Jill Kerby

Investing abroad wont pay any extra dividends



CR writes from Co Dublin: In your item headed "Canadian Option" this week you indicated that Irish income tax is levied at the highest rate on non-EU deposits. Is this also the case for dividends from non-EU companies?

The dividend payment a person receives every year (or half year) from a company whose shares they own, are already often subject to withholding tax in the country of origin. You are also obliged to pay Irish income tax on the dividend you receive but where double taxation agreements exist – or at least apply to dividends – you can claim a tax credit for the tax that was deducted at source, but only at the lower of the applicable country’s tax rates.

For example, if the foreign dividend was subject to a 25% withholding tax and you only pay 20% standard rate Irish income tax, you can claim a tax credit of 20%, not the 25%. If you pay 41% marginal rate income tax, you can claim a tax credit of 25% for the amount of tax that was deducted by the other country’s revenue authority so that you end up paying 41% tax, not 66%.

This is not a hard and fast rule, however. In the case of UK shareholdings, you cannot claim any credit for any of the 1/9th of the net dividend that is withheld by the UK tax authorities. You are also still obliged to pay your highest income tax rate to the Irish revenue on the net dividend you receive.  

 Seperate taxes

SM writes from Dublin: I inherited a house from my neighbour in 2006. At the time I was separated and living with my mother. I paid inheritance tax of €33,000. I recently came across an article that you wrote about capital gains tax exemptions for separated people and I am wondering if there was an exemption for me? I moved into the house straight away and am living there since.

The article to which you refer dealt with the tax treatment of inheritances between separated spouses, not capital gains tax.  Wealth transfer or inheritance between spouses is entirely tax free. Where a couple has not divorced, any inheritance they leave each other is not subject to tax; the couple in question were close friends and childless.

Despite your separated status, the house you inherited from your neighbour – and not a relative - meant that you had to pay more tax on the capital value of the property than if say, you were even the benefactor’s child, sister or other relative or linear descendent. Capital acquisition tax in 2006 was 20%; today it is 27%, and the tax-free inheritance threshold between strangers is just €16,604, compared to €23,908 in 2006.

 No Garuntee

KK writes from Dublin: After reading in an article by Niall Brady last week about how there are no real capital guarantee investments I went and looked at one of my own investments, a five year and 11 month tracker bond I have with Irish Life. It seems that my €100,000 capital is not guaranteed and if JP Morgan, the fund manager in this case goes bust, I get nothing.

I feel I was missold this product four years ago when I took out this investment as I wasn’t told that the guarantee is only as good so long as some bank in America doesn’t go bust. If I try to take my money out now it will be subject to early encashment clauses.

My question is, is there anything I can do straight away? If I went to the Regulator it would probably be two years before they got around to me and in the meantime anything could happen to this American bank. Any advice would be welcome even if other learn a lesson from it.

These tracker bonds are popular because they dangle the words ‘capital guaranteed’ in front of risk averse investors who also hope that at the end of the nearly six years they will also have earned a net return that what their money would otherwise earn if it was left in the bank.

Unfortunately, as you have discovered the capital guarantee only holds good so long as the institution managing your money – JP Morgan in this case – stays in business and you don’t withdraw your money before the maturity date.  This is encashment penalty to which you refer.  Some trackers on the market do ‘guarantee’ a small annual return, usually no more than 2%, but otherwise the profit depends on the performance of the invested index-based derivatives.

Tracker bonds are a bit more transparent than they used to be – which isn’t saying much since it is very difficult to establish the reduction in yield (RIY) after all charges, fees and commission are applied.

You shouldn’t automatically assume that the financial ombudsman is too busy to process your complaint, especially if you believe you have a cash (and evidence) that you were missold this product.  Otherwise your option is to keep the bond to its maturity date in the belief that JP Morgan remains in business or encash it now and live with any loss.

One lesson to be learned from your experience is that everyone needs to be more sceptical of financial guarantees of any kind and to never invest in any fund or asset that you do not fully understand.  With a sum as large as €100,000 at stake, the second opinion of a good fee-based advisor should also be sought.

For years the advisors I respect have discouraged their clients from buying expensive, opaque tracker bonds and instead recommended, if the client was still disposed to this kind of part deposit, part share investment that they place the bulk of their funds on deposit with a top interest yielding account and with the balance buy a small selection of carefully selected shares or low cost ETFs (exchange traded funds). 

At the end of the five or six years, the idea was that most or all of the capital would be returned from the deposit account and the shares or funds would have produced a profit in excess of the going five year net deposit return.

Rate expectations rise if you deposit outside EU

MM writes from Dublin: I am confused by the answer you gave in your first question in the Sunday Times (17th April) and would ask you to clarify please. Are foreign deposits taxed in Ireland at a flat rate 27% under an EU directive or is your statement  "Irish residents are liable for top-rate income tax on deposit interest earned abroad"?  Presumably this refers to the same deposits?

If you open a deposit account in a bank within the EU, you will have to file an Irish income tax return and pay Irish DIRT tax of 27% on any return.

If you are also subject to withholding deposit retention tax in that country, under double taxation agreements, you can claim a tax credit here up to the Irish DIRT rate. If you deposit your money outside the EU, the interest you receive will be subject to your highest rate of income tax, which might be the marginal rate of 40%. Again, any retention tax charged in that country might be subject to a double taxation agreement so that you can claim a tax credit. 

You must declare all off-shore accounts to the Revenue Commissioners, who incidentally are very interested in Irish people who have opened Swiss accounts in particular.  You may want to ensure that you are entirely tax-compliant before doing so.

