Jill Kerby

The Sunday Times

MoneyComment  Feb 7

By Jill Kerby

 

 

Last weekend the Minister for Communications, Energy and Natural Resources Eamon Ryan told The Sunday Times that the government planned to appoint a panel of external experts to provide proposals to deal with the huge problem of residential mortgage debt and defaults.

 

I wish I could believe that there is such a thing as ‘a panel of external experts’ in this country, especially regarding mortgages and property.  The ones in the banks who claimed expertise, turned out to be morons.

 

Anyway, the minister says this expert panel will consider every option, such as stretching mortgages over longer terms to reduce monthly repayments; debt-for-equity swops where lenders would take ownership stakes in borrowers’ homes; and even purchase or rental arrangements similar to the joint ownership schemes that are now operated by local authorities.

 

The lobby for legal aid quickly joined in too to say that new insolvency rules will also have to be introduced to allow those mortgage holders for whom none of the above will be suitable, to be able to hand back their keys without facing financial ruin.

 

All of these proposals, said Ryan, are in addition to the repossession moratorium already in place with the main banks and the mortgage interest supplement (MIS) currently being paid to struggling mortgage holders. 

 

I reread the Minister’s comments several times, but couldn’t find any reference to the most important consideration of all: how much will all this cost, and who pays? 

 

If, by some miracle, the billions of euro that will undoubtedly be required are found, what about the moral hazard – the danger that homeowners who are just about coping with their negative equity mortgages might decide it’s also in their interests to walk away from their debt?

 

The Economic and Social Research Institute now estimates that a third, or up to 196,000 of all households are in negative equity- owing more than their homes are worth. 

 

The Financial Regulator says that at the end of last September 26,271 mortgages were in arrears for more than three months, with 17,767 mortgages in default for more than six months.  If the mortgage interest supplement was cut off tomorrow, the arrears figures could theoretically double.  Given than the figures are six months old, they probably have done so anyway.

 

At the end of last year, according to an Oireachtas report by Deputies Thomas Byrne and Olwyn Enright, 15,100 people were in receipt of an average €367 monthly mortgage interest supplement and another 1,000 applicants were being turned down every month.  (At the end of 2007, just 4,111 mortgage holders were getting this supplement.) 

 

The annual cost of this bail-out is already over €66.5 million. So who will pick up the even larger tab?

 

The last time I looked, the Irish banks were still on life support. Loading them up with yet more arrears doesn’t sound like a very likely solution. 

 

As for the state carrying the can, the national debt, you may not have noticed, is already €76.976 billion as I write and rising by the hour. Check it out at: http://www.financedublin.com/debtclock.php

 

 

The Minister might want his panel to look at the experience in America before endorsing the idea that borrowers could exchange their unaffordable mortgages for a rental contract under which they lease some or all of their home from their lender.

 

In some places where this state or federal backed ‘solution’ has been tried, many first time buyers in particular have come to regret signing up. The monthly outgoings might be lower, and the threat of eviction removed, but they are now repayments might be more affordable and they aren’t in danger of being evicted, even more tightly locked into starter homes that they never intended to live in for more than a few years. 

 

 

As the resentment increases,  lenders will find more sets of keys pushed through their letter boxes.

 

 

It’s possible that the Minister and his panel of mortgage experts will come up with a set of proposals by the summer…but affordable, workable ones are another matter altogether.

 

 

*                      *                          *

 

 

The Irish League of Credit Unions told a Joint Oireachtas Committee on Economic Regulatory Affairs last week that it was unhappy with “the over-zealous and intense” approach that the Registrar of Credit Union Brendan Loguehas taken in his regulation and supervision of them.

 

 

It’s nice to know that at least someone in the Financial Regulator’s office has been doing their job properly. 

 

 

Too bad the ILCU doesn’t see it that way.  It’s convinced that credit unions are being subjected unfairly to onerous regulation when the banks and building societies have got away with ‘soft-touch’ regulation.

 

Credit unions had no part in bringing the country to the brink of financial ruin, but in the few years that Brendan Logue has been in charge of regulation, he has uncovered all sorts of debt and solvency problems, poor investment practices and compliance and administrative shortcomings in several credit unions.

 

Logue will retire shortly and I hope his successor takes the ILCU’s criticism for what it is, and keeps doing was Logue has been doing.  It’s clearly working.

 

Tweet

 

TAM from Co Galway:

I will retire very shortly after 42 years working and will have a lump sum of €150,000 to invest. I have a mortgage balance of €70,000. What suggestions would you have to offer for either/or short/long term?

 

Most financial advisors I know recommend that their clients always aim to clear their debts before by retirement for the very good reason that you will most probably be living on a reduced, and maybe even fixed, income going forward. It’s also the reason that mortgage lenders prefer not to extend a repayment term beyond age 65.  By clearing your mortgage you not only have the reassurance that whatever happens, the roof over your head is paid off, but you also free up monthly income that can otherwise be spent on essentials like groceries and running a car, health insurance, utility and insurance bills, etc.  What you do with the remaining €80,000 depends on your needs and risk profile. If this money is surplus to an occupational pension that comfortably covers your basic needs then you might feel secure in invest some of it to boost your pension.  Advisors inevitably suggest that someone in your position leave a good portion of the fund on deposit for easy access, but that you then consider spreading the rest between an income yielding bond or dividend returning blue chip share(s). Low cost ETFs are a good fund option. You might consider buying some gold (in the form of ETFs or certificates) as a way to protect the value represented by your paper euros.  Before you do anything however, do your own research and since you will have the time, I suggest you sign up for an investment course – I’ve just attended Rory Gillen’s InvestRcentre course. Also, log onto free financial sites like www.fool.co.uk and www.dailyreckoning.co.uk and subscribe to some good finance magazines/newsletters. The markets are highly volatile places and you need to know what you’re doing before you buy any shares or commodities. Good luck. 

