prices – there isn’t much sentiment involved when free money is at stake – but patience is also it’s own reward in a buyer’s market.

 

This house fell in value by about 30% from when it was first put up for sale, far more than other properties in the area. The renovation costs are a fraction of what they were three or four years ago, “and the bank wasn’t reluctant to lend, even though the house needs a lot of work.  They could see it’s a very fine house and someday it will be worth a lot of money again.”

 

More of a case of ‘buyer aware’, than ‘buyer beware’.

 

Smart move 

 

I’m not a huge user of smartphone apps, but I do like National Irish Bank’s new current account one.

 

Not only does it let you access all your accounts and transactions, it lets you transfer money between any account and pay your bills, but will soon allow privide access to NIBs dealing desk.

 

The NIB share dealing facility is one of the biggest attractions of their current account and is a very cheap alternative to conventional stockbrokers and on-line dealing facilities. It’s also extremely easy to operate and provides instant access to your trading record.  The app dealing desk, say NIB should be available early in the new year.

 

You don’t need to be an NIB customer to download the App, though its features will be restricted to a branch and ATM locator and the currency converter. 

Tweet

Middle classes strain under burden of financial recovery

 

The government is reveling in all the praise Ireland is getting from our fiscal overlords in the EU, ECB and IMF for the way we’re complying with our receivership; but is anyone asking how far the compliant Irish taxpayer can be pushed around before they start fighting back?

Last week we found out that the cost of bailing out Quinn Insurance was to be a 2% levy on every non-life insurance contract for at least the next five years. This is certainly the high end of the 1% - 2% estimate of last April when it was decided that instead of bankruptcy, Quinn Insurance’s (mainly overseas) losses would be socialized, just like the Irish banks’.

 The €320 million is now our debt, that is anyone who is legally obliged as a driver or mortgage holder to insurer their car or home, along with anyone else who buys travel insurance, payment protection cover and of course all important public liability if you’re a business owner.

Aside from dropping the non-essential insurance contracts – which many are forced to do – there’s not much you can do to register much of a protest about this latest levy.

The government is counting on the middle classes to ‘put up and shut up’ when it comes to levies, which is why they are their favourite way to raise extra revenue without officially raising tax rates.

 They may want to be careful how far they go before they cause the cash cows to resist any further milking: they already pay 3% worth of insurance levies dating back to the collapse of the PMPA in 1982; a 1% levy on life assurance policies; a 0.6% private pension fund levy that will result in €2.4 billion in losses in the next four years plus the private health insurance levy of €205 per adult and €66 per child to subside the VHI, the Department of Health’s otherwise loss-making sick child.

 You also have to wonder just how tempted the government will be to increase the hated USC by another percentage point or two?  It would be the last staw for many who believe they have already paid enough for the failings of others.

 

Electrical charge

 

The introduction of a new property tax in Greece is the latest austerity measure that is causing unrest there. Calculated at between 50 cent and €10 per every square meter of home floor space depending on the value and location, this tax will set back the owner of a typical, modest 150 square meter home, at €4 per square meter, €600 in the coming year.

The tax will be collected via the homeowner’s electricity bill, on which existing local authority tax and the Greek equivalent of the RTE license fee are already included. 

Tax collection remains a significant problem for the Greek government and now the electricity worker’s union says it will sabotage the collection of the new tax on the grounds that the electricity company should not be turned into a tax collection agency.

No doubt the Irish Minister for the Environment Phil Hogan will be watching how this latest Greek tax farce develops; he has already flagged a new water charge and preliminary property tax that some anti-austerity groups say they will oppose.

At just €100, the temporary property-cum-household charge probably isn’t, by itself, going to drive crowds of protestors onto the streets, but it’s a miserable enough little tax and will put up homeowner’s hackles. There’s a real risk of non-payment unless the Minister tack it onto something like a utility bill that so many of us pay by direct debit. 

I wonder how that would go down with our powerful, well paid state electricity workers, who are already smarting at the suggestion by their own union leader that they’re ‘spoiled’ ?