Outside interests

NW writes from Dublin: I currently have approximately €100,000 saved in Bank of Ireland and AIB. I am concerned my investment is not safe in these Irish banks.  Could you advise if there are any foreign investment banks that would be safe and would there by any implications for withdrawals or tax that could occur?

If your €100,000 is on deposit in AIB and Bank of Ireland, it is guaranteed under the Irish bank deposit guarantee scheme. From your letter, however, I’m not entirely clear if your money is on deposit or tied up in investment funds offered by the investment arms of the banks, and as I wrote recently, there is no compensation scheme in Ireland for insurance fund losses. 

If you are concerned about leaving your money in either of these banks, despite the deposit guarantee, you can shift it to solvent, non-Irish banks such as RaboDirect, owned by the Dutch Rabobank; NIB, which is owned by Danske Bank of Denmark or Nationwide UK (Ireland). The same DIRT rate of 27% applies to all interest paid by these non-Irish, but Irish-based banks. Another option is to put some or all of your money into an offshore deposit account within the EU or eurozone.  Irish DIRT tax is payable on any returns.  If you open accounts outside the EU you will pay your highest rate of income tax on interest earned.

If your money is under investment with AIB - Bank of Ireland’s investment arm was sold to the US investment managers State Street - and not just on deposit and you are still concerned, I suggest you speak to an independent advisor about other options.  Returns from Irish based investment funds are subject to exit tax of 30% and there may be exit penalties as well as new set up costs and on going charges if you change providers. 

Life decisions

MM writes from Dublin: I have a friend who has invested quite a substantial amount of money in Irish Life and Permanent TSB.  The cost of his shares are now averaging €2.7 per share. Will this person ever get to buy premium shares at discount price within Irish Life before they are sold onto a new company? He may be in a position to borrow money to buy shares, that is, he would hope to buy shares at €1 each and hope some day that they would increase to €3.70 and hopefully get all his money back.

What will happen with these shares? Will they go with Irish Life or Permanent TSB? Can you forecast whether PTSB will survive as a bank without Irish Life or will they be taken over by a bank e.g (Bank of Ireland) and if so what will happen his shares? My friend is very worried and concerned with the present situation, I would be very grateful on any information.

I can understand how worried your friend must be, but the future of Irish Life and Permanent has not been settled yet, though it is expected that the flotation of Irish Life, as a separate entity to their banking arm, will go ahead some time later this year. It has been suggested by the Institute of Investment Managers that existing shareholders be given first options on buying new shares, but that is all it is – a suggestion.

The position of Permanent TSB is even more uncertain. It is not being considered as part of the ‘two pillar’ banks to be created from the reformed AIB and Bank of Ireland, nor is there any expectation that it will be separately floated on the stock exchange. It may or may not be sold to outside interests.

Meanwhile, I think your friend needs to lower his expectations about his existing shares.  At time of writing the stock was priced at just 16 cent and it would take a very significant increase in the fortunes of a separate Irish Life plc for him to ever recoup his losses. 

There are many excellent, less risky stocks or investment funds that your friend could consider buying to achieve a decent annual dividend, potential capital gain and to help rebuild his wealth. If he has the time and money, and wants to build some investing skills, I suggest he consider signing up for the one-day stock market investment seminar offered by www.InvestRcentre.com

Diversify and conquer dangers to your deposits

JH writes from Cork: I am a pensioner in my late sixties who has a few deposit accounts and investments each under €100K invested in a number of financial institutions in this country and a last ditch deposit with Rabodirect. The investment money is not required for everyday expenses. I am attempting to look ahead to 2013 and am nervous that the deposits and investments here might not be safe in the event of Ireland defaulting on it's loans and perhaps the Euro collapsing.  I am considering shifting money abroad into US dollars, sterling and New Zealand dollar accounts. Can I do this legally and what are the risks apart from currency fluctuation? Also, would I have a tax liability here on interest earned outside the state and if so, could I claim credits for interest paid abroad? Since there are a number of financial institutions located in Northern Ireland, can you say which ones are guaranteed by the UK government?  

Before you do anything, you need to properly assess the risks associated with your savings and investment accounts. This means ticking boxes issues such as institutional solvency, currency strength, guarantees that may apply and appropriate asset selection in the case of your investments. It sounds to me as if you could use a proper wealth review by an experienced, fee-based independent advisor. If you have bulk of your funds in cash – here or anywhere else in the eurozone – you need to know that this carries inflation risk, aside from potential euro currency risk.

As price inflation rises, it will eat away at the spending power of your capital and you will need to achieve an annual return that beats both the rate of inflation and any deposit interest retention tax (DIRT) liability. Moving your funds to the UK is like jumping out of the Irish frying pan into their inflation fire if you intend to spend any of your money there: as of February, the annual UK retail price index (as opposed the more general consumer price index) is running at 5.5%.  Add 27% Irish DIRT on any returns from UK deposits, and your capital spending power depreciates (in the UK, at least) at a rate of 6.5%.

 I’m all in favour of diversifying away from euro only deposits in Irish banks as one of a number of ways of protecting your wealth in these volatile and uncertain times. But you need a sound, cost and tax-effective plan BEFORE you rashly move all your money off-shore or into other deposit accounts. 

 Banks is Northern Ireland, including those owned by AIB and Bank of Ireland are covered by the UK financial services compensation scheme up to a maximum of £85,000 (€95,500) per customer per bank. You can check here (http://www.fsa.gov.uk/Pages/consumerinformation/compensation/limits/index.shtml) for an overview of UK financial compensation schemes.