 

PW writes from Dublin:  

I’m a bit concerned about how tax rates may increase after the Budget and whether the new tax will apply immediately or later. The background to this is that my husband has been offered a good job in Canada.  He is there now and the children and I will be joining him in the early New Year. We have put up a second property we own for sale and there is an interested party, but I am concerned about the capital gains tax changes that may happen in the Budget.  If we sell the house after the Budget would we have to pay higher tax right away, or is there a grace period? Also, I am wondering if you know if our VHI policies can be used in Canada until their renewal date in May?

Capital gains tax has gone up from 20% to 23% to 25% in the past year and in both cases the higher tax applied immediately, presumably as an effort to stop sellers from attempting to backdate their transactions.  Only the Minister for Finance knows if he is going to raise these capital taxes and perhaps even deposit interest which is also at 25%, but you might want to close that property deal sooner rather than later.  As for your VHI policies, it is my understanding that they cannot be maintained once you are no longer living in this state, but that you will be entitled to a refund if you cancel them before the renewal date.  Your husband should be applying for provincial health cover for you and the children immediately as residency rules vary between Canadian provinces. You will also need to register with a family doctor in order to avail of free GP visits and consultations. 

John McFarlane of the Post Polio Support Group writes:

 I have been following the letter about medical cards for pensioners coming from other countries with interest and agree with you in every detail except one.  In the instance that any person entering Ireland from another EU is in receipt of a disability allowance from their EU state, they are issued, upon application, with an Irish medical card without means testing but have to prove they are in receipt of another EU member state disability allowance or benefit.  This applies in the case of the UK where the person is in receipt of Incapacity benefit or Disability Living Allowance and not in receipt of an Irish State benefit (apart from Child Benefit or Early Childcare Supplement) and not be liable to contribute to the Irish Social Welfare System. We have several members who have returned home from the UK who are in receipt of UK benefits and who make no claim on the Irish State who have benefited from this EU trans-national ruling.  I agree that it applies only to a small number of people but have brought this respectfully to your attention for clarity and future reference.

Thank you (and two other readers) who brought this clarification to my attention. The original correspondance specifically concerned UK pensioners, not UK citizens in receipt of UK disability benefits or pensions, who believed they were entitled to the medical card without means testing because they received free medical care under the free NHS service in the UK. But that is not the case here: medical cards for pensioners are means-tested in Ireland. I include here the HSE website you kindly passed on, regarding medical cards for disability benefit recipients: http://www.hse.ie/eng/services/Find_a_Service/entitlements/Medical_Cards/Your_Guide_to_Medical_Cards.html#qualify

Tweet

 

The price of gold hit $1,215 an ounce last week (and over €808), yet the morning afterwards it didn’t even merit a mention on the morning business news. Instead, the usual ISEQ and FTSE prices were announced – they were both down of course. 

I’ve been writing about the importance of gold as a store of value against depreciating currencies and the threat of future price inflation in this column since the autumn of 2005 after the first signs appeared that the US property bubble had finally popped.  It then cost about $575 an ounce. 

Since then, the price of gold has gone up and up, and sometimes, down, but always the projectory was upward.  Meanwhile, property bubbles have burst all over the place, the world’s financial system has imploded, dragging a few countries down with it.  Last week was Dubai’s turn. 

Gold is what nervous people buy when they see the value of savings, property, and shares fall and debt rise.  But very few of those gold buyers are ordinary people who foolishly stuffed their pensions with companies they can’t name, buy-to-let properties and holiday homes that don’t pay their own way, or fancy cars that lose a quarter of their value the moment they’re driven off the forecourt. 

Most gold buyers are contrarian, competent, knowledgeable professionals (and their clients) who understand the very simple principle that the more pieces of paper money you print, the less they are worth.  They know that you can’t print gold coins or bars. 

And these people, but especially the ones who work for the Indian, Chinese and Middle East governments are very, very worried.  

Their purchase of hundreds of tonnes of gold from the IMF in recent months is pretty much the main reason why the price of gold, and silver - another form of sound money - have soared this past year and is up 13% in November alone.  

Half the commentators I read think gold is due a brief sell-off, that like the stock market, the price is too ‘toppy’, and that the dollar is probably oversold.  The other half just say, “buy it”. They’re convinced that over the medium to long term the dollar is toast and Dubai’s inability to repay its sovereign debts is just the tip of a debt iceberg that is on a crash course with massively indebted countries that includes the United Kingdom, the United States, Greece, most of the Baltic countries… and us, of course. 

If the high price of gold frightens you, then you can always try and time the market by waiting for a sell-off, which many commentators believe will happen when this stock market rally ends. Or you can buy cheaper silver on the dip. 

In fact, the historic correlation between gold and silver is so out of sync at the moment that gold has to become a lot cheaper or silver a lot more expensive before the historic 16:1 price ratio reappears.  On that basis, silver might be the better value buy.

Finally, if someone says that gold is in a bubble, ignore them.  A gold bubble will only form when your neighbours and in-laws are talking about gold and are queuing to buy krugerrands, gold ETFs or Perth Mint gold certificates and not to sell their old gold jewellery.  

Richard Russell, one of the world’s greatest investment gurus said not long ago: “The greater the world ocean of fiat paper, the higher gold goes. You see, gold is the secret, unstated world standard of money. Gold can't be devalued or multiplied out of thin air. So as the various currencies of the world decline in relation to each other, gold stands alone. It can't be cheapened or devalued or bankrupted.”