 

Credit waiting

 

When 70,000 people joined their local credit union in the past year, most of them presumably did so with the idea that it would be a source of borrowing.

Now that the Central Bank has informed seven out of 10 credit unions around the country to curtail their lending, thousands of these new and existing customers will either have to curtail their spending plans or look harder to find a source of credit. 

It also means that economic recovery is even further away than most ordinary people believe it to be, notwithstanding the spin the government keeps putting on how well we are complying with the troika’s austerity terms.

The credit unions do have a huge capital base – about €14 billion in savings, and only about half that amount in outstanding loans -  but with 14% of repayments already in arrears the signs are worrying about future losses.  Also, there is a tradition in too many credit unions for loans to simply be renewed if the borrower’s repayment record was unblemished and now reports abound of how those records were maintained only because the new loans were being used to pay off the old ones.

The Credit Union movement isn’t immune to the great Irish recession. Reduced lending probably means further reduced dividend payments, which could result in CU savers shifting their money to the Irish banks, which they perceive to be ‘safer’ now that that they’ve been recapitalized and that pay artificially high deposit interest rates.

In light of this latest intervention, loyal credit union members who are determined to keep their CU open should be more proactive and ensure that their executive committee is controlling its costs, imposing best lending standards and is doing everything to reward savers, but not at the expense of borrowers.

This country hasn’t got a hope of getting through this recession anytime soon if every lender sits on its capital. 

It would nice to think the credit unions are leading from the front, but that can only happen if they get the all-clear from the Central Bank. 

And that doesn’t look like it’s going to happen anytime soon. 

Tweet

Middle classes strain under burden of financial recovery

 

The government is reveling in all the praise Ireland is getting from our fiscal overlords in the EU, ECB and IMF for the way we’re complying with our receivership; but is anyone asking how far the compliant Irish taxpayer can be pushed around before they start fighting back?

Last week we found out that the cost of bailing out Quinn Insurance was to be a 2% levy on every non-life insurance contract for at least the next five years. This is certainly the high end of the 1% - 2% estimate of last April when it was decided that instead of bankruptcy, Quinn Insurance’s (mainly overseas) losses would be socialized, just like the Irish banks’.

 The €320 million is now our debt, that is anyone who is legally obliged as a driver or mortgage holder to insurer their car or home, along with anyone else who buys travel insurance, payment protection cover and of course all important public liability if you’re a business owner.

Aside from dropping the non-essential insurance contracts – which many are forced to do – there’s not much you can do to register much of a protest about this latest levy.

The government is counting on the middle classes to ‘put up and shut up’ when it comes to levies, which is why they are their favourite way to raise extra revenue without officially raising tax rates.

 They may want to be careful how far they go before they cause the cash cows to resist any further milking: they already pay 3% worth of insurance levies dating back to the collapse of the PMPA in 1982; a 1% levy on life assurance policies; a 0.6% private pension fund levy that will result in €2.4 billion in losses in the next four years plus the private health insurance levy of €205 per adult and €66 per child to subside the VHI, the Department of Health’s otherwise loss-making sick child.

 You also have to wonder just how tempted the government will be to increase the hated USC by another percentage point or two?  It would be the last staw for many who believe they have already paid enough for the failings of others.

 

Electrical charge

 

The introduction of a new property tax in Greece is the latest austerity measure that is causing unrest there. Calculated at between 50 cent and €10 per every square meter of home floor space depending on the value and location, this tax will set back the owner of a typical, modest 150 square meter home, at €4 per square meter, €600 in the coming year.

The tax will be collected via the homeowner’s electricity bill, on which existing local authority tax and the Greek equivalent of the RTE license fee are already included. 

Tax collection remains a significant problem for the Greek government and now the electricity worker’s union says it will sabotage the collection of the new tax on the grounds that the electricity company should not be turned into a tax collection agency.

No doubt the Irish Minister for the Environment Phil Hogan will be watching how this latest Greek tax farce develops; he has already flagged a new water charge and preliminary property tax that some anti-austerity groups say they will oppose.