Show your metal

Mr SK writes from Co Sligo: On January 28, 2000 I invested €50,789.52 with New Ireland in two Evergreen funds and a European Securities Fund. Between them the units were worth €54,272.31in October 2010. Should I cash I the above or leave it for the present?

 Oh dear. The fund values you have been quoted do not include the 30% exit tax that you will have to pay on the €3,483 ‘profit’ your funds have earned, leaving you with a net profit of €2,438 on your initial investment or a cumulative return of 4.8%.  Divide this by 11 years (now) and you have achieved a net return of less than 0.41% per annum. Adjusted for inflation, which in Ireland is reckoned at about 2.6% per annum over the lost decade you’ve lost over 26% of the spending power of your original investment. 

 Had you simply left your €50,272.31 on deposit since 2000, you would have earned a real, inflation adjusted return of - co-incidentally -  0.4%, less DIRT, according to a recent Credit Suisse (?) survey.

Deposit accounts come with their own downsides, but they were clearly superior to poor performing, high cost investment funds. Can I suggest instead of leaving all your money in cash – if that is what you decide – that you at least consider converting a small amount of it into ‘real’ money as well – gold and silver, that can’t be devalued at the whim of central bankers and that in the past has performed well during periods of inflation?

Rent clawed back

 HN writes from Dublin: Soon after purchasing his house in 2007 a nephew of mine lost his job in the construction industry and was forced to emigrate to the UK to seek employment, save his house and honour his financial commitments. He has had no option but to rent the house to supplement its outlay of mortgage, insurance, upkeep etc.

 Under the current tax code I'm told that he has incurred a tax liability (in the region of approximately €9,000plus interest penalties by letting out his house within 2/5 years of purchase as a family home. Is this correct? Surely this is not equitable or right in this current environment? Finally, I understand that properties governed by the Mortgage Code of Conduct are (a) family homes or (b) the only property owned by an individual within the State?

 To qualify for an exemption from stamp duty as a first time buyer, your nephew had to be the owner-occupier.  Because he purchased his house before December 5, 2007 and then rented it quite soon afterwards, that relief would be subject to a clawback.  Until that date the claw-back period was five years; for purchasers after that date the claw-back period was reduced to two years. 

 From your letter it sounds as if it isn’t just DIRT relief that accounts for his tax bill.  If he did not declare his rental income or file an annual tax return, he would have also incurred penalties, to which you refer.  Fair or not, these were the regulations that applied to getting the property tax break in the first place.  Your nephew should consult a good tax advisor to see if he has any wriggle room with the Revenue Commissioners.

 The Mortgage Code of Conduct specifically refers to family homes only and not investment or rental properties, but Ulster Bank told me recently that they are meeting with customers having problems repaying their rental properties in order to restructure these loans without resorting to legal procedures.  Your nephew should also make an appointment to see his Irish mortgage lender.

High Irish interest makes the UK a land of low return

PL writes from Cork: I am retired with Stg£80,000 on deposit in Nationwide UK.  Is it better to convert to euros and invest in Ireland or look for a better return in Britain or elsewhere?

Interest rates offered by some Nationwide UK Ireland demand accounts are much higher than equivalent deposit rates you could earn from a UK account. Here, for example, the easy access demand account offers 3% gross on a minimum balance of €2,000; in the UK is it just 0.45% or 0.55% (the latter if you are over 60) on minimum sums of £. However, the three year, on-line fixed rate in the UK range from 3.85% to 4.10% gross interest (depending on the size of the deposit which starts at £1) compared to the three year return you will get here from Nationwide UK of 3.3% gross on a minimum balance of €3000.  You don’t say what sort of account you have with Nationwide UK, but you would want to compare UK savings rates with your existing return and what foreign exchange costs and commissions are involved before you transfer any money here to a solvent, deposit taker here in Ireland, which of course includes Nationwide UK Ireland.    The www.lovemoney.com site is very good for comparing up to date UK savings rates.  If this £80,000 is all your money, you should also read up on the devastating effects that inflation and tax (if you are eligible for DIRT) can have on the spending power of your savings.  Inflation is c4.5% in the UK and is creeping up here too, so you might want to consider diverting even a small amount of your money into a non-cash asset or investment fund that would counter the loss of spending power.  A good fee-based advisor could certainly help identify such assets.

In a fix

DC writes from Limerick: We recently bought a house, have just finished refurbishing it and have an option from AIB to fix it over two, three or four years. Our mortgage term is for 27 years. I am currently a mature, full-time student, working part-time while my wife works full-time in the educational sector. She is down about €400 a month after levies and USC.  For how long should we fix our mortgage, considering the current climate and proposed ECB rate hikes over the coming months?  I will possibly be staying in college to pursue a Masters or PhD after I finish my undergraduate studies. We have one child and one on the way, so money will be tight for the next while.

I think you’ve answered your own questions.  If money is already tight, your short to medium term earning prospects are diminished because of your studies and another baby is on the way, fixing your mortgage repayment makes a lot of sense, assuming of course that you can afford the higher repayments.  If ECB interest rates are raised two or three times this year - as many commentators expect they will be – and again next year, then your decision to fix your rate now will certainly pay off AND provide peace of mind.

As interest rates rise, the banks may increase the fixed rate or even withdraw their existing offers, so you may want to make up your mind sooner than later, However, before you sign any fixed rate contract find out what penalties will apply if you have to break the contract before it matures.

Border dispute 

SG writes from Dublin: I wonder if you could help me with a pension query. I work for the UK subsidiary of a French multinational and am based in Ireland and am paid in euro. My employment began in January 2004 but because of the delay in having a suitable pension arrangement in place for Irish employees it was not possible for me to organise my current PRSA plan until January 2007. I had to instigate this process myself. The UK pension plan did not seem to me to be a suitable option for Irish employees resident and paying tax in the Republic of Ireland but if it had been I would have been entitled to the relevant employer pension contributions from April 2004, which was approximately 4% of my salary.

