Jill Kerby

One of the (many) criticisms laid against the majority of government ministers and TDs is that they lack business and finance experience.  Lawyers, teachers and farmers are, shall we say, over-represented in our representative assembly.

 

The latest publication of Dail Members financial interests (and the Seanad) makes for very interesting reading, and pretty much confirms the above. (You can see for yourself what your local TD or minister has declared by way of directorships, shares and property holdings: http://www.oireachtas.ie/viewdoc.asp?DocID=11429).

 

Close scrutiny of the shares and property interests that members disclosed (their spouse’s interests do not have to be divulged) shows that many of them have made the same investing mistakes as the rest of us:  they poured too much money into Irish bank shares and other Irish listed companies (which represent a tiny fraction of European or global markets). And way too many of them bought far more than they should have had, both here and in other countries. 

 

For example, the Taoiseach himself who owns one rental apartment in Leeds and two other rental properties in Dublin 7 and Dublin 8 – which are probably not the best investments he could have made now that prices have crashed and rents are falling. (I live in Dublin 8).

 

The register doesn’t reveal when the properties (or any shares listed by TDs and Senators who have a separate register) were purchased, but with no other declared shares or investments, the Taoiseach, perhaps even when he was Minister for Finance, was clearly over-invested in a single asset – property sicne these are in addition to his family home back in Offaly.  (The Tanaiste and Minister for Finance list no investments whatsoever.)

 

He isn’t the only one who may have overstretched his property interests:  the biggest property magnates include Frank Fahy, the Galway West TD who owns outright or is a partner in many residential, commercial and retail properties in 18 different locations that include Galway and Limerick, Leixlip and Athlone, Dublin and Dubai, Boston and Brussels; he also owns properties in France and Portugal as well as a number of publicly quoted shares, including AIB, Grafton, Eircom, Kingspan, Ryanair and Worldspread.  

 

Alan Shatter, the Dublin TD has 14 different residential and commercial property investments, mainly in Dublin, London and Florida as well as small portfolio of shares. The Dublin North TD, Dr James Reilly is another major property investor with 10 different interests in land, holiday homes, medical facilities, residential lettings, some farm and woodland and an entire commercial building in Lusk with about a dozen different tenants including residential tenants. 

 

The register is notable for the few women TDs with any outside financial interests: poor Mary O’Rourke, the Westmeath TD and former government minister is now stuck with Bank of Ireland shares, as is health minister Mary Harney who laments that her original stake in Bank of Ireland, which she bought with her husband originally “exceeded €13,000…they do not do so now”.

 

Only the Cork TB Deirdre Clune stands out amongst her women colleagues for having three residential properties and sites in Dublin and Cork and for a few share investments which include – patriotically - the Barry’s Tea company.

 

A few of the farmer’s (or farmland owners) like Richard Bruton from Meath, Michael D’Arcy from Wexford, Seymour Crawford of Cavan Monaghan, Frank Feeghan of Sligo/Roscommon, Tom Hayes of Tipperary South and especially Edward O’Keefe of Cork East also happen to have invested – quite sensibly – in various co-op and agri-shares:  farmland and agri-company shares are expected to be among the investment survivors of the global downturn. 

 

As many people already know, the Dail is pretty top heavy with former teachers, and a pattern emerges here too:  they tend to stick with life assurance investment funds from the likes of AIB, Bank of Ireland, Hibernian, Standard Life and Irish Life and Permanent, all of which have suffered substantial falls in value.   

 

Quite frankly, there is very little for a constituent to learn from the investing habits of their public representatives, except perhaps not to put all your eggs in either the Irish property or stock exchange baskets.  

 

However, there are a few who have tried to position themselves with a more balanced and global portfolio: Sean Haughey, the Dublin North Central TD holds global oil and gas shares, European share funds, emerging markets funds (like Asia and China) and investment trusts, big pharmaceutical companies (as well as a tobacco company) and perhaps unfortunately, a number of Irish and foreign bank shares though he starting disposing of a number of his shares in February ’08.

 

Meanwhile, Michael Noonan, the Limerick TD is clearly a huge fan of low cost ETFs – exchange traded funds – and Dr Rory O’Hanlon of Cavan/Monaghan has one of the most global share portfolios of all – it even includes Chinese real estate interests. 

 

And should you happen to meet his colleague, Minister Willie O’Dea on a Limerick street, do ask him how his African gold and diamond shares are doing these days:  pretty well, I’d say. 

 

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LIFE COVER IS ONE INSURANCE YOU DON’T WANT TO LOSE

 

The imposing of the pension levy on 370,000 public and civil servants has already resulted in one unintended consequence: life and pensions brokers from one end of the country to the other are being told to cancel Additional Voluntary Contributions (AVCs) that up to half of all these state workers have been making, some for many years, to top up pensions that would otherwise be short maximum service years.  

The ‘law of unintended consequences’ looks as if it might be broken again for another financial product that many people who are losing their income or their jobs are cancelling:  their term life insurance. This is especially unfortunate, because while the AVC can always be re-instated when the economy picks up again, getting rid of life insurance as a cost saving measure could end up causing a catastrophe for your dependents. 

Some people believe carrying mortgage protection insurance and some death-in-service benefit that they have at work is sufficient.  But these days the loss of job also means the loss of the work-based insurance; mortgage protection might cover the outstanding loan in the event of your death, but your dependents may be unable to sell the property for what they believed was even the mortgage value.  It could spell financial disaster – at least in the short term.