At just €100, the temporary property-cum-household charge probably isn’t, by itself, going to drive crowds of protestors onto the streets, but it’s a miserable enough little tax and will put up homeowner’s hackles. There’s a real risk of non-payment unless the Minister tack it onto something like a utility bill that so many of us pay by direct debit. 

I wonder how that would go down with our powerful, well paid state electricity workers, who are already smarting at the suggestion by their own union leader that they’re ‘spoiled’ ?

 

Credit waiting

 

When 70,000 people joined their local credit union in the past year, most of them presumably did so with the idea that it would be a source of borrowing.

Now that the Central Bank has informed seven out of 10 credit unions around the country to curtail their lending, thousands of these new and existing customers will either have to curtail their spending plans or look harder to find a source of credit. 

It also means that economic recovery is even further away than most ordinary people believe it to be, notwithstanding the spin the government keeps putting on how well we are complying with the troika’s austerity terms.

The credit unions do have a huge capital base – about €14 billion in savings, and only about half that amount in outstanding loans -  but with 14% of repayments already in arrears the signs are worrying about future losses.  Also, there is a tradition in too many credit unions for loans to simply be renewed if the borrower’s repayment record was unblemished and now reports abound of how those records were maintained only because the new loans were being used to pay off the old ones.

The Credit Union movement isn’t immune to the great Irish recession. Reduced lending probably means further reduced dividend payments, which could result in CU savers shifting their money to the Irish banks, which they perceive to be ‘safer’ now that that they’ve been recapitalized and that pay artificially high deposit interest rates.

In light of this latest intervention, loyal credit union members who are determined to keep their CU open should be more proactive and ensure that their executive committee is controlling its costs, imposing best lending standards and is doing everything to reward savers, but not at the expense of borrowers.

This country hasn’t got a hope of getting through this recession anytime soon if every lender sits on its capital. 

It would nice to think the credit unions are leading from the front, but that can only happen if they get the all-clear from the Central Bank. 

And that doesn’t look like it’s going to happen anytime soon. 

Tweet

Volatile markets spell bad news for the retiring types

 

How can an ordinary private sector worker, whose managed pension fund is down nearly 6% in August alone, and has lost over -8.4% so far in 2011, have any confidence in the idea of an affordable retirement?

Only with great difficulty, especially when you consider that the last decade has been a complete write-off too, with an annualised managed fund return of just 0.9% since 2001. 

Adjusted for inflation, the pension contributor might as well have saved themselves the bother of investing in a ‘formal’ pension scheme and instead thrown their bundles of euro onto the nearest bonfire.

As one reader also discovered, leaving his pension money entirely in cash didn’t yield him any greater, or safer return: “I put €10,000 into a cash pension fund only to discover it was worth just €9,600 a year later. I had no idea the charges would be so high.”

The fall in stock and currency markets, continuing high charges, the impact of inflation and the clawing back of pension tax relief is guaranteed to make it tougher, not easier for private sector workers to save for their long term future.

The picture isn’t much better for public sector workers, the victims of pension promises the state can no longer afford. Nearly every generous defined benefit pension in the western world is being amended or abolished.  How can a state on economic life support, with a €20 billion annual budget deficit, possibly maintain Rolls Royce pension payouts to its public servants?

It can’t, is the simple answer.  With public sector and old age pensions being paid straight from general taxation and private pensions relying on the performance of increasingly rigged stock markets, the government will hopefully acknowledge the pensions crisis, let alone have a programme to repair it, when it presents its three year budget plan later this year.

Until then, time for a little ark building of your own.  Financial advisors, anticipating more market volatility and what might be the last chance to claim top rate tax relief, are all trying to come up with credible, short-term investment positions for their existing clients.

Join them.

 

No key solution

The frustration amongst indebted homeowners is palpable: it’s hard to avoid their grim stories in the media. Growing numbers, many with young families, feel that they are getting nowhere in trying to sort out their mortgage arrears or repayment problems.

Meanwhile, the forbearance measures in place “are not working and the ‘solutions’ are not long term solutions” says Michal Dowling of the Independent Mortgage Brokers Association which is bringing out its own report shortly on the arrears crisis.