Given that no arrangements were in place at the time is it possible, or is my employer obliged, to pay the pension contributions from April 2004 to December 2006 retrospectively into my current PRSA? I have asked and they have said no. This seems rather unfair as my understanding is that company pension contributions form part of my overall remuneration.

Unless your contract of employment states that you are eligible to join the company pension scheme and they are obliged to make contributions at an agreed rate, there is no obligation for your company to make retrospective contributions for the period in which you were not in a pension scheme.  If there was no occupational pension scheme in place at the Irish division of the company in 2004, the company should have arranged, under Irish pension regulations, to put a group PRSA in place for the employers to join.  You would not have been obliged to join it – you could have purchased an individual PRSA or even a private pension known as a retirement annuity contract (RAC). Employers are not legally obliged to make contributions to PRSAs, but if the company operated occupational schemes in the UK or France it would not have been unreasonable for you to ask them to make a contribution to your PRSA.

You might want to consult the Pensions Board if you are not sure about the company’s contractual obligations to its Irish employees or whether you have any grounds to seek retrospective contributions to your PRSA.

The rules of most pension schemes are quite transparent, but your firm operates across three borders and there may be something in your employment contract or the company’s operating rules that requires them to fund their Irish employees pensions.  You can reach the Pensions Board at LoCall 1890 656565 or www.pensionsboard.ie

Be ware of putting your nest egg in one basket

MO’L writes from Dublin: Your reply to PC in last week’s Sunday Times on An Post risk makes me uneasy. Last year I put most of what I managed to save over more than 30 years into both An Post 5.5 year savings bonds and three year certificates. I was made redundant two years ago and am still unemployed. This represents every last cent I have and what I really must know is, was this a dodgy decision on my part given your hugely well-informed opinion on the foolishness about giving the State more money just to bail out the banks? To be more precise, are the two An Post schemes I mention here as potentially exposed in your opinion as the ten and four year bond schemes referred to in your reply to PC? Is it time to think about withdrawing my money altogether before the state of the State becomes so bad that default is inevitable?

I can only repeat what I have written before: you should not leave the bulk of your wealth in a single asset, whether this is cash, property, bonds, equities, commodities, precious metals, etc. While each asset category has its strengths and weaknesses, investment markets are fickle and can be volatile.  Cash is particularly vulnerable to inflation risk; diversification spreads your risk.

No one knows for certain if the Irish state will default on its debts, or what will be the outcome. If you are confident that An Post will always honour its deposit commitments even if there is a sovereign default, then you should be able to leave your life savings with the state-owned deposit taker and sleep peacefully.  If you are not reassured, then consider moving some of your money to other, non-Irish deposit institutions or to other assets or investments that suit your needs for income and security.  If you encash your bonds or certificates before the final maturity date, the total interest will be less than if you kept them for the entire term.

Rate dilemma

 JO’S writes from Limerick: I have a 35 year, €135,000 mortgage which I started in 2007. For the first three years it was on a fixed rate of 5.60% but has now come to an end. It automatically switched to a tracker loan for the remainder of the term. The interest rate I am now paying is 1.15% above the ECB rate so I am now paying 2.15%. I'm reading various reports that interest rates are due to rise once or maybe twice in the coming months. My question is, do you think that this is going to become the norm with interest rates on the rise for the next few years and do you think it would be wise to fix or try to continue with the tracker?

The 2.15% interest rate you are now paying is 3.45% less than your previous fixed rate. I reckon this represents a savings of at least €200 a month, or €2,400 a year.  At 3.7% over five years, PTSB’s fixed rate – the best one on the market at the moment - is 1.55% higher than your current tracker rate, but still lower than your previous fixed rate. However, this advantage wouldn’t last long if the 1% ECB rate started to rise by 0.5% increments. 

European interest rates have been kept artificially low to stimulate economic recovery, but price inflation is a growing concern. The situation is extremely fluid however, and there has even been some wishful thinking expressed that the European central bankers might postpone a rate rise because of the developments in Japan and North Africa, which could stifle economic recovery.

This isn’t an easy decision:  do you opt for five years of payment certainty or do you stick with a 32 year guarantee that your mortgage rate will never go 1.15% over the ECB rate and hope that even if the ECB rate were to rise significantly, it wouldn’t stay there for too long.

Default Position

WO’S writes from Dublin: The first query relates to both prize bonds and/ or post office bonds invested over a fixed period. If the amount invested by an individual exceeds €100,000 and the government does default is any of this sum reimbursed under an EU guarantee? The second query relates to capital gains tax. Can a loss by an individual in financial shares be offset against a capital gain on the sale of an Investment property? In order to avail of any offset does the loss have to occur before the gain?

Yes, you can offset your capital losses from shares against a capital gain made from the sale of property. The loss can be carried forward in time until it uses up the value of the gain.  As for your first question, the Irish state alone guarantees any money that you save in post office bonds or in prize bonds. Neither product qualifies for any of the Irish deposit guarantee schemes, nor are they guaranteed separately by the ECB or any other European agency.

Missing Years

CMcC writes from Dublin:  I am a 45 year old nurse, with a lot of interrupted service during my career, who started working for the HSE in 2005. As a member of the PNA union I get advice from Cornmarket. The adviser has suggested that I try and top up my pension with a guaranteed AVC. I vaguely remember a PrimeTime programme a few years back on Cornmarket and AVC's which makes me think they were not a good idea. Are AVCs suitable in my situation or would a PRSA be better?