 

Financial Services Ombudsman Joe Meade retires

The Financial Services Ombudsman Joe Meade retires at the end of this month and has decided to let rip about the state of the industry before he goes. 

"Financial institutions have to understand that they are given people's money in trust,” he says in his final report. “It is obvious from the complaints I have dealt with that banks and other financial institutions have been giving wrong advice.”

How wrong?  Well, how about the advice a bank gave a 68 year old separated woman with no pension to invest the €410,000 proceeds of her family home into the same property fund that they had earlier convinced her to place her entire savings of €100,000?  (She was refunded the entire sum.) 

Or the high risk investment fund that an elderly couple with €113,000 in savings were sold, despite the fact that they went looking for a “deposit account with a good interest rate”?  

And then there was the six year guaranteed bond that a life assurance company sold an 80 year old grandmother with no history of investment experience, who actually wanted a fund for “emergency expenses” and “a burial fund” for herself and her husband. 

Meade says that the culture of misselling and sharp practice that targets vulnerable pensioners in particular, hasn’t changed since he took office five years ago. At least when he leaves his job in a few weeks, he can go knowing that unlike the bankers and investment industry chiefs who continue to oversee this behaviour, he goes knowing he’s done the people of this country some service. 

 

Pension Funds

Anyone working for an Irish publicly listed company like AIB and Bank of Ireland, Aer Lingus and others won’t be too pleased to hear that despite the stock market surge since March, the combined pension deficits of all these companies has risen almost 15% to €5.4 billion from €4.7 billion at the start of this years.

Asset values held in these pensions went up by €2 billion to €14 billion says Attain, the Dublin pension consultancy firm that did the research, but liabilities rose from €16.7 billion to €19.4 billion.

Pension funds here have taken one of the biggest hits in Europe and continue to be volatile because of the low exposure by Irish pensions to bonds, says Maurice Whyms of Attain, but also because “With close to a quarter of pension liabilities on Irish company balance sheets relating to UK subsidiaries, the deterioration in the UK [pension] position was bound to have some spill over effect.” 

It’s another reason to review your own pension urgently…and to buys some gold.

Tweet

The Sunday Times MoneyQs – Nov 29 By Jill Kerby

JN writes from Galway:

Over the years I’ve received share options from my employer which I now intend to exercise, I know they are treated as income and liable to tax, my question however concerns in which jurisdiction. I must exercise the options in the US and transfer any proceeds back to Ireland. However, if I do not supply the US institution with a WBEN-8 they will withhold 28% proceeds, far better than the 41% I will have pay in Ireland. Does the dual tax arrangement allow me to pay US tax and then no further Irish tax?

I’m afraid not. According to Sandra Gannon, tax advisor at TAB Taxation Services in Dublin, the correct way for you to realise the gain from your share options is to complete the form to which you refer, the W8 form, which will allow you to be paid your options gross, then to file your return here and pay the income tax. Unfortunately, the return is subject to the income levy but there is no PRSI liability. There should be someone in your company who can help you process the exercise of your share options, or else consult a tax advisor.

JM writes from Co Mayo:

I have lived permanently in Ireland since retiring in 2003 and do not pay Irish tax but instead pay UK tax under the double taxation agreement between Britain and Ireland. Recently the Irish tax authority, whilst agreeing with this, have said nevertheless I am liable to pay a health levy of 2% on my gross annual income for 2007 and 2008 (rising to 4% from 2009 onwards) and, in addition, with effect from 01/01/2009 an income levy of 1.67%, again on my gross income (which is only my pension from my last employer). Liability for payment of the health levy ceases when I reach the age of 70 years. Is this advice correct and, if so, can I obtain a pro rata reduction in the UK tax I pay so I am not paying double for similar services in Ireland and the UK?

The advice you have received is correct, and unfortunately you are not entitled to any reduction in your UK tax as a result of the imposition of the income and health levies. At the moment, you are obliged to pay tax to both the UK and Irish authorities with a tax credit/refund on the "double" tax you pay. Once again this week, tax advisor Sandra Gannon recommends that you should simplify this by applying to the UK tax authorities for the gross payment of your UK pension. You then file your annual Irish tax return, pay the appropriate tax and levies on your income, thus avoiding the complicated business of claiming Irish tax credits and UK refunds on the two sets of tax you are otherwise obliged to pay. Finally, many UK UK pensioners who settled in Ireland in recent years have benefitted from higher value social welfare benefits and services (and even lower tax), but that could now be coming to an end, given the serious financial problems here. We’ll know on December 9th if any of those higher benefits are reduced, or it the levies are increased or new ones introduced.

KM writes from Cork:

I took out a life assurance, sick benefit and pension policy back in the early 1980s when I was working for the public sector part time. When I secured a full time position, I continued to pay into my private pension even though I joined the superannuation scheme. No one ever told me I couldn’t do so. Nor did I realise I could claim tax relief on the contributions. I will be retiring in a few years time and last summer, after a growing concern about how much it was worth, I decided to review my pension plan only to find out that not only had it fallen in value by quite a lot, but that I was not entitled to keep the policy since I was a full-time employee contributing to the superannuation scheme. The life assurance company has offered me only a refund of my contributions with interest, but it falls very short of the contributions I have made which went up steadily every year. I’m not sure if the first few years contributions, which I was allowed to make are included in their sum. There is a lot at stake and I’m wondering if there is some way I can redeem more of my money or even claim tax relief on the first three years of contributions?