For mortgage experts like Dowling the exponential growth in arrears and repossessions means that time is of the essence if the cost of this crisis doesn’t also spiral out of control.  What is needed, he says, is a consistent approach by the all the banks in the way they process applications for restructuring and forbearance measures, let alone providing a wider selection of options that can be offered.

This is not a problem, he says, that was ever going to be dealt with by one-size-fits all approach.

Meanwhile, the idea that there are a growing number of frustrated, hugely indebted homeowners who are resorting to the ‘jingle keys’, nuclear solution “is an urban myth”, says Dowling.

Only about 10% of all repossessions are ‘abandoned’ repossessions, he says and while some owners are undoubtedly non-nationals who’ve gone home, most cases of people ‘walking away’ are actually people with substantial arrears who have agreed to voluntarily leave their homes. In those cases, the banks have been known to write off the shortfall, but only “on a case by case basis.”

 “It is not advisable to ever just hand back the keys and walk away property if you plan to stay in the country,” says Dowling. The banks will, and they have, sought court judgments against such people.  It can impact on your earnings for up to 12 years, “and in cases that I’ve come across that involve buy to let properties that people want to walk away, I know that the banks will look for the courts to attach the shortfall to your to your family home.”

No matter how inadequate the debt forbearance measure or how stressful dealing with the mortgage lenders can be, stick with it, says Dowling.

It buys you time.

 

Paper trails

There is a saying that all fiat currencies eventually turn into wallpaper.

Last week, the Swiss franc joined the global money-as-wallpaper club by abandoning the sound money principals it had clung to for so long.  It de-pegged itself from gold and onto the unstable euro instead.

The Swiss said they had not choice. So much money was pouring into the franc from weak currencies like the dollar, pound and euro that Swiss exporters were in danger of losing their businesses.

The currency wars that started last year have been ratcheted up by the Swiss move but it has left gold as one of the last stores of value. 

With shares falling, commodities and bonds looking very overpriced, and even strong currencies being intentionally debased by their central banks, gold is the only ‘money’ that can’t be printed out of thin air or have its market value set by political dictat.

Unfortunately, ordinary Irish people still don’t see it that way.

Governments in developing countries, and their wealthier citizens are piling into gold, but here, all people see is a price per ounce that has soared. Silver, at c€30 an ounce seems a more manageable price tag, but it travels on an even steeper rollercoaster than gold and is not for the faint of heart.

In the past six months an ounce of gold has gone up (and occasionally slightly down), by over €300 (over $435), a price point that is just too great for people who only see a bubble ready to burst when any asset rises that fast.

I don’t think gold is in a bubble, but I understand why others do, and it’s too bad. 

All paper currencies, backed by nothing but the empty promises of the indebted governments that issue them, turn into wallpaper eventually.  And it will happen to the euro and dollar – and the once-mighty Swiss franc as well – once the central bankers get their instructions to fire up their presses and print away the toxic banking and sovereign debts.

That’s when it’ll be time to invest in wheelbarrows. 

Tweet

The eurozone car crash encourages us to go for gold

 

A car crash in slow motion is as good a description as any for how the European debt crisis is unfolding. The number of casualties there will be in the end is still unknown, but it’s not looking too good.

 From a personal financial position the best thing to do is not to linger at the scene for too long. You don’t want to find yourself on the wrong side of a sovereign debt default, whether in Greece, here, Portugal or any of the other peripheral countries that are being systematically shut out of the borrowing markets. 

In the same way that the credit bureau assesses an already indebted individual’s capacity to take on more loans, so do international credit agencies decide whether a country has hit its borrowing limit and is unlikely to be able to repay any more loans.

Realistically, we Irish – and that goes for the government as well - should be considering what happens if the EU, ECB and IMF are unable to work out a new monetary, fiscal and political union for the eurozoneto replace the chaotic efforts that have so far clearly failed.

 

It looks now that events are overtaking the politicians and central bankers and it might be better to ignore what they are doing – or rather, not doing – and come up with a plan of your own.