The Financial Regular has just published its latest comparison price survey on life insurance (see www.itsyourmoney.ie) which is very timely and helpful for anyone who feels perhaps that it’s an expendable cost.

The survey includes three term life insurance profiles and three mortgage protection insurance profiles and shows the cost of the insurance for male and female separate and joint smokers and non-smokers and for dual coverage for both smokers and non-smokers.  (Joint cover pays out only on the first death; dual cover pays out after both deaths and the latter is better value but only slightly more expensive.)

The Regulator reminds us that the cheapest quotation may not be the best, but straightforward term insurance – is a pretty simple product though in the form of mortgage protection, the cheaper version is inevitably the one in which the cost of the premiums – and cover – reduces in tandem with capital repayments. In other words, the value of the insurance falls in line with the amount of the loan you pay off and the amount outstanding. 

What might also surprise buyers is that term mortgage protection insurance is cheaper - by about 20% -  that ordinary term cover and that smokers can expect to pay anywhere from 30% to 50% more for the same level of insurance.  The lower mortgage protection cover is partly due to the fact that there tends to be greater retention of this insurance because it is compulsory. 

So which company offers the best price for the 30 year olds seeking €320,000 life cover over a 30 year period?  For male non-smokers, the cheapest policy (by just 29 cent a month) is Danica Life at €28.16 followed by Bank of Ireland/New Ireland at €28.47. Danica Life also comes out top at €21.74 per month for women; and male and female smokers can expect to pay Danica just €48.72 and €33.20 per month respectively.  Not all of the 10 companies surveyed offer joint policies, but again, Danica Life comes out on top for these, while Bank of Ireland Life is the cheapest for dual policies which amount to €42.72 and €76.61 per month respectively for non-smokers and smokers. 

Life insurance gets more expensive the older you buy it, as the third profile in the Regulator’s survey shows:  for just €120,000 cover over 10 years this time, a 49 year old male non-smoker will pay Danica about the same amount they charge the 30 year old male non smoker who wants €320,000 worth of cover over 30 years. 

Danica Life, incidentally, is the life assurance arm of the Danish mutual bank, Danske Bank, which is the parent company of National Irish Bank and is one of the more secure European banks, not a small consideration in these uncertain banking times. 

The importance of holding onto your life insurance can’t be stressed enough, even if you do lose your job.  Term cover is not hugely expensive compared to other financial products, but if the policy has been in place a few years and you cancel it, you will have to pay more when a new policy is started. This is because you will be assessed not just at an older age than when you first took out the cover, but also perhaps you health may have deteriorated.  

Keep in mind that any serious illness you suffer, once you cancel the policy, can also impact on the cost of future insurance if you want to buy some again – this is because you many now have a ‘pre-existing medical condition’ which, like your age will be used to calculate the new premium.   

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TAKE CONTROL OF YOUR FLEXIBLE FRIEND

 

Desperate to reduce the number of card holders who can’t pay off their credit card, American Express in the US recently offered a $300 incentive to certain customers to stop using their card and close their account. 

 

If only some of the Irish card providers would be so inspired:  the number of people here who can’t pay off their card balance is on the rise as thousands of young workers join the Irish dole queues. 

 

The credit card may be one of the most convenient forms of payment, but it also provides one of the easiest ways to borrow and spend. With an estimated 2.5 million credit cards in circulation here in 2008 and nearly 120 million annual transactions worth about €14 billion, we are keen users of the little plastic cards, though we don’t hold proportionately as many cards as Americans or the British who don’t pay a €30 stamp duty per card. 

 

We do, however, pay some of the highest interest rates on our cards and these rates are beginning to go up, just as some people are also being told the amount of credit available to them is falling. 

 

I don’t this is such a bad thing.  The higher the interest rate, the more incentive there is to monitor your spending and clear the balance sooner, though so many people fall into the trap of using up their credit balance quickly and then find themselves struggling to pay off both the interest and some capital. 

 

The most sure-fire way to never get yourself into credit card debt is to arrange to have your balance cleared every month by direct debit.  Having that deduction in place will control how much you spend. 

 

For the person who blithely only pays the minimum required payment every month – indicated in that little box at the bottom of your statement – the outcome is disastrous.  For example, if your balance was €5,000 and your interest rate was 16.9% - not an untypical rate for many - and you only paid the 2% of the required balance, it would take you 568 months, or 47 years, to pay off the entire loan.  You would also have paid a whopping €10,780 in interest on those €5,000 worth of purchases! (Key in your own credit card balance on the calculator at www.whatsthecost.com to see how long it would take you to pay off your debt.)

 

With so many people now struggling to find sufficient cash by the end of the month to pay their bills, you need to lower that credit card balance. Here are my five best tips to remove your flexible friends fingers from around your neck and to regain control of your card: 

 

1)Find out exactly what credit rate you are paying.  Ask your bank if it has a better rate and how many months free credit they will give you to switch to that card. 

2)If you bank doesn’t cooperate (and you account is in good standing) take advantage of the once-a-year, free stamp duty card switch facility and move to a provider with a free or low interest rate period AND a lower interest rate for when your free period is over.  The likes of Halifax and Bank of Ireland offer 0% for six months and NIB, 0% for five months. MBNA cards offer a 1.9% six month switch period.  The lowest, post-free period rate is Bank of Ireland’s card at 9.5%. 