I am so very sorry about the situation you have found yourself in, though it is not the first case I, or financial advisors I know have come across. The advice you received when you took out your original policy was not good, in that it was a very expensive all-in-one protection and pension plan with high charges and commissions that would have absorbed at least the first two years of your contributions. The premiums were indexed upwards at 5% each year (as were the benefits on the two protection policies) and this has resulted in a huge monthly contribution of over €800 today. It’s bad enough that the broker did not give you clear instructions on how to claim the tax relief but that when you ended up with a full-time job, that he did not inform you that you could no longer keep the policy if you were part of a superannuation scheme. The pension could have been encashed and cancelled, or at least the pension part of it put into a fully-paid up status for collection at retirement. or put into a fully-paid up status. The reason why your refund and interest is below the amount of contributions is because an increasing portion of your (rising) contributions were diverted every year away from the pension investment into the cost of the whole of life cover and income protection benefits: very simply, the older a person gets, the more it costs to provide cover. Good financial advisors never recommend that you bundle together a pension and whole of life cover (which relies in investment returns) together, or a mortgage and whole of life cover in the form of an endowment mortgage for this very reason. Your case pre-dates the setting up of the Financial Regulator and Financial Ombudsman to whom complaints about private pension plans are directed, and the Pensions Ombudsman who deals with complaints about occupational pension schemes and PRSAs. However the Pensions Ombudsman has kindly offered to review your case. You are not the only public servant who has been funding parallel pensions at a huge expense…and loss.

Tweet

One of Marianne Finucane’s guests on her radio programme last weekend was a civil servant who made an interesting point about why there is such a sense of grievance on the part of public servants about the 7% gross pension levy that was imposed on them this year:  in his own case, his 13% gross salary contribution into his pension is now “greater than the size of my mortgage”. Others will substitute ‘child care’ for mortgage. 

He made point that private sector workers know all too well - that private pensions are very expensive, not to mention risky, which is why only about 50% actually have one.  

So here’s a suggestion that might help get us over the great pension levy hump:  allow civil and public sector workers an opt-out clause if they feel that the burden of a 13% pension contribution for a guaranteed, 50% final salary defined benefit pension at retirement is too high.  

Those workers who cannot afford a pension and a mortgage or child-care during the high spending years when their families are young, should be allowed to join at a later age when their incomes are not under such pressure. 

I thought Ryanair boss, Michael O’Leary’s recent suggestion that public sector pensions should be immediately converted into defined contribution ones rather than defined benefit (which include hugely valuable service and salary guarantees) was also interesting, but of course this could only happen for future contributions.  

The current total public sector pension liability going stands at €100 billion and all benefits are paid out the current tax take – that is, the Pay As You Go system.   This means that aside from what’s left in the National Pension Reserve Fund - €16 billion?  €18 billion? – there is no other pool of cash under investment to pay this massive commitment. 

I’ve been undergoing a major review of my own pension that is, thankfully, nearly over.  

I know exactly how that civil servant on Marian Finucane’s show feels:  pensions are bloody expensive, especially when you’re funding them entirely on your own, as I have since 1987.  And if you want one that’s going to deliver a comfortable retirement for yourself and your spouse, you have to forego quite a lot of spending – on big mortgages, holiday homes and lovely, new cars and furniture.   

It’s been a sacrifice I’ve been willing to make – I don’t want to be old and poor, not in this country -  but my commitment has certainly been shaken by the hammering my funds have taken this past year.

As the national debt soars just to meet the state payroll and unemployment benefits, everyone who is struggling to meet their day-to-day expenses, whether they work in the public or private sector should have the right to choose whether they can afford to make pension contributions. 

But only if they’re clear – like the rest of us are - about what it means if they opt not to. 

 

I too oppose cuts to the child benefit payment in next month’s Budget. 

Except, unlike all the women’s and child advocacy groups that have come together to lobby the Minister for Finance, I think the entire €2.5 billion boondoggle should be abolished, to be replaced with a means-tested payment to those parents and children living in poverty, on unemployment benefit and very low incomes to ensure none of these children go hungry, naked, without shelter or an education. 

Where the lobbyists and I digress is that I think this country is bust and they don’t. We are in the early days of an economic depression, and only for the financial IV tube that the European Central Bank has rigged up for us, we’d be queuing behind Iceland and Latvia at the IMF court of bankruptcy.

Some day, hopefully only a decade or two from now, when we have a properly functioning economy of hard working, self-reliant, vibrant, export-earning citizens, the state will be in a position to return to the old, fairer system of allowing parents of children to claim some tax credits for the cost of raising each child, who in turn, someday, will be a net contributor of tax to the state. 

Under my proposal the loss of €535 a month for a family with three children will of course be a hard blow if they don’t have a financial cushion of savings and low debt to fall back upon.  It means no more family holidays, no second car (or maybe any car) or other luxuries. Basic things like children’s clothes will have to be passed between siblings, mended or sourced from other family members, friends, from Penny’s or charity shops. Feeding everyone - conveniently – might be a thing of the past (but no one will starve.) It will be very tough if you’ve been living from paycheque and benefit payment to paycheque and benefit payment every month.  You will have to work harder, smarter.

But if €2 billion can be saved, it will be an extra €2 billion that your children won’t still be paying for…when they have children of their own. 

 

Last week my colleague Brian Carey in his Agenda column wondered why the state, in the form of the Department of Health “is still involved in [the health insurance] market.” He was referring to our exclusive page one story about how the VHI is seeking, for their own benefit, to have the health insurance levy doubled from €160 to €320 for every adult and from €58 to €116 for every child.  They need this money, they say, to offset their loss-leading older members, a legacy of their decades as the monopoly provider of health insurance. 