 

If you have a sizeable amount of cash that you do not need for day-to-day living purposes, you may want to move it now to protect it from the worst case scenario of sovereign default or a euro-wide banking crisis. You can do this by opening a deposit account in a solvent bank in a non-eurozone country. Northern Bank, in Northern Ireland which is part of the non-eurozone Danske Bank and sister bank to National Irish Bank, is probably the most convenient destination.

 

A euro currency account in an ‘offshore’ non-eurozone bank means you avoid currency exchange risks and costs if we stay in the eurozone and you want to transfer money back here. By also opening a non euro currency accounts – the Swiss franc and Norwegian krone are often cited as two of the world’s safest currencies – means that you hedge the growing risk of Ireland no longer remaining in the euro or even the collapse of the eurozone.

 

The soaring price of gold, priced in euro, dollars and sterling, is a sign that more people and even countries like China and India in particular are losing faith in paper currencies backed by nothing but the promises of the indebted countries behind them.

 

Precious metals cannot be devalued or printed at the whim of politicians and central bankers and if any eurozone country defaults or is forced to leave the euro, you will be happy to have a portion of your savings or pension fund in gold.

 

Meanwhile Eddie Hobbs, the financial advisor recommends that pension fund holders urgently discuss the security of their pension savings – and especially the cash and bond holdings within their fund - with their pension fund advisor, administrator or trustee.

 

The cash holdings in the fund should not be held exclusively in Irish banks, he says, or entirely in euro, or the spending value of your retirement income could also be at risk.

 

Finally, ignore the people or politicians who suggest that the above is an overreaction and that our leaders in Brussels and Frankfurt will come up with a solution – in time - that will satisfy everyone.

 

That may very well happen. But this is not their hard earned money or life savings at stake. It is yours.

 

Unhealthy Interest

 

 

Pensions are on the mind of one reader, a fan of RTE’s The Week in Politics programme.

 He noted that some Dail deputies are now claiming that the private pensions levy is a ‘crock of gold’ that can be tapped to offset government cutbacks, such as the closure of hospital services.

 

The Limerick Fianna Fail deputy Niall Collins, appeared recently on the programme suggesting to an incredulous Sean O'Rourke that "there is no need to close hospitals, now that the Minister for Finance has a new stream of revenue, the pension levy".

 

The €1.8 billion confiscation of pension savings over the next four years has been earmarked for the Job initiative scheme’ not to finance struggling hospitals, but our reader thinks “It can only be a matter of time before the spokesmen for every pressure group is calculating on the airwaves about how their interest could be served if, say the pension levy was increased to 2% for ten years. We could raise whatever you're having yourself…"

 

Hardly a cheerful thought for anyone wondering about whether there’s any point in continuing to pay into a pension plan.

 

 

Protection racket

 

I wonder if anyone was surprised to read that the largest proportion of the nearly €21 billion social welfare budget is paid to older people, followed then by payments to job seekers.

 

In her department’s annual report that was published last week, the Minister for Social Protection noted that more than one in every five euro in her budget or 22.1% is made up of payments to older people, in the form of state pensions and other benefits, some of which, like electricity and fuel allowances are to be clawed back in the next budget.

 

The next 19.6% of the budget goes to the unemployed, but just 12.7% of payments are child related, the bulk of which is paid in the form of monthly child benefit payments to 1,124,003 children from 591,432 families that are neither taxed nor means tested.

 

By flagging cuts in the household package of benefits to pensioners last week, the Minister is confirming that while actual welfare rates may be left untouched in December’s  Budget, the bells and whistles that adorned the various payments are likely to disappear.

 

 

Tweet

Why Counting on a state pension just doesn’t add up

 

Politicians do not concern themselves with the long term effects of their decisions.  The here and now and the next election is about as far as they can focus, and nothing exemplifies this short-termism better than the way state pension systems are run.

 

The latest ‘Mind the Gap’ European pension update from the insurer Aviva unfortunately shows, once again, that most people at the receiving end of state and private pension have the same short-term view when it comes to retirement funding.

 

Here in Ireland, 75% of those questioned here in Irelenad, who were a decade away from retirement, are still counting on their state pension to help finance their retirement. They believe they will need at least 50% of their final salary to ensure an appropiate level of comfort.