3)While you are paying off your credit cards balance, don’t use it (even if the bank tells you that there will be no interest on new purchases.) The idea is to clear the debt as much as you can, not increase it.

4)Once your six month period is up, think about switching to yet another zero or low balance card, though try time it so that you don’t get hit with the €30 stamp duty twice.  This is especially good advice if you have a particularly large balance.

5)Still having trouble clearing the card?  It’s time to speak to your lender to arrange a personal loan with a rate that is lower than the card rate. Then arrange a direct debit to It’s also time to get the kitchen scissors out. 

 

Finally, don’t take out any credit card until you check the credit card cost survey at www.itsyourmoney.ie.  Click on each card to get more details about extra charges and penalties, especially the cost of withdrawing cash with the card, which many of us resort to especially on holidays. (MBNA offers a similar table for their cards only, including their affinity cards at www.mbna.ie/creditcards/directory.html). 

The purchase rate on Irish credit cards hasn’t risen noticeably since the downturn began, but the cost of money withdrawals has soared:  AIB and Bank of Ireland may have two of the lowest purchase rates at 8.5% and 9.5% but they’ll charge you 23.4% and 19.9% from the day of withdrawal.  

 

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HAS THE PROPERTY WORM TURNED?

 

There’s a hint of spring in the air, and if the estate agents are to be believed, there is also considerable interest by perspective buyers in the huge inventory of unsold properties that are on the market.

According the Sherry Fitzgerald CEO, Mark Fitzgerald, over 4,000 viewings were recorded by their company on the Valentine’s Day weekend and many first time buyers are simply aching to buy a home, if only they could raise sufficient finance. 

I think we should take what Mr Fitzgerald says with a pinch of salt:  the bursting of the property bubble and the collapse in prices has hurt his business badly, and any glimmer of hope is going to be blown out of proportion. 

But he is right when he says that the property downturn is now entering its third year and that people “can’t put their lives on hold indefinitely”.   What those buyers need however, is to go into any house purchase with their eyes wide open, a firm hold on their wallets, and a total understanding that what they are buying is a home, not an investment, an alternative pension or anyone other than a very expensive consumer item that is going to carry a number of  on-going costs in addition to the monthly mortgage. 

Mr Fitzgerald’s note of optimism last week, was of course, also encouraged by the announcements by the major banks – AIB and Bank of Ireland, Ulster Bank and Halifax of finance packages for first time and trading up buyers. 

The two main banks are offering lower, one year fixed rate interest rates of c3.5%APR for loans up to 95% of the purchase price while the Halifax has one year fixed APR rates of 3.17% and 3.14% until July 2010 and July 2011. Ulster Bank has a slightly different deal on offer of a five year fixed rate of 4.1% if the FTB agrees to buy a house listed amongst the inventory of eight of their property development clients; the bank will guarantee up to a 15% mortgage capital reduction if the house has fallen in value by up to 15% at the end of the five years (as determined by an independent valuer.)  If it has fallen by more than that amount, the loss is yours alone.

Needless to say, none of these deals comes without conditions and the most obvious ones are that you have a sufficient down payment, a secure job and the ability to repay the loan. 

So is it time to get onto the property ladder or not?  

My first instinct is an emphatic “no”:  not only are house prices still falling, but the latest DAFT report showed that rents are falling too – by a whopping 12% last year with 21,000 properties now available to rent, twice the number from the same time last year. This is not the sign of a healthy property market. 

Unemployment is also still soaring under the weight of the on-going global credit crisis, low consumer spending and falling productivity and tax revenue.  The income tax and pensions levy are both going to take yet more spending power out of the economy. 

This deflationary period means that any house you buy is going to keep going down in price until the bottom is reached:  astonishingly, 19 years after Japan’s great property crash, prices there are still 80% less than they were in 1990. 

On the plus side, buyers are firmly in the driving seat and sellers are open to offers and negotiation. If you are interested in a property offered by one of the eight Ulster Bank developers (see Secure Step Mortgage link at www.ulsterbank.com) it might be worth getting that price down at least another 15% (but ideally even more) before taking up the 15% refund insurance offer; call me a cynic, but I expect the developer may have already priced in the refund.

Whatever about the tempting mortgage offers, you should keep the following in mind before buying any property this year, even if you are certain that is the ideal house for your long term needs and the location is perfect: 

A one-year fixed rate may end up resetting at a higher rate in 12 months time, resulting in a higher repayment.  Look into fixed rates as well.

In addition to the monthly mortgage you will have on-going insurance, utility and maintenance bills. Factor in a property tax and local authority rate charge going forward that might be a flat rate (perhaps €1,000) but more likely a percentage of the rateable value of the property. In most countries this is between 0.5% - 1%. 

Price falls could continue:  if you buy now with just 5% down, you could be in negative equity within months of taking on the mortgage.

Don’t count on the lender or mortgage broker to properly stress test the loan. Do it yourself by asking if you could still afford the mortgage if the repayment rose to 5%-6%.

Aim to pay off your mortgage as quickly as possible, especially while interest rates are low.  The more equity you own, the better to command the best mortgage interest rates.

Offer to rent the house for a year or two, with an option to buy. 