The only credible reason I’ve ever heard from a former VHI insider, is that the VHI is, and always has been the private little empire of the civil servants who control it from the Department of Health. 

Of course this incompetent government shouldn’t be in the health insurance business: in the UK and the Netherlands where at least 32 and 14 private medical insurance companies operate, not a single one lets a civil servant near them. 

Tweet

BK writes from Co Kerry:

I am 51 and have worked in the HSE for the past 15 years and pay into the HSE pension fund. Prior to this I worked for eight years in the private sector where my pension contributions were invested and left in the Irish Life’s Consensus Fund. As well as my HSE contributions, for the past five years I have also been investing in an AVC with Irish Life. Is it possible to transfer both these Irish Life pension funds into my HSE pension now and use them to buy back years of service? I am aware that buying back service is very expensive. Irish Life said it was not possible, but I read somewhere that since the Pension Act it was possible.

According to the Pensions Board it is possible to secure transfer values of your occupational pension fund from your previous, private sector employer and your existing AVC and to then use this value towards the purchase of years of service in your HSE pension. But you must check first with the HSE pension administrator about the rules that pertain to purchasing years of service. This can be a very complicated area, but one that pension consultants, in my experience, is worth considering when compared to the cost of funding AVCs. If the transfer value you are quoted appears much lower than you were expecting, it could be because the one you are working off is not very current, or it could be due to the way the value has been calculated by the scheme actuary. You might also want to consult an independent pension advisor if you have any doubts. If you haven’t already done so, I suggest you open a file, and keep all correspondence and documents in good order so that all parties are fully up-to-date with exactly what terms and conditions apply to both your pension funds and the purchase of the extra service years.

FG writes from Dublin:

I was very surprised to read your recent reply in regarding a medical card for a UK pensioner. My understanding is that receipt of a UK state pension automatically entitles a pensioner living in the Irish state to an Irish medical card regardless of his/her total income as long as it includes no Irish pension and the pensioner is not working in the Irish state. This is due to EU regulations that prevent an individual person in one EU state being worse off when moving to another EU state.  Please research the issue fully and confirm the above.

I have confirmed with the HSE that all medical cards issued by them are means-tested, regardless of the origin of the applicant. However, if you are declined a card, said the spokesman, you may still be granted a card at the discretion of the HSE, depending on your particular circumstances. Since the beginning of this year there has been a big change in the system of allocating medical cards but another reader who also contacted me thinking that means testing did not apply in his case supplied me with a very out-of-date document he received from his Citizen’s Information Centre dated September 2000. If you have any further doubts about your own case, contact the HSE at Callsave 1850 24 1850
or directly at your local health office.

YM writes from Dublin:

I am unemployed living on savings, would I have a tax free allowance that I could claim against DIRT payments as that is my only income?

The only people who are not subject to deposit income retention tax are those who are permanently incapacitated and the over 65s whose income falls below the tax exempt income threshold, which is currently €20,000 for a single person and €40,000. Despite your low income you will still be subject to DIRT and while this is no consolation, even children – who are too young to work – will find that any growth in their savings is subject to the 25% tax.

MNM writes from Dublin:

I'd be most grateful if you could answer the following question, based on the following information: two people own three properties in joint names. Property one is the principal residence of person A. Property two is the principal residence of person B. Property three is used as a holiday home by both people, and NPPR tax has been paid on that holiday property. Is there a liability for NPPR tax on property one or two, with regard to the person not using it as a principal residence?

The Non Principal Private Residence charge of €200 applies to property that you own that is not your “sole or main” residence. You and your friend, person B, each partly own three properties – but the two that are each considered your ‘sole’ residences are exempt and you are only obliged to pay the €200 on the holiday property that you jointly own. It’s a good thing that you paid your tax on the holiday property; the Act provides that if a charge is not paid within a month after the last date for payment, a late payment fee will apply for every month or part of month that the €200 charge remains unpaid. For 2009, this means that the late payment fee will apply to all payments made after 31 October 2009.

Tweet

 

The Environment minister Eamon Ryan says the state has six months to come up with a credible scheme to prevent a bigger wave of house repossessions. 

Organisations that work with debtors, like MABS and FLAC, the free legal aid centre, would say that deadline is far too generous.  

Right now, the first of the 160,000 people who lost their jobs between October and May (about 20,000 a month) are already shifting onto means-tested jobseeker’s allowance. 

The €820 a month they’ve been receiving on job-seekers benefit could melt away once a spouse or partner’s income, and any other financial resources are taken into account, pushing many into arrears for the first time.   And who knows – aside from the Minister for Finance - for how much longer the state will continue to pay mortgage interest supplement at that bill creeps up towards €60 million? 

Eamon Ryan has suggested that the cabinet is already considering a scheme that will force the banks to take an equity stake – some suggest as much as 50% worth – in the property of some indebted homeowners which could then be described as an ‘asset’ to be recouped when property prices recover to 2007 levels.   

The genius who came up with this solution must be the same one who has projected that Nama will make a profit for the state within the next 10 years. 

 

Which is why we should be hoping that before any more cocktail-napkin-back-of-the-envelope policies are rushed through, the cabinet takes the proper time to study the Law Reform Commission’s wider recommendations on the reform of the treatment here of personal debt.  

At their annual conference last week the big debt picture was presented – and it isn’t pretty.  It is estimated that there is €395 billion in all private sector personal debt, about €110 billion worth being mortgage debt (according to recent Central Bank statistics) and another, €2 billion in credit card debt.  All other personal, commercial and business debt makes up the balance. 