The wisest thing for you to do is to engage a truly independent, fee-based advisor to help you address your retirement needs, especially since pension tax relief is scheduled to be reduced to the 20% standard rate by 2014. Cornmarket Financial Services are a division of Irish Life Permanent Group and its commission-paid sales people do not offer the same selection of products or advice to the civil and pubic service union members than is available from a truly independent, fee based advisor. Set up and maintenance fees and charges are notoriously high, so every insurance policy or investment you have ever purchased from Cornmarket should be independently reviewed.

Lobby a TD if you need access to your pension

GM writes from Wexford: I have a pension fund with Bank of Ireland Investments into which I have contributed €80,000 over the last 15 years. It is now worth less than my contributions, which I have recently ceased.

I have an overdraft and am behind with my mortgage repayments and have requested the bank if I could have these funds released to enable me to try and restore my life to some sort of normality - to pay my overdraft, reduce my mortgage repayments. Once again they have refused.

I need these funds now, not in seven years.  Bank of Ireland got itself into trouble as a privately owned company and the Irish taxpayer, people like me, has to five it what it needs, but when I’m in trouble, I can’t get my own money back? Is this a fair country we live in?

So many small business owners, and now, ordinary employed homeowners, are in the position you describe: they have money in pension funds, but are cash poor, with bills and mounting debts that have to be paid. Unfortunately, Irish pension legislation does not permit pension fund holders to encash their funds for any reason other than retirement or early retirement on health grounds. Nor can you raise a loan against a pension fund.

In its election manifesto, Fine Gael said it was prepared to look at amending pension rules to allow some access to private pension funds – as is the case in the United States and Canada, for example.  You may want to lobby your public representatives to this effect, but in the meantime, I’m afraid you will have to try and raise capital some other way. (See Comment).

Tracker bond fears

RD writes from Dublin: I’m wondering if you can help me with a query on behalf of my mother, who is 69. In 2007 on the advice of Ulster Bank, she took out two separate six-year policies each for €20,000 with Irish Life and New Ireland. The capital is guaranteed at maturity, but have not performed well and both are worth less than the initial investment. I am worried that these companies are not covered by the Government Bank Guarantee. Can you confirm this and my mother have any cover in the event that these companies closed down? Is there much likelihood that this could happen in the next three years?

 Six year tracker bonds, like the ones you describe, involve a large portion of the investor’s money being put on deposit to safeguard the capital over the term of the contract, and the balance used to track the performance of stock market indices. According to independent financial advisor, Vincent Digby of Impartial.ie, the millions of euro deposited by the tracker fund manager in their bank desposit account is not covered by the bank deposit guarantee scheme, which has an account limit of just €100,000. Corporate deposits – like a tracker deposit fund - are covered by the Eligible Liabilities Scheme, but only for institutions that joined the scheme between December 2009 and this coming June unless further extended. “Not only was your reader’s tracker deposit made in 2007, before the ELG came into existence, but Ulster Bank is not a participant,” says Digby,

However, Ulster Bank is part of Royal Bank of Scotland, and, with its parent bank Lloyds Bank, is mostly owned by the UK government. Digby’s view is that it is unlikely to fail in the next three years.  Nor is there any reason to believe, he says that Irish Life or New Ireland will cease trading. Nevertheless, there is no compensation scheme for life assurance account holders in the event that an Irish investment company fails. 

Deal or no deal

BT writes from Dublin: I have two mortgages on my house, a tracker worth worth €100,000 and the other, a €60,000 variable rate mortgage for an extension. I can pay off both with cash at the moment but I want to go to the bank and offer them 50c on the euro for the tracker, do you think that this would be right approach and would the bank take it as a serious offer?

Does the bank know you have sufficient resources to pay off the €160,000?  If they do, they are unlikely to offer you any deal for surrendering the tracker loan.  No harm in trying though. Do let me know you get on.

Put it in the post

SR writes from Dublin: I am an OAP with enough to live on with my pensions. My life savings are €100,000 and I would like to keep it together.  I would need €2,000-€3,000 from my savings for the little extras. I was thinking of investing €90,000 in An Post three year deposit scheme at 10% and keeping out €10,000 to do me for next three years. What would you think of this plan?

An Post savings bonds are entirely tax free, the return is very competitive and the post office has always repaid saver’s capital, which is state guaranteed. The income you receive from the bond is also exempt from the universal social charge (USC) which is capped at no more than 4% anyway for pensioners. 

That said, you are effectively leaving your entire life savings with a single Irish state owned institution, entirely denominated in euro. If price inflation begins to take hold – some suggest it already has and will get worse – you will have locked your funds in at rates that will not keep up with prices and the spending power of your capital will be at risk. 

A good, fee-based advisor should be able to suggest ways to spread your risk – into other assets than deposits: inflation-linked bonds; relatively low risk blue chip shares or pooled funds that produce annual dividends/income that exceed deposit rates and will hopefully be inflation-proof and precious metals that will act as an insurance policy against the ongoing risk of currency debasement.

Stay in Spain's too short to avoid capital gains tax

FR writes from Dublin: My brother has a shop to sell here in Ireland. He now lives in Spain, for the last two years. Does he have to pay capital gains tax here in Ireland?

“If your reader’s brother has only been living in Spain for two years he is probably still ordinarily resident in Ireland,” says tax advisor Sandra Gannon of TAB Taxation Services in Dublin.  “He will be liable to pay Irish capital gains tax on any profit from the sale of his shop.  You only stop being considered ordinarily resident until after the third year.