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10 SMART WAYS TO BUILD A RECESSION CASH BUFFER

 

Cash in king, whether you’re a bank, a business or just an ordinary PAYE worker:  the challenge for all of us is not to run out of that cash as the economic downturn deepens. 

For anyone who has unfortunately lost their job, their cash-preserving options are fewer than for someone who is still in employment, but it is even more imperative that they maximise every penny possible.

The following is my top 10 list of practical ways to quickly maximise your personal finance budget; you may not be able to access all of these savings, but you should be able to reduce our outgoings and improve our cashflow via some of them. 

1) If you have a mortgage, and you are already struggling to pay it, you can reduce it by requesting your lender to switch you onto interest only payments, and/or by extending the repayment term to a maximum period of, say, 35 or 40 years.  

Several hundred euro a month should be freed up by this action and you can then use this money – after it’s been deposited safely in a good demand account - to help offset your redundancy or build up as an emergency fund. Everyone should have three to six months worth of net income in an emergency account.  

The new mandatory code of practice regarding home repossessions means that if you do end up unable to pay your mortgage, the bank cannot begin foreclosure procedures until you are at least 12 months in arrears.  Just make sure you don’t keep your mortgage and your savings fund with the same bank – they can deduct the full mortgage payment from the savings if you do.  

 

2) Do you have enough space in your house to take in a lodger under the Rent a Room scheme? You can now earn up to €10,000 a year tax-free – though not by renting to your adult children. Register with the revenue to qualify for the scheme. 

3) If you have credit card debts, try to reduce the total sum as quickly as possible by switching to a 0% or very low interest repayment card with the likes of the Halifax, Bank of Ireland and Ulster Bank for six, six, and five months respectively after which you switch to their much higher variable interest rates.  Postbank has just brought out its first credit card at a 1.9% rate for six months. Don’t keep spending. 

4) With the economy imploding, it’s time to get real:  car loans can be as crippling as a mortgage if you can’t afford them. Ask for a new interest only or longer repayment schedule.  You can try and sell the vehicle, but most car loans are unsecured – the vehicle will be repossessed if you fall into arrears but once the card is recovered you can’t be chased for any price shortfall.  (Your credit record will take a hammering.) If you can’t or won’t sell the car at least consider putting it up on blocks so that you don’t have to pay the thousands of euro it typically costs to tax, insure, fuel, NCT, park and maintain it every year. 

5) Forget the foreign holiday this year and use this money – typically €3,000 or more for a two week family trip when all expenses are counted – and use this money to build up your emergency fund. Check out the growing selection of local budget offers at home instead. 

6)  Try to sell your unnecessary “stuff” on e-Bay or other on-line sites, through boot sales and auction rooms.  It all adds up.

7) If you must, borrow from your family. Keep proper records and make sure repayment arrangements (where they apply) are clear to everyone.  You can always offer them collateral:  your house, car or other assets (and hope they never collect.) If interest is charged it will probably be less than the bank would charge you and (hopefully) it won’t be compounded.  

8)  Pension fund contributions can be either reduced or postpone entirely – just check that you are not penalised. You will lose some tax relief, but you should still try and bank this money instead. 

9) Cut the rest of your discretionary spending to the bone, like expensive gym or golf club memberships, beauty treatments, eating out and alcohol.  If you bring your own lunch instead of paying a fiver every day, physically bank that amount into a big glass jar. Ditto for expensive cups of coffee (buy a thermos), newspapers and magazines you can bring home from the office or read free on-line.   I am assuming you have already cut your huge grocery bill with visits to the discount grocers.

10)  This is a controversial suggestion, but if you have older teenaged children or other young adults still living at home and earning who are not being charged anything for the bed and board I suggest you insist upon a minimum 20% contribution.  Their budgets will be squeezed too, but their contribution could – in a worst case – help keep a roof over everyone’s head. 

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ANALYSIS: The impact of tax relief means that those on higher incomes in the public service will, in percentage terms, suffer a smaller hit to their incomes than their lower-paid colleagues, writes Dominic Coyle

WHEN PUBLIC service workers open their pay slips next month, they will notice a drop in their take-home pay as the pension levy announced this week by the Government kicks in.

The actual impact will depend on their current pay. They will also benefit from tax relief on the sum deducted towards their pensions.

Taoiseach Brian Cowen said the levy would take 3 per cent from the first €15,000 earned in a year.

Above that level, 6 per cent will be deducted on earnings between €15,001 and €20,000. On anything higher, 10 per cent will be taken.

The levy will take into account total earnings, not just salary. In that, it will operate in the same way as the income levy introduced by the Minister for Finance in the last budget.

That means overtime payments, which do not count when calculating pension entitlement, will be included when applying the levy.

However, the impact on take-home pay will be reduced because workers will receive tax relief on the amount deducted in the pension levy. Income tax, PRSI and the health levy will only be assessed on the amount of pay left after the levy has been deducted.

That will hit the Government coffers which are likely to receive closer to €900 million as a result of the levy.

For those earning above the marginal tax threshold – €36,000 for single people and €45,400 for married workers bringing in the only family income – tax relief means they will no longer be taxed at 41 per cent on the portion of their income taken in the Government pension levy.

The Department of Finance says average earnings in the public service amount to €50,000. At that point, the levy will amount to €3,750, or 7.5 per cent of earnings.