Meanwhile, our average household debt to income ratio is now a massive 176%, says the Commission, a 276% rise between 1995 and 2008.   In other words, for every €10,000 being earned, €17,600 goes out.  In their own September financial capability study, the Financial Regulator found that 9% of those surveyed are in serious debt arrears – the kind that can result in losing your home - and another 8% had missed some payments. 

 

This problem isn’t just about the terrible negative equity problem of a generation of first time buyers, or the mounting arrears of unemployed homeowners.  It’s much, much bigger than that. This is the kind of debt that sometimes only a proper bankruptcy system can deal with, something the President of the Law Commission Mrs Justice  Catherine McGuinness said we desperately need in this country. 

I’m really sorry to keep harping on about how bankruptcy needs to be one of the options that the government should be considering, but someone has to.

Pension consultants I know seem resigned to the idea that pension contribution tax relief will be reduced in the December budget, perhaps to a flat 30%-35%, down from the 47% worth of tax and PRSI relief that applies now. 

There’s no question that higher taxpayers have enjoyed the bulk of the €2 billion plus in pension tax relief awarded every year; certainly there was no advantage to saving for a pension if you were out of the tax net or paying only a small amount of tax at 20% or 26% including PRSI. 

That will certainly change if the tax bands are widened, and draws back in many of the nearly 50% of earners paying little or no income tax right now.  That is, of course, if they can still afford to make contributions after the Budget dust settles. 

The same might apply to higher rate taxpayers.  Already, 19% of pension contributors have cut back on their pension payments according to a Friends First survey, and modest earners in the €36,000 to €50,000 pay bracket, who  are paying between 53% and 56% in tax, levies and PRSI on the top slice of their earnings and these people will most certainly think twice about tying up earnings for up to 40 years for a 30% tax break, if the retirement income they receive ends up subject to up to a much higher top rate tax. 

If a single tax relief rate is introduced, it should come with at least two new incentives – the right to access to the cash in your pension fund, and abolishment of mandatory purchase of an annuity for members of occupational pension schemes. 

The only thing worse than reduced tax relief for such people, is then to be stuck with a fixed pension for life that reflects lousy annuity rates and that then reverts back to the annuity/insurance company when you die, to the disadvantage of your beneficiaries. 

I’m a big fan of Sarah Beeny, the Channel 4 presenter of Property Snakes and Ladders and before that, Property Ladder.  Unlike so many of the fawning presenters of the ubiquitous property shows during the boom, she continually warned the stream of amateur developers that they were inevitably underestimating the cost of and amount of work involved in turning their old property wrecks into show-houses. 

She inevitably pointed out to the participants who did make huge capital gains that they benefitted far more from the bubble market than from their genius as developers or decorators, and she endlessly warned them about over-extending their borrowings, especially if they were going to pursue ‘careers’ as developers. 

Now that the bubble has burst, few of the latest participants on the renamed Snakes and Ladders have been able to sell their glammed up properties; most are renting (at a loss) or living themselves in their developments in the forlorn hope the market will recover so they can at least break even some day.  

Beeny has now spotted a niche in this depressed market and has filled it with a website for UK sellers called Tepilo.com .  

Anyone here in Ireland who finds themselves unable to even rent their empty buy-to-let should check it out for Beeny’s practical and realistic selling and pricing tips.  Especially now that Daft.ie has reported that there are over 20,000 rental properties on their site, and average rents, at €770 per month have returned to 2000 prices. 

Tweet

 

DC writes from Dublin:

My wife and I are looking at getting a mortgage for a house we have finally found. We are first time buyers with the deposit accumulated. We both bank with AIB who have are offered a fixed and variable mortgage. The fixed rate is 2.8% for two years and the variable is now 2.4%. I know Europe is now out of recession and the ECB will be increasing rates over the next year. Would the rate of the variable increase rapidly over the next year or would it be a slow process? AIB would like us to take a fixed rate mortgage. We would like to know what your thoughts are on the benefits of both types of mortgage.

That two year fixed rate is very low indeed. And while economic recovery is going to be tenuous and not at all consistent, either in its strength or in the number of countries involved, there is plenty of consensus that the ECB rate isn't going to go any lower than 1%.You need to keep in mind too that the Irish lenders are not constrained by the ECB rate when it comes to setting their own mortgage lending rates. The only thing that is stopping the likes of AIB and Bank of Ireland, for example,from raising their mortgage rates is the Government's share of their businesses: in return for the billions in bailout money the two received, they gave a mortgage lending commitment, and for the moment, that seems to include no increase in the interest rate.  If you do accept this 2.8% fixed rate, you must also accept that the variable rate could be higher in two years time. Stress-test your ability to pay over the longer term by raising the 2.8% interest to at least 4.8%.  Could you still afford to pay your mortgage?  Even if you can, will you still be happy to pay a higher rate if the value of your property was to fall into negative equity? You don’t say how much your down payment will be, but if it is just 8% to 10% of the purchase price, negative equity is a real possibility.  I wish you good luck in your new home, but the most important thing is to accept that this is your home, not an “investment” or a future pension.  If you have serious doubts about your ability to comfortably repay this debt every month, keep renting.

 

WO’S writes from South Dublin:

I worked in an academic institution for 33 years.  During this period I also purchased seven years pension contributions before retiring in 2004. Prior to joining the institution I worked in industry for 13 years in the UK thus entitling me to a UK  social welfare pension. I’ve been granted a credit of one year by the D I T  due to the system which it applies because of  how I achieved my qualification prior to joining it . However , I’ve been notified that because of my UK  Social Welfare Pension I  will forfeit this extra year of entitlement. The information was not available to me prior to retiring. I would be most grateful on any clarification of  the validity of the reduction of one year of pension. 