“He may also be liable for CGT in Spain,” says Gannon, “but because of the double taxation agreement between Spain and Ireland he will get a tax credit for any payment he makes in Ireland.  He should check with a Spanish tax advisor.”  If the property is sold between January and the end of November, the CGT payment date will fall due in mid-December; if it sold in December, the CGT must be paid no later than 31 January.

 An Post risks

 PC writes from Dublin: As a regular reader, I note that in your advice to the retired civil servant with €130,000 to invest, (Sunday Times 6 March) you did not advise investing in An Post Savings, the interest of which is DIRT free.  I have noticed that you never advise on this investment. Am I missing something?

An Post is a wholly owned subsidiary of the Irish state. It has an exemplary record in providing tax free interest bearing products to the Irish people, its deposits are 100% guaranteed by the state and it carries no debt of its own to my knowledge.  However, my concern is more about the ‘state of the State’, and not so much the ‘state’ of An Post. Between our huge and growing sovereign debt and what we owe our bank creditors, the liability is now in the region of €250 billion.

I have asked the NTMA about the size of the deposit base of An Post and am still waiting for an answer, but what bothers me even more is how the state is exploiting its unique position in the wider savings market, first by promoting the 10 year National Recovery Bond and more recently, the new four year version. 

Not only is this a complicated product, but the 10 year version is an especially unappealing one in my opinion, with a mere 1%, taxed, annual return and a bonus that is only paid at the 10 year maturity date.  I think it is very foolish indeed to voluntarily hand over any more money to the Irish state, given the continuing uncertainty about our finances and its ongoing commitment to raise more taxes, but not to tackle its own spending, to keep filling the black hole in the banks.

Until our wider solvency issues are properly addressed, I think you need a great deal of faith to put your hard earned money into An Post, even if the return for conventional savings certificates or savings bonds is tax-free.   

Three or five?

PG writes from Dublin: We currently have a three year fixed rate mortgage with AIB (at 3.65%).  We can switch to a five year fixed rate deal at 4.39% without incurring any penalty charge.  The repayments at the moment are approximately €925 per month.  If we decide to go for the five year deal the payments will be approximately €985.  Therefore the extra we will be paying will be €60 per month.  At the moment we have approximately two years and three months left of the three year fixed deal.  In your opinion does it make sense to change to the five year deal to try to offset the interest rate rises which are imminent?

I hope you accepted this offer in time.  On Tuesday raised all its fixed rates, and the five year fixed rose nearly 1% to 5.35% from 4.39%. That extra €60 a month that you would have paid at 4.39% would go up another €52 per every €100,000 borrowed.  You don’t say what size mortgage you have, but it will certainly cost you more than €720 if you haven’t secured the lower offer.

A fixed rate – whether at the cost of an extra €720 or even more – is, in effect, an insurance payment against the chance that the variable rate would rise even higher over the next five years.

To judge whether that ‘premium’ is worth paying or not, you need to satisfy yourself that the cause for concern at the European Central Bank – price inflation in the wider eurozone, but especially in Germany, is real or not. The ECB has been guilty of printing too much money and buying up too much toxic debt from banks (like ours) and along with the US Federal Reserve, which has been pumping up the global money supply for the last decade, is now realising that this policy has finally resulted in the rise in commodity prices and a consequent rise in the price of food and fuel, in particular.  They have left interest rates too low for too long and must now try to squeeze the inflation genie back into the bottle by raising rates.

If you are confident that the politicians and central bankers have a magic formula to keep bond prices high (and yields low) and can keep inflation at bay without raising interest rates, then there is no urgency to fix your mortgage interest.  If you believe higher interest rates are inevitable, you will share my view that paying the higher monthly repayment will be well worth the five years of peace of mind you will hopefully get in exchange.

Pressure Fine Gael over unfair PRSA tax change

JH writes from Dublin: I wonder could you confirm if the following is true? I have been told my employer’s 5% contribution to my PRSA is now considered a benefit-in kind and is subject to tax and the universal social charge but a private pension scheme is not treated this way. Unfortunately I changed moved to a PRSA on the advice of our company broker who said there was no difference between the PRSA and the private scheme we were in, except there would be onerous new rules for the trustees of our scheme and high training costs.

Unfortunately, as a result of changes in the 2011 budget and Finance Act, an employer who contributes to an employee’s personal retirement savings account (PRSA) will have to now deduct PRSI and universal social charges from the employee for the PRSA contributions the employer makes, whereas no such deduction applies if the employee is part of an occupational pension scheme or is a recipient of a public service pension.  This is deeply unfair to people like you with a private PRSA, or anyone who works in a company where there is a group PRSA to which the employer contributes. If your employer stops making contributions to your PRSA you might consider rejoining the company scheme, but be careful about costs, charges or penalties.

The government has spent a great deal of money promoting PRSAs and especially in making them mandatory for companies without an occupational plan.  At a great cost, the Pensions Board has to pursue employers who don’t comply with the law. Now the government is undoing this work and expense by imposing a tax penalty only on PRSA contributions made by employers.

Unfortunately the Pensions Board, despite their other mandate to advise the government has taken no position on this matter, their spokesman confirmed. You could formally complain to your TD or the new pensions minister, though the pensions industry warned the previous government this PRSI/USC charge could destroy the PRSA market but it went ahead with it anyway. The new coalition programme makes no reference to it either.

Spread the risk

TR from Wicklow writes: I have received letters from Anglo Irish Bank, AIB and Irish Nationwide B/soc re my deposits being transferred and that they will still be covered by the Deposit Guarantee Scheme.  However, none of them mention the situation if I already have a decent sum deposited with the receiving institutions.  Say I had €60,000 with Anglo Irish, now transferred to AIB, but already had €60,000 with AIB.  I was covered before but am I now €20,000 over the guaranteed limit in the one institution or has the guarantee been re-written?