But that will be offset by the tax relief. Precisely how much tax will be paid depends on whether people are single or married with just one income.

People first recruited to the public service after 1995 already pay limited pension contributions and that will also affect their final take-home pay.

A single person who joined the public service after 1995 and is earning €50,000 will see his or her annual take-home pay drop only €1,998, rather than the €3,750 indicated by the levy – effectively a 4 per cent fall in take-home pay, not the 7.5 per cent headline rate.

The worst-off workers at that salary point would be a married public servants in a household with just one income – again recruited since 1995. They will see a net fall of annual take-home income of €2,331, but even that is 4.7 per cent of their pay.

The impact of tax relief means that those on higher incomes in the public service will, in percentage terms, suffer a smaller hit to their incomes than their lower-paid colleagues.

An assistant principal employed since 1995 and earning €69,659 will face a levy of €5,712. At first sight, that amounts to an 8.2 per cent cut in pay. However, when the impact of tax relief is taken into account, the real hit to earnings is just €3,239, or 4.6 per cent of take-home pay.

At the other end of the scale, a married clerical officer on €25,338, who has worked in the puiblic sector since before 1995 and is the sole earner in their household will face a pension levy of over €1,413, or 5.3 per cent.

Even after allowing for tax relief, this worker will still face a 5.1 per cent, or €1,361, fall in annual income.

The largest group of public service workers earns between €40,000 and €60,000 according to figures supplied by the Department of Finance.

The Government will have to introduce legislation to permit the introduction of the levy. It expects to have this in place to allow the tax authorities implement the levy from March 1st.

While the figures first presented by the Government indicate that public service workers could be facing an effective pay cut of over 9 per cent, it appears now that, for most, the figure will be closer to 4 or 5 per cent of their take-home pay.

 

 

 

 

 

 

 

Talks between the social partners broke up without success at 4am today when the unions could not agree to the proposals for substantial payments from public employees towards their pensions. 

The pension-related payment will form the main part of the cost-cutting package. Mr Cowen said that it would save €1.4 billion on the public pay service bill. The levy will be graduated with those public employees on higher earnings paying a higher percentage of their income. He also said that the payment would apply to local authority employees. 

Later in the Dáil he gave more details of the package. Those earning €40,000 per annum would pay €2,750 or 6.9 per cent; those on €50,000 would pay 3,750 or 7.5 per cent; and those on 100,000 would pay 8,750 or 8.8 per cent. At the highest scale of pay in the public service, those earning €300,000 will pay €28,780 or 9.6 per cent. However, the contributions will be calculated on gross income and not on taxable income. 

The new payments system will be viewed as the most controversial and are expected to meet resistance from unions and from public service employees. Ictu general secretary David Begg said this morning that they would lead to a "revolution" from lower paid workers.

 

He said the largest concentration of public servants was in the lower and middle income bands and for the Government to generate significant revenue from the pension levy this was where the emphasis had been placed.

He said the Government's proposal was to raise €1.35 billion from the levy which would have been applied according to a complex formula ranging in scope from 3.8 to 9.6 per cent.

However he said the levy proposals would have proved to have been very onerous for those in the low and middle income groups and would have represented “more than the traffic could bear”.

"This would cause such a shock to the system that we would not have been able to sustain it and we would have had the worst of both worlds where we would put out some proposal to our own people who might simply rebel against it and would not really be able to assimilate why it was happening."

“It was a judgment call - we could not do it just today. It was just not possible," he said.

Mr Begg said the process to agree a national economic recovery plan with the Government and other social partners had “run out of road”.

 

 

The new pensions levy will be calculated on gross pay and will range from a 3 per cent contribution for workers earning €15,000 up to 9.6 per cent for staff earning €300,000.

 

PUBLIC SECTOR workers will, in effect, get tax relief on their pension levy contributions. As a result, the impact of the levy on middle- and higher-income public servants will be considerably lighter than initially indicated.

The average public sector worker, earning €50,000 a year, will see a 4 per cent cut in their take-home pay, despite paying 7.5 per cent in the pension levy. Speaking in the Dáil yesterday, Minister for Finance Brian Lenihan said: “Public servants paying the new pension contribution will be treated for tax purposes in the same way as those making pension contributions in the private sector.

“Contributions will be deducted from gross pay by employers before income tax, PRSI and health levies are calculated and, as such, pension contributions will be effectively relieved of tax at the marginal rate.”

Mr Cowen announced the levy on Tuesday as part of a package of measures designed to cut €2 billion from Government spending this year after talks with the social partners broke down over the refusal by the Irish Congress of Trade Unions to accept the proposed levy.

He said the pension levy was projected to cut Government spending by €1.4 billion in a full year. However, the money lost in income tax and other deductions will significantly offset this. While no precise figure is available, Government sources said the exchequer was likely to benefit by about €900 million in a full year. This year, the figure is likely to be closer to €750 million, as the levy is not due to take effect until March 1st.

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START SAVING NOW…TO PAY YOUR PROPERTY TAX

 

There are plenty of good reasons to be saving money these days.  A contingency fund with three to six months net pay in it can meet unexpected expenses like a busted central heating boiler, car repairs, school fees or even a family holiday that can’t be paid for out of the monthly pay cheque or by the credit card.  Many people who have been put on short time or have lost their jobs are discovering just how handy it is to meet their immediate household expenses. 