 

This might be a perfectly reasonable, and even attainable presumption, if two things were also in place – a solvent state and an already substantial individual pension fund.

 

This Irish state cannot afford the existing €12,000 a year pension promise to every qualifying PRSI contributor who turns 65 and is only paying out the cheques because of the financial life support package from the EU/ECB/IMF.

 

Meanwhile, anyone who still thinks they’ll be claiming that €12,000 (or its inflation adjusted equivalent) in 10 years and that it will supplement the 50% of their salary that they told Aviva they will need to live on in retirement, should also think again.

 

If such a person’s final salary is, for argument’s sake, €50,000, and the total pension they want is €25,000, then they will have to have saved over €200,000 into a pension fund in order produce another €13,000 worth of private income to supplement the €12,000 they will get from the state.

 

Unfortunately, judging by today’s experience, the average private Irish worker is more likely to retire with a pension fund worth about €100,000, than over €200,000 and this will produce an income of €6,000 if they are lucky.  This also explains why 59% of the same age group told Aviva they expect to keep working after they reach retirement age.

 

Let us hope some form of state pension is still be around if they are to avoid having to work forever.

 

Meanwhile, as unprepared as pre-retirees are, the Aviva survey revealed that 34% of the 18-34 year olds polled say they will need 100% of their final salaries to have a comfortable retirement.  The remaining 56% admit they’re more concerned about funding today’s bills than any they face in retirement.

 

Both groups are in for the shock of their lives some day. 

 

As for our well-pensioned politicians, well, they lost the plot years ago.  They has their chance 20 years ago to introduced sustainable tax and funding structures for all pensions – private, public service and state – but didn’t bother. 

 

Now we’ve run out of money and time, the two most important retirement factors of all.

 

Follow exit signs

 

I received a note from a reader last week who thought I might be interested to know that his life and pensions broker – a commission paid salesman, really - had written to him to suggest that he shift the money he had in a predominantly equities-based Irish Life savings fund into an all-cash fund. 

The reason for this alert – the broker was of the opinion that his client could lose yet more of his money if he left it in shares.

 

“Wealth protection” is the common mantra of most advisors these days. One cynic of my acquaintance believes this could be nothing more than a ‘churning’ opportunity by a know-nothing life assurance salesman who will pick up a commission if he can shift the reader into another asset.  Perhaps not the first time: most life companies still allow a free switch or two a year between their different funds.

Whatever the motivation, I think the broker was at least doing this reader a favour by alerting him to the level of concern there is about markets in light of the great uncertainty about the indebted eurozone countries and whether we can avoid defaulting on our debts, as well as the impact that the end of quantitative easing by the US Federal Reserve Bank will have on America’s ability to meet their own debt repayments and the support of stock prices.

 

Anyone with an investment fund or private pension should have it reviewed – ideally by an experienced fee-based financial advisor who can determine how exposed you are to either a single asset – like shares – and whether it would be safer to diversify, or exit the market altogether and seek the safety of cash and indexed bond funds and some ‘real’ money like gold.

 

While they’re at it, ask your broker to pitch in by reducing the fees, charges and commissions that weigh down the value of your investments.

 

You can laugh or cry

 

Recent announcements by the Taoiseach and Tanaiste that there would be no increase in income taxes or social welfare cuts in the December budget show what a pair of comedians they are.

 

Last Saturday morning, the Minister for Social Protection got in on the act when she announced the setting up of an Advisory Group on Tax and Social Welfare that will “harness expert opinion and experience to address a number of specific issues around the operation and interaction of the tax and social protection systems, recommend cost-effective solutions as to how employment disincentives can be improved and better poverty outcomes, particularly child poverty outcomes, achieved and to identify the specific practical institutional and administrative improvements to their operation.”

 

Out of the 15 people named as the Minister’s new advisors, 13 of them are public servants, one is a trade unionist and one is a private sector human resources director.

 

I’ve no idea how much these mainly government employees will collect in fees and expenses, but with that torturous mission statement, the meetings are sure to be a barrel of laughs.

 

 

Tweet