 You are correct that the deposit guarantee only covers sums up to €100,000 on an aggregate basis.  I suggest you shift amounts in excess of the €100,000 as a result of the transfer of your Anglo Irish deposit, into another institution.  Or, you could open a fixed rate account before the end of June at AIB with a sum in excess of €100,000 and avail of the Eligible Deposit Guarantee scheme.

Home truths

GM writes from Wexford: I have a home worth €320,000, and an outstanding mortgage of €45,000. I had started to build a new family home close by and had a mortgage offer in place from Bank of Ireland. I had invested €410,000 on the site and part construction of my new house when my business failed due to withdrawal of funds from the bank. I have run my own small building company for the past 30 years, never getting into any difficulties. My business and my life was destroyed by decisions of people who had made bad mistakes. I have tried to raise the capital to finish my partly built home but have failed to do so. Could you advise on anyone that could help? I require €200,000 for five years to finish it and pay off the existing mortgage at interest only, for, say, five years. I will then let out the existing property to fund the interest only mortgage or until the current climate changes. As it stands at the moment my new home is starting to fall into disrepair, unless something is done soon, my hands are tied.

I am very sorry that your business has failed and that you now left with an existing home that you are unable to sell – or rent – until you can secure the additional €200,000 loan. However, without a verifiable, steady income with which to pay off the new loan (and your existing €45,000 mortgage) I doubt if any bank would consider lending you the money.

This is little consolation, but you are not alone.  There are thousands of people in a similar situation to your own, each despairing in their own way about their debt problems, the uncaring position of the banks and the ineptitude of the government to act in the interests of its citizens and not just bankers and our paymasters in the EU and IMF.  I’ve spoken to a number of very good financial advisors about this debt/capital dilemma, but none of them believe there are any easy solutions. They do all say that you must speak to your creditors and provide them with a realistic assessment of your personal financial position. You should also share your anxiety with family members who may be in a position to help you and with your local priest or minister if you have one.  Is there anyone in the family who would ‘buy’ a share of your new house and let you repay them in the future when your income or the property market picks up and the other one can be sold?

If you are at risk of falling into arrears on your family home, contact MABs and their help, seek protection under the new Code of Conduct on Mortgage Arrears.  Good luck.

If you want to play safe, pay off your mortgage

OS writes from Dublin: I am a retired civil servant with a reasonable pension, savings of €130,000 and a 1.6% interest rate tracker mortgage with monthly repayments of €1,232, €75,000 outstanding and five years remaining. Like a lot of other people I am extremely worried about the current financial situation and fear for my savings if anything should happen to the euro. Should I pay off my mortgage and if so, what advice can you offer regarding the remainder of my savings. If I continue with the tracker mortgage how can I then safeguard my lifetime savings?

My personal view about mortgages hasn’t changed in 20 years:  if you can afford to pay off your home loan, do so, especially by your retirement, if only for the peace of mind it gives you.  My husband and I cleared our mortgage nearly 10 years ago with a voluntary redundancy settlement he received when we were only in our 40s. We haven’t regretted it for a moment. We could have used the windfall to buy a second property mortgage or other investments, but we decided that it was wiser to clear the mortgage and all our other debts first. (We still don’t have a second property.)

 While you don’t have a large outstanding mortgage balance, as a retired person you are living on a fixed income from the state that looks set to be further reduced by higher taxation.  Also, if the ECB does increase its base rate this year this will in turn raise your tracker repayment. (With just €75,000 left to repay, every 1% rate increase will cause your mortgage repayment to rise by about €45 a month.) 

If you clear your mortgage, you will still have approximately €55,000 to invest.  There are many offshore, non-euro based investment and assets that you could consider and there is nothing to stop you from putting some or all of this money into non-euro currency account or short term bonds (or even in ‘real’ money like gold and silver) until you choose one that suits your age, risk profile and expectations.   Since you now have the time, start doing your own research.  Read up on the various options; find a good fee-based advisor to help you in your search.   Good luck.

Road to Arrears

AC writes from Co Mayo: I have a mortgage with Ulster Bank for a property that was originally my home but is now rented out (as I have moved elsewhere and married). I lost my job in July 2009 and the bank agreed to interest-only payments ever since. Now they are only offering me an 11% discount on my repayments. I still can't afford their offer, as I am still unemployed and my husband cannot afford to pay on my behalf as he has three mortgages in his own name (including our family home). He would sell at least one of his properties and I would sell mine if the market allowed it. Has the bank the right to insist that my husband's income be considered in this matter? What options do I have if I cannot afford repayments? I presume the Code of Conduct on Mortgage Arrears does not apply.

First, according to John Hogan of the Leman Solicitors in Dublin, unless your husband’s name is also on the mortgage deed of your rental property, he cannot be held legally responsible for your debt, nor, from what you write, does it appear that he has much leeway either to cover another repayment.

The arrangement you have in place with your bank since July 2009 pre-dates the introduction of the Code of Conduct on Mortgage Arrears, but unfortunately the code doesn’t apply to you because it is no longer your principal private residence. This is too bad because the code not only sets out the mortgage arrears resolution process that the banks must follow for customers who have fallen into arrears, but also ‘pre-arrears’ customers.

I expect Ulster Bank wants a higher payment from you, as they do from all their standard variable rate customers, because, even though you are unemployed, you have been making your interest-only payments and they must believe that you have further resources at your disposal, including your husband’s income.