 

Unfortunately, it looks like another reason to save could be introduced  - the re-introduction of a universal property tax – and could supercede all the others. 

 

By the time you read this, the government’s €2 billion spending cuts and tax add-ons will have been announced.  If the list includes a tax or levy on second homes it isn’t expected to be a particularly large sum (€200 has been suggested) and it isn’t expected to raise more than about €52 million a year, a drop in the ocean of our annual expenditure.

 

Instead, the introduction of a tax on all principal residences is what Central Bank assistant director Tom O’Connell, believes is needed to plug the huge revenue shortfall the country is facing. Last week he said that a €1,000 charge would raise €1.7 billion every year.  (This year’s tax gap alone is €2 billion.)

 

A universal property tax is unlikely to be introduced immediately – the impact would be huge, politically devisive and would require major property tax reform, especially on existing stamp duty rates and the current capital gains tax exemption on principal private residences.

 

A flat property levy of €1,000 is unlikely since it would not differentiate between the elderly person living in a tiny cottage and the multi-millionaire in their mansion or the realistic annual yield (ie how much rent the property could realistically raise).  It also smacks of the hugely unpopular poll tax that finally helped to bring down Margaret Thatcher’s government in the early 1990s. 

 

Instead, the government is likely – probably on the urging of the Commission on Taxation, which is preparing a major report by the Autumn - to consider a more conventional property tax formula, such as those already in place in other jurisdictions.  

 

These places most commonly set their rates based on a percentage of the market value (as determined by the local authority) perhaps with tax relief applying for households owned by low earning pensioners, the disabled or families with children.)  A typical percentage of market value is somewhere between 1% and 2%.  The rate usually varies depending on location, population and the cost of services to the local authority or municipality. 

 

At 1% per €1,000 market valuation, a typical property worth c€260,000 (according to the Permanent TSB/ESRI property index) would result in an annual charge of €2,600.  Anyone whose home is still valued in the region of €1,000,000 might face a bill of €10,000 a year. 

 

Such a drastic change of tax policy here will be a huge political issue and will inevitably be resisted. Given how much unwinding will be necessary of the current way taxes apply to property, changes will most likely have to be introduced gradually if only because any universal property tax would further depress house prices …and, it must be said, taxable valuations too.

 

If this tax is introduced, would you be able to afford it, whether it is deducted directly at income source or, more typically in other jurisdictions as an annual or bi-annual payment?  (Some allow monthly payments, but with an added premium costs.) 

 

If you are a homeowner, and don’t already have a good regular savings account, you should seriously consider opening one – forewarned is forearmed. 

 

The best regular savings accounts are currently available from AIB and the EBS Building Society, ostensibly for parents saving for their children’s future, but there is nothing to stop anyone from opening the account. (Each parent can open up to an account in the case of AIB Parent Saver product.)

 

The AIB  ‘Parent Saver’ pays interest of 8.25%, 6% of which is the premium over the ECB rate until May 20th on maximum monthly savings of €200.  After that date, the bank will pay the ECB rate (currently 1.75%) plus 4% until May 20. 2010.  As a variable rate account, you should expect the rate to be adjusted again after that date. 

 

The EBS ‘Family Savings’ account pays fixed annual interest of 5.1% for the first year on regular, monthly sums of between €100 and €1,000 after which the rate will be reset. Anglo Irish Bank and Bank of Ireland both have substantial regular savings rates of 7.3% fixed for one year in the case of Anglo Irish on sums of up to €1,000 a month while Bank of Ireland is offering a variable rate, currently 7%, on sums of up to €500 a month to a maximum of €5,000. 

 

Each bank varies the number of withdrawals it allows so check the terms and conditions.

 

 

 

 

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IT’S OFFICIAL:  WE’RE SAVING NOT SPENDING (AND A GOOD THING TOO)

 

The man and woman in the street seem to know an awful lot more about this recession than their governments:  they know that the only way to get yourself out of a financial hole is to stop digging.  

 

Instead, the hole must be filled in – with savings – so that you can eventually, genuinely, afford the things you want to buy.  A prudent savings regime will even allow you to borrow again, for the really big ticket items, like a home, which cannot realistically be purchased with savings that have already been ravaged by the tax-man.

 

In the first quarterly Savings Index survey from Postbank, the banking arm of An Post, found that 75% of respondents are saving some money, however modest the sum. Over the next three months 54% of existing savers said that they intend to maintain their level of savings while 21% of respondents intend to save even more.  Only 17% say they are likely to reduce their savings in the next three months. 

 

Meanwhile two thirds of all savers are still doing so within their original SSIA range of €254, a good thing too given that our debt to disposable income ratio, at c180%, is the highest in Europe and even higher than in debt-laden America and Britain. 

 

Too bad then that our government and all the other governments and central banks that are doing everything possible – like lowering interest rates below the rate of inflation - to discourage us from cleaning up our personal balance sheets by paying down our debts. As this Postbank survey shows, there is no shortage of common sense amongst the public:  three quarters of respondents, back in the second and third weeks of December, admitted that they “are looking to preserve or increase their savings amounts and more than 40% say specifically that they are saving for their emergency fund”. 

 

(The ‘emergency’ or ‘contingency’ savings fund is something this column has always promoted and should amount to at least three to six months worth of your net, after tax, income.)