This is an unusual case and not one that I have ever come across.  I have heard about circumstances in which the integration of an occupational and state pension has resulted in disputes over the size of the final pension, but in each case these have been Irish pensions in both instances (and not a UK or EU state pension benefit.)  I contacted the Pensions Board on your behalf and was told that based on the details you supplied me, it would appear that they are the agency to investigate your complaint. “If this doesn’t turn out to be so we will ensure that he is directed to thecorrect one,” - perhaps the Pensions Ombudsman. You should send a letter expaining as clearly as possible the time-line of events and include any documentation you may have to support your complaint.  I’ve passed onto you the name of the Pensions Board official who will receive your correspondance. 

 

HB writes from Dublin:

I’m writing with a question concerning the management fees on managed funds.  I have three modest funds and a very small personal pension plan.  The funds have taken a big hit this year and recently I calculated the actual amount of the management charges and was quite shocked.  I’m aware that there has to be some charge as I expect that professionals will do a better job than I could do myself.   I’m currently unemployed and living on unemployment benefit so to see an annual amount of €2,500 leaving my funds – regardless of performance - is very worrying.  If the funds were to remain at their current value, fees of 1.5% or 1.75% would eat up a large chunk of money over 10 – 20 years.  I’m happy enough with my financial advisor, as far as I can tell they are doing whatever they can in difficult times.  My portfolio was changed in 2006 therefore there would still be early encashment charges if I switched to a different scheme now. I’m wonder if you would have any suggestion how I might reduce these fees?

Most pension funds allow for a couple of free switches between funds every year and this might be a way to reduce annual costs:  cash and other fixed interest funds usually carry lower annual management fees, but you want to make sure that this is a suitable asset for your needs.  (It may not be possible to switch out of a property fund as easily.) Before you do anything, speak to your advisor – or better still, to a new, fee-based one if yours is not - to review your existing asset mix and your schedule of charges.  Hopefully this person can make some suggestions to improve both. It seems scandalous to me that fund managers and their sales agents don’t take some of the pain, in the form of lower annual management fees or commission rebates, when they consistently lose their client’s money through poor asset allocation and advice, as has happened with typical Irish managed pension funds for the past decade.  It’s certainly a subject to which the new Financial Regulator should give some attention when he takes office next January. 

Tweet

 

Progressive taxation - Move to Belize

The fact that 10 lenders have now agreed to a six month moratorium on pursuing mortgage arrears through the courts will undoubtedly be welcome news for those thousands of people who are receiving threatening letters from their lenders over their inability to meet their monthly mortgage repayments. 

The new arrangement doesn’t include the sub-prime lenders who not members of the Irish Bankers Federation and who have pursued a disproportionate number of repossession orders in the courts, but I’m not sure that’s such a bad thing. 

Subprime mortgage holders who are in arrears need to face reality: a large number of these higher cost loans, taken out on overpriced properties during the property bubble, were always unlikely to be repaid if their financial circumstances deteriorated or interest rates went up. 

Losing their house or apartment could be a blessing in disguise, especially if an agreement can be reached that involves a realistic repayment of any shortfall between the outstanding capital/arrears and any sale price the lender achieves.  One such distressed owner said on radio last week “that anything would be better than what we’re going through right now”, referring to the drawn out, legal process in which he and his partner were now trapped. 

The problem is so much bigger than the few numbers actually being taken to court suggest. 

Last summer, the Daft.ie economist Ronan Lyons calculated that 720,000 of the 1.7 million properties that make up the national housing stock would not achieve their last sale price. He predicted that 340,000 homeowners, a large number of them first time buyers, would be in negative equity by next year and because of high unemployment, 60,000 would be in arrears and therefore much closer to defaulting on their loans. 

This latest IBF lifeline is not going to be enough.  It will allow a growing number of desperate mortgage holders to tread water, but what the weakest of them need, is a genuine rescue boat.  

Fine Gael’s idea of a Nama-style equity-for-debt bailout may very well end up being adopted, but it doesn’t strike me as very realistic, no matter how “fair” it sounds now that the reckless builders and bankers have been saved from bankruptcy.  

By my own reckoning, the cost of a 20% equity-for-debt swop for 100,000 first time buyers with average mortgages of €250,000, who are now in serious negative equity of 35% - the amount so many estate agents and economists agree that property has fallen by since 2007 - would be at least €5 billion, plus debt servicing and administration charges. 

And that’s just the problem of some first-time buyers. What about the existing home-owners in danger of losing their homes through unemployment who borrowed heavily against their existing homes to buy second or buy-to-let properties, to invest in their businesses or even expensive lifestyles?

Should the taxpayer pick up the cost of their bad judgment, however encouraged they were to borrow by the reckless bankers?  What would the effect of this be on mortgage holders who were paying their loans, but were disgruntled by the more favourable treatment being given to their feckless neighbours? 

The Americans have set up all sorts of mortgage assistance schemes, even though home loans there are already ‘non-recourse’, meaning that the owners can walk away from an capital shortfall if they property is sold at a loss. 

Reports suggest that they are not all working to plan: owners who were eager to keep their home at any cost, and sign up for a part rent/part capital refinance deal often regret their decision if the property price keeps falling, or they see other nicer houses are now cheaper than their own. In those circumstances, they stop making repairs or renovations and there are many cases where they still end up walking away, crystallising an even greater loss. 

Since the banks don’t have the capacity to write off the scale of our bad mortgage debts – and the state ruled out bankruptcy, the natural solution a year ago when it started down the Nama road, what can be done?