If you have not already done so, says John Hogan, you should contact the bank and explain that by demanding a higher repayment, they are risking you becoming yet another customer who could fall into arrears on their debt. mortgage. Ask for a meeting to discuss your case and bring with a budget statement that will outline exactly your financial circumstances and the efforts you and your husband are making to meet all your debt repayments and essential personal expenditure.

Until the property market recovers, so that some of your properties can be sold, or until you find another job, coming to a mutually satisfactory arrangement with the bank is in your and their interest. A spokesperson for Ulster Bank told me said that they have done 27,000 mortgage and debt ‘flex reviews’ since the summer of 2009, which include non-principal private residences. “I urge your reader to contact us,” she said.

Ends  

To claim or not

BC writes from Dublin.  I am the secretary of our tennis club that has suffered some roof damage this winter. I got a quote for €450 to repair the damage, but there is a €250 excess on the policy. Should we bother claiming?  There has also been some minor damage to the court lights that will be a separate claim.

Your club is better off paying for the damage out of the club’s contingency fund and only claim against your insurance policy for higher value events, says Sean O’Connell of The Insurance Shop in Fairview. A small €200 claim like this – even with the €250 excess – could make it more difficult for you to challenge next year’s premium increase or to get the best deal from a new insurer if you decided to switch providers. He also recommends that you review your policy to make sure that it will delivers the proper level of coverage, and that you have the right security in place. “Too often these days, the cost of damage done to the premises during a break-in is greater than the goods that are stolen,” says O’Connell.

Finding a negative equity mortgage is improbable

JK writes from Dublin: I want to buy a bigger house but am in negative equity of €100k plus. My present mortgage provider has informed me that although I qualify for a new mortgage, they will not provide cover for the negative equity. Do you know of any provider that will include negative equity in a new mortgage? Do you have any advice for the lots of people who are in my position?
 

To my knowledge, no lenders will extend credit to owners of property in negative equity, especially in a market where property prices still haven’t bottomed out.

One financial advisor I spoke to said that KBC and Permanent TSB might consider, on a case by case basis, a mortgage application involving negative equity but the ideal applicant would most likely be a young professional with high future earning capacity, buying a property that the bank would consider to be very competitively priced indeed.

Fine Gael proposed in its election manifesto that it would introduce new banking provisions that would allow people with negative equity to trade down to a property with a lower market value than that which they originally bought. 

But this only locks in the losses, which is hardly an adequate solution if you are still stuck with a very sizeable loan that may be unpayable during a normal working lifetime.  Frankly, only debt forgiveness or hyperinflation will reduce the huge mortgage liabilities taken on by many thousands of buyers since c2003.

Anglo write-off

TC writes from Meath: I owned shares in Anglo Irish Bank when it was nationalised on the 21st of January 2009. Can I write this loss off against other gains I have made from investments? If so, how long do I have to enact this readjustment of finances?

Revenue has acknowledged that AngloIrish shares are worthless, allowing shareholders to use their losses to reduce capital gains tax. You can offset your share losses against capital gains from other assets – say, from other shares or the sale of a property that is not your principal private residence. There is no time limit for offsetting losses, so for example, if you lost €20,000 on your Anglo Irish shares, you can offset that loss against future gains for as long as it takes to make up the €20,000.

Smart moves

TG writes from Co. Mayo: On my retirement, my wife and I investment in a portfolio in Bank of Ireland Life Smart Funds.  With all the talk going on regarding the viability of Irish banks, we are getting concerned about our investment. What is the situation if the Bank of Ireland gets into deep trouble? Since, the funds are only managed by the Bank and the investments are external to the bank do they survive?

Your money is a liability on the balance sheet of Bank of Ireland Life so it could be at risk in a catastrophe. Ireland has no protection schemes for investors in insurance funds, unlike bank deposits.

The good news is insurance companies are in much better financial health that banks. Bank of Ireland will not be shackled to the bank for much longer because European commission has decided that the division must be sold as a condition of the state aid given to Bank of Ireland.  The hope is that Bank of Ireland Life will be bought by a strong international insurance company.

If you are concerned about the value of your investment or how it is managed (as opposed to Bank of Ireland’s future) you should have your Smart Fund reviewed by an independent, fee-based advisor who will report on its performance and explain what costs or penalties you may incur by encashing your fund or switching it to a different provider. 

A safe place

My son, who is a college student, has received a lump sum as a result of an accident. I would like to get advice as to where to invest the money. He intends to finish his education overseas in two/ three years time and would need access to funds at that stage. I would appreciate your suggestions.

If your son needs access to his money by 2013-14 then it probably makes sense to simply find a good deposit home for it – ideally in a secure, solvent institution that offers the best possible interest rate.  The Irish banks are not the most secure financial institutions in the state, and may end up being merged, sold or closed eventually but until then all deposits up €100,000 are guaranteed by the state.

Since it might be best for him not to have immediate access to these funds if they are earmarked for education purposes, you son should be considering a fixed deposit account. The best one year fixed rates range from 3.5% to 3.62% gross from Ulster Bank and KBC and Permanent TSB respectively, but require a deposit of at least €10,000.  If ECB rates go up, as many commentators expect they will by the end of this year, then hopefully the next one year fixed rate he locks into will yield an even better return.  By year three he can then spend a portion of his savings and roll over the rest into another one year deposit term. Finally, as a believer in ‘real money’ and not just fiat, paper currency, I’d encourage him – if he was my son - to exchange at least 10% of his settlement into gold or silver.  The further debasement of the euro is inevitable as the ECB increases eurozone debt and we are already seeing how prices are rising, partly due to the huge increase in the supply of money and credit to insolvent eurozone countries.