 

Meanwhile one third of respondents say they are saving up to €100 a month, while a further 30% are saving between €100 and €250.  Just 5% are putting away over €1,000.  Not surprisingly, the biggest group of non-savers are the 18-24 year olds and pensioners, neither group of which generate much or any surplus income; but interestingly, the one group that have been regularly vilified in the recent past as the most profligate – the 25 to 34 years olds – are now identified as the biggest single group of savers (83%).

 

Aside from that ‘rainy day’ purpose (with 42% response), Postbank say that people are saving for holidays (15%), retirement (9%), a home loan or mortgage (8%), education (7%) and just 2% for home improvements.  Weddings are the source of just 1% of savings and 14% are saving for ‘other’, unidentified purposes. 

 

 

The low level of mortgage savings shouldn’t come as much of a surprise; mortgages are purchased when people are confident that their jobs are secure and prices are not just affordable but stable, or rising.  None of those factors are at play at the moment.  Nevertheless, Postbank officials last week said they’re proceeding with their plans to introduce a mortgage product later this year.

 

 

And what are Irish savers expected to cut back on in 2009, if at all, according to this survey?  First, lunches (41%) followed by holidays (35%) and fashion purchases (34%).  This is followed by coffee and alcohol (31%), beauty products and treatments (28%) and visits to the cinema 21%, which is pretty good news for the sellers of smaller treats, but doesn’t sound too hopeful for the beleaguered restaurant trade, the holiday industry or high street shops. Again, it will be very interesting to see how these figures adjust next April, when the impact of government cutbacks and higher unemployment figures take effect.

 

Finally, this first ever national savings survey also asked people about their level of confidence in the banking system.  43% of respondents noted that the security of their funds was even more important than the interest rate on offer (31%) while 28% said that access to their money was their priority.  

 

I expect that that 43% figure will be even higher when the next survey comes out. 

 

The banking crisis here is far from over and Postbank is now in the enviable position of not only being the official banking arm of AnPost, one of few financial institutions to maintain its financial integrity, but one of very few banks (RaboDirect being another) that is not burdened with catastrophic levels of property-related bad debts. 

 

Next week:  What savings accounts deliver the best interest rates AND meaningful security?

 

 

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NO RETIREMENT FUND?  HOW ABOUT YOUR OWN VERSION OF ‘FRIENDS’ 

 

Back in 2001 I made a modest lump sum pension contribution into an equity fund with a well-known pension provider.  My timing was bad that year – the NasDaq crash and 9/11 reduced the value of my contribution pretty quickly. It recovered but then last year happened.  

 

That’s pretty much the story of most of my pension funds at the moment, though one or two have fallen far less, thank goodness, and one has actually remained entirely in the black.  I still have more than a decade before retirement, but my ‘early’ retirement plans have pretty much been …well, retired, after the devastating losses of the last year and the poor prospect for a recovery in the immediate future.  

 

The substantial tax relief that I’ve enjoyed on my pension contributions is some consolation for poor performance  but how long this huge, two billion euro tax break lasts for private pension contributions is another matter:  the government finances are under extreme pressure and long term retirement problems will either be sorted out once and for all once the Pension White Paper is published, or the pensions issue will be shelved as more pressing issues like our eye-watering budget deficit and borrowing requirements take up everyone’s attention in the Departments of Finance and Social and Family Affairs. 

 

Younger people still have time on their side. Last week, Bank of Ireland suggested that a 30 year old earning €30,000 who has been contributing to a pension for the last decade should add another €112 a month to make up for current losses – at a real cost, after tax relief of just €66.  (Presumably, this money is going into a nil-risk fund). 

 

But what about the person in their 50s or worse, on the verge of retirement who were counting on their 20 or 30 or 40 years worth of occupational and personal pension contributions or AVCs to provide them with a decent retirement?  Higher contributions may not be possible if they are already making maximum payments.

 

Last week I mentioned the author (“Liar’s Poker” and “Gold: The Once and Future Money”) Nathan Lewis’ unconventional, but practical suggestions to employers and workers who desperately need to find ways to stay afloat as their economic conditions deteriorate.  He proposes the company as ‘family’, meaning that it does more than just provide an increasingly fragile paycheque at the end of the month. 

 

But he also has some rather ‘off-the-wall’ views about baby boomer pensioners, who spent more than they saved these past decades, who are now worrying about their heavily depleted retirement funds:  he suggests moving back in with their old college room-mates. 

 

In a recent column on the excellent (and free) DailyReckoning.com newsletter, Lewis produces some interesting figures to support the idea that four, or six can live a lot more cheaply than two. See http://www.dailyreckoning.com/Issues/2009/DR010709.html#essay)

 

He describes his own parents, just retired, who have suffered big stock market and pension losses in the past year and whose mortgage-free home has also fallen dramatically in value. Even running a paid-off home doesn’t come free – there are basic living costs that need to be paid – the car, utilities, insurance, food and taxes.  Here in Ireland, a €20,000 combined contributory/adult dependent state pension will barely meet all those overheads and leave much money left over. 

 

“Like many older people, [my parents] would like to stay in the house they have owned for about 20 years now, in the community they are accustomed to, and near the friends they have,” writes Lewis. “It’s not so easy to start over when you’re over 65.