All suggestions welcome.  They’ve got to be better than what our so-called leaders and captain’s of industry have come up with so far.

 

Private Health Insurance - Review your Policy

Private health insurance holder would be wise to review their policies soon: on January 1st two of the three providers, the VHI and Quinn Healthcare, are expected to raise their premiums by 15%-20%. Hibernian raised their premiums by 12% last month.

Dermot Goode, a fee-based advisor who specialises in private health insurance (www.healthinsurancesavings.ie) told me last week that more and more of his clients are finding it tough to justify the high cost of their existing plans, despite their concern about not having private cover.  

“If they do switch and are VHI or Quinn Healthcare members, they should do so now and lock into current, lower premiums for the next 12 months.” 

Goode says he’s worried about how the December budget is going to treat private health insurance premiums which still carry standard rate tax relief of 20%.  If the Minister reduces or abolishes the tax relief, or increases the €160 per adult and €53 per child levy introduced a year ago, he foresees even greater numbers of cancellations – some suggest as many as €10,000 a month are dropping their membership - and a big headache for the public health service. 

Tweet

 

YM writes from Dublin:

I am an unemployed lady in my fifties and am living on savings.  I have not been in PAYE employment for about seven years.  I believe I have paid enough contributions over the years for a 75% contributory pension, someone has told me I could sign on for more credits towards a pension. (If there is any money left in the country to pay anyone a pension!) Is this correct and how would I go about it?

You should contact the pension section of the Department of Social and Family Affairs at Social Welfare Services, College Road, Sligo, Tel: (071) 915 7100 or Locall: 1890 500 000 or by e-mail at http://www.welfare.ie/ to establish exactly how many PRSI contributions you have made and the size of your state pension at age 66. They can then advise whether you should make some voluntary contributions or not towards securing a maximum state benefit. Since you will reach your pension age after April 6 2012, you will need to 520 paid contributions (10 years paid contributions) and not more than 260 of the 520 contributions may be voluntary contributions. 

 

KK writes from Carlow:

I will be 65 and retiring in September 2010 and I have a pension with New Ireland worth approximately €8,000 invested in a safe fund. Would you please advise me if it would be worth my while investing the maximum amount in AVC's for 2009-2010 and if so what percentage of my pension and AVC's can I take as a lump sum on my retirement. I earn approximately €40,000 per annum.  

I’m not entirely clear if the €8,000 you quote is the investment value of your pension fund with New Ireland or the size of the actual pension you expect. Either way, your pension fund/income is quite small. Had you qualified for a full, 40 year service pension at retirement, with sufficient funding by both you and your employer and satisfactory investment returns if yours is a defined contribution scheme, you could have ended up with a pension €26,666 per annum or two thirds your final €40,000 salary. As it is, says Dublin investment advisor Liam Ferguson of Ferguson and Associates, you personally can still make AVC contributions in 2009 and 2010 worth 40% of your total net realisable income which would boost the value of your tax free lump sum, which can amount to no more than one and a half times the value of your final income, or your final pension income.  This percentage contribution must include any normal contributions you already make into your pension fund.  Your employer could, if he wanted, fully fund your pension, but this is an option usually only reserved for very senior employees or executives who have a funding shortfall.  If you are a married person and sole earner, you are unlikely to pay any tax on the higher income that is produced by topping up your AVC, says Ferguson, as your total income, “even including a state pension, is unlikely to exceed the tax free, €40,000 per annum income threshold for married couples. The Commission on Taxation has recommended that a higher than standard rate tax relief replace the current tax relief rates for pension contributions and if this is introduced in the Budget, it will give your final pension value another boost, says Ferguson. Just make sure your fund is protected against any investment risk between now and then.  

MP writes from Kildare:

My husband, who is 80, spent all of his working life in England and has a UK company and state pension, but not an Irish state pension.  He has lived in Ireland since 1987 and received an Irish medical card at age 65 and earlier this year was informed by the Department of Social Welfare that he was entitled to hold his medical card. Am I correct in believing that my husband's UK state pension gives him automatic entitlement to an Irish medical card under EU rules?  At age 60 I became eligible for a small UK state pension on the strength of my husband's contributions (I am now 68).  I am not in receipt of an Irish social welfare pension.  When I retired from teaching in January 2004 I was advised I was eligible for an Irish medical card under EU rules. I applied for and received a medical card in February 2004. I have had two review dates since then. My next review date will be in February 2010.  Again, am I correct in believing that my UK state pension gives me automatic entitlement to an Irish medical card?

 

First, it is the Department of Health and the HSE that determines who is eligible for a means tested medical card, not the Department of Family and Social Affairs. The fact that you have UK state pensions is not relevant. Irish medical cards are available to the holders of UK pensions, but they are means tested. Your husband clearly has passed his means test. If you are concerned about whether your qualification for a card is still valid, I suggest you contact your local health board or get onto the HSE in Co Kildare at the following number: 045 876001.

 

HFQ writes from Dublin:

We hold a "qualifying account" with I. Nationwide. Can any benefit accrue from a possible demutualisation in the future?

I doubt it.  My husband once had a similar qualifying account, which he opened a number of years ago in the hope of a carpet-bagger’s windfall, but the chances of Irish Nationwide ever being demutualised are, I suggest, slim to zero.  This bankrupt institution is either going to be subsumed into some other creation of the Department of Finance as a ‘third force’ in banking here, or it will remain on life-support from the taxpayer as a zombie bank or be simply wound up.  Your ‘qualifying’ account is now redundant, and you might want to fashion an exit plan for your cash from it, at some point. 

Tweet