“So, here’s the plan:

“You get together with your friends. You say: “We’re all retired now. I’ve got a big empty house. You do too I suppose. Maybe we can think of living together. That would help reduce our living expenses. Plus, it might be fun, and it would be a good way to keep an eye on each other. That can be important when you’re getting older.

 

“Everyone is repulsed at first, because we Americans are all taught that we have to live as far away from each other as possible. But, they remember that, when they were in college, they used to share houses, and it was kind of fun. Also, everyone is older now and a lot better behaved than when they were in college. And, it is true that it might be good to have someone keeping an eye on you.”

 

Lewis shows how by combining resources – sharing one existing (larger) house on which a proportionate rent is paid to that owner by the incoming couple or couples, who then rent out their smaller house(s) to supplement their own incomes - can make the combined incomes go much further.  Food, utilities and other costs are also shared; the savings can be converted into more discretionary income – to run a car (if they can’t otherwise), for travel, etc. or to pay for domestic help and eventually, even nursing care as the housemates get older. 

 

Could it work if the parties really were compatible and flexible? Personally, I could see two or three older fellas living happily together more than than the three fellas and their respective wives.  But sometimes desperate times call for desperate measures. 

 

You just need to be willing to let that light at the end of that gloomy tunnel shine. 

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DESPERATE TIMES CALL FOR DESPERATE MEASURES?

 

If you haven’t read Michael Lewis’ 1989 bestseller ‘Liar’s Poker’ about his brief life as a broker at Soloman Bros investment bank on Wall Street, you really should.  

Aside from being a funny, cracking good read, it also set the stage perfectly for the culture of greed that predominated the world of high finance until last autumn when decades of excess finally caught up with the so-called money ‘Masters of the Universe’ who were also perfectly depicted in iconic novels like Tom Wolfe’s ‘Bonfire of the Vanities’.

‘Liar’s Poker’ also launched Lewis’ journalism career and his current analysis of the global solvency and credit crisis is both top rate and eminently readable. (See http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom).

Last week in two fascinating articles, Lewis made a couple of novel suggestions for companies that are facing difficult decisions about how to keep their workforce intact while also trying to keep their businesses afloat in the face of tight or non-existent credit and falling consumer spending, and about the dilemma facing baby boomers whose property values, pension and investment funds have collapsed, shattering their retirement plans. 

But first,  “The combination of skyrocketing food and energy costs, rising medical costs, falling real estate values and stagnant wages is putting increasing numbers of workers in financial distress,” writes Lewis. “A distressed workforce can hardly be a productive workforce, and companies must do whatever it takes to make it physically possible for their employees to function. What can companies do to remedy this situation?” he asks. 

Well, how about treating the company like a family unit in order to cut down everyone’s day to day essential spending and overheads? 

Some firms are already implementing reduced pay, shorter working weeks or unpaid holidays in an effort to cut down on payroll and production costs.  But how many have considered going so far as to provide goods and services to their workforces in lieu of pay or as part payment for more expensive clawed back benefits?

Lewis suggests that companies with their backs to the wall consider offering to use their greater spending clout to help lower paid workers especially, who are struggling to meet their food, clothing, fuel, and even housing costs by ramping up their canteen facilities to include breakfast and early evening meals – with takeaway dinners also available to bring home to families –  by providing wholesale grocery or petrol vouchers for free or at discount prices, setting up group insurance schemes if they aren’t already in place and even offering to house younger, single workers by renting properties in empty estates. (It’s already been done in the meat trade for immigrant workers.) 

Here in Ireland (and probably in the US) there are benefit-in-kind tax issues to address, but in desperate times – and few would doubt after the Dell announcement in Limerick that the government might want to ease up on its Revenue rules – such roadblocks shouldn’t be insurmountable. 

And if this smacks of the visions of a grim satanic mill owner forcing their workers to buy goods at the company store, consider that Google, whose European HQ is based in Dublin and operates one of the most impressive employee benefits packages that includes, writes Lewis, (quoting Google’s US boss Eric Schmidt of the US operation) “first-class dining facilities, gyms, laundry rooms, massage rooms, haircuts, car washes, dry cleaning, commuting buses - just about anything a hardworking employee engineer might want."

These benefits are in addition to a generous package of wages and conventional benefits, but the message shouldn’t be lost on smaller, struggling companies:  in a downturn some creative thinking needs to be considered to reduce costs, but also keep your best assets – your people – intact.   Some workers may not be able to take a pay cut or a reduced working week if they can’t also put food on the table or find the money to tax and insure and put petrol in their car.  But if personal expenses can be offset by the bigger purchasing power of a company that can command wholesale or discount rates and there’s a willingness to consider the unconventional, then why not?

As the thousands of workers in Limerick affected by the Dell factory closure will know to their cost over the next year, and all the people affected by the collapse of Waterford glass, this is not a brief economic cycle downturn as we have experienced a few times since the Irish economy was finally dragged into the late 20th century and the birth of the Celtic Tiger around 1993-94.  

This one is going to kick the living daylights out of big and small companies – and countries, as it has already to poor little Iceland, to the nearly bankrupt Ukraine and Hungary – before it’s over.  And it’s going to take imagination, fortitude and cooperation as well as hard work and luck to get us out the other side, bruised and bloody but still standing. 

Next week:  Could you live with your old roommates again?  At 65?

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