IS PEER TO PEER LENDING THE REAL THING…OR JUST A GLITCH IN A FIXED MARKET?

 

My son can’t understand why I don’t bother to use apps that he insists will make my life easier. He is flabbergasted that I sometimes forget to juice up my mobile phone. Or that I sometimes ignore it completely.

His eyes roll when I tell him I was an Amstrad user who had second thoughts to switching to a Windows driven PC. (I eventually opted for a Windows-friendlier Apple.)  I even I thought Twitter was a nonsense the first year it came out. Now I am utterly hooked @jillkerby.

But I’m no Luddite. I’ve just been a little slow at times to acknowledge and adopt technological changes that have improved the way I’ve plied my trade: from manual to electric typewriter; from word processor to desktop, laptop and tablet via telex, fax, internet-enabled Facebook, Twitter and yes, apps.

Like millions of others – including other worried print-based journalists – I read more papers on-line than I buy.  I seldom watch network television anymore. News and entertainment programmes stream to my tablet via the RTE and BBC Players, Netflix and Amazon.

I can’t remember the last time I was in a bank branch – all my banking is done on-line and I know that medical software programmes, apps and simple over the counter home diagnostic tools exist now that can diagnose ailments more efficiently, accurately and quickly than my family doctor or even an experienced consultant. The same programmes will then identify the appropriate treatment centre, book you in for treatment and even pre-clear the cost with a private insurer.

Try and beat that service, Doc Martin.

Industry after industry has been transformed by technology during my son’s short lifetime, let alone mine. Who ever imagined the swift demise not just of the great Kodak corporation but the very nature of camera’s and video technology? let

(The ubiquitous mobile phone alone has replaced any number of pieces of technology that we once “couldn’t live without” – cameras, watches, calculators, land-lines, fax machines, PCs, TVs…)

And now it’s the turn of the retail banking.

In the space of just a few years, virtual currencies, crowd-sourcing and peer to peer lending (P2P) are threatening the powerful, global finance industry as they harness the power of mobile technology and social media and grow exponentially.

The power of direct, on-line capital sourcing is revolutionary. Everyone in business should be investigating how it could advance their business, no matter how small. 

In an economy like ours that is still starved of capital, where profit margins (outside of tracker mortgages) are high and where thanks to the ECB’s promise to support the euro “at whatever cost”, they can borrow from each other at 10-12 times less than they charge their own business customers, is it any wonder that hard-pressed borrowers are increasingly tempted to by-pass them?

Business crowd-funding and P2P lending are the children of the noughties tech boom, but have come into their own since the great crash of 2008.

Nature abhors a vacuum. When bank lending came to a shuddering stop in 2009 it didn’t take long for word – on-line - to circulate that enterprising middlemen with banking and high-tech skills were setting up companies that would help everyone from charities and co-ops, dreamers and entrepreneurs, high risk start-ups and established, cash-starved small businesses, to by-pass the banks and instead find willing, private lenders directly.

Late partygoers

Ireland has come a bit later to the party, compared to the UK and America where crowd funding and P2P lending – which is still not permitted in America - has raised billions. 

Kickstarter, one of the best-known crowd-funders has raised over a billion dollars of finance in the US and UK from nearly 70,000 people for over 65,000 businesses and intends to set up an Irish operation.

So far crowd funding operations (like Fund It) has focussed mainly on charitable and social projects in which money (usually not more than six figures) are raised from hundreds or even thousands of small individual donations. It also raises repayable seed capital for start-ups but the downside risk is high and the survival rate (and repayment) rate is low. 

Peer to peer lending, meanwhile, is the commercial flip side of crowd-sourcing. The largest player, Linked Finance set up 18 months ago and by last summer, had raised about €4 million for borrowers. The average sized loan has been in the region of €28,000, is repayable over a three year term and most borrower repay as 190 small lenders.

The winning lenders, who cannot stake more than €2,000 per loan, (an important risk control measure say Linked Finance) receive average gross interest payments of 8.9% or 7.7% once Linked Finance deduct their fee of 1.2%. (Borrowers also pay the intermediary a small percentage of their loan.) 

Peer to peer lending can be a win-win for both parties – so long as the borrowers, who must be the owner of a small business, a sole trader or in a partnership, honour their 36 annual repayments. 

Not only does P2P result in cheaper loans (the typical unsecured bankloan rate ranges from 9.5% and 13%) borrowers report that the process is much faster and more transparent. Since they often borrow from their own communities and customers, some admit that they feel a greater moral obligation to repay not just the money but also the trust of that community.

For lenders, the loan auction means a higher return on their bank deposit or savings. They face a lower tax bill too – all bank yields automatically deduct 41-44% annually. 

Their downside is the higher risk they take. Someone who has lent €10,000 to five or ten different borrowers is still facing ‘concentration’ risk as well as the default risk that comes with unsecured lending. No Linked Finance loans have failed yet says the company, “but they will” and small lenders have to exercise caution.

Peer to peer lenders like Linked Finance undertake credit and directors checks and post as much information about the borrower as is available. But they don’t provide risk rankings; that final assessment is the responsibility of the lender before they enter the auction and in determining the interest rate they want.

Lenders who set their target interest too high will not win the debt and will lose the auction to someone who is prepared to accept a lower rate from the borrower.

The Wild West

Peer to peer lending has been described as the ‘Wild West of banking’ – new, brash, unregulated: capitalism at its purest as it links willing borrowers and lenders sellers in an unfettered marketplace.

Back in the heavily regulated banking market, where interest rates and the supply of money is constantly manipulated by politicians, central bankers and the parallel investment banking sector, P2P lending is causing some panic.

In the United States regulators have so far protected the vested interests of conventional banks by determining that no such direct lending is possible without regulation…which is not forthcoming.

In the UK, the intermediaries themselves are subject to regulation (a good thing) but P2P lending remains unrestricted. Is it any wonder it has caught the eye of hedge fund, private equity managers and even investment banks which see opportunities to profit from a market that the conventional banks have stopped servicing?

Technology will keep lowering the cost of crowd-funding and P2P lending. It will widen access to more players.  But will these savings be enough if States step over-regulate, over-tax and overburden the players?

Who knows? But with vultures and vampires already soaring overhead, early birds might want to check out that P2P worm …while it’s still wriggling and for the taking. 

 

 

 

 

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HEALTH CARE TROUBLE AHEAD…STARTING WITH GP’S

By Jill Kerby

 

 

If you think trouble is brewing over implementation of free GP care for the under sixes, just wait until the Department of Health tries to roll out the same ‘free’ care for adults and, by 2019, compulsory health insurance for everyone.

With expectations as low as they are about the success of the ‘consultation’ process between the HSE and general practitioners on the revised contract they are expected to implement this summer, it’s hard to imagine that under-resourced GPs will be very keen on extending free treatment to the rest of us.

Existing child and adult medical card holders, they claim, are losing their entitlement to free care at the expense of mostly healthy children. The volume of extra work involved in treating all 420,000 children under six will be impossible based on current resources, they say, and certainly not for c€74 per child, per annum.

I have a lot of sympathy for primary care doctors and other practitioners who run their own businesses. I’m also a lifelong supporter of health insurance, especially the bonkers community rated kind that used to be cheap but was always unsustainable without a steady stream of health, young customers.

Now that both models are disappearing, we all need to come to the realisation that healthcare is only going to become more expensive…a lot more expensive.

 

Wonderful care

The two GPs who have taken care of me and my family for 20 years (one was a GP paediatrician who I took The Child to when he was little) have provided wonderful care for just €50 a visit.  I can’t remember the last time surgery fees went up, but it hasn’t been since the Celtic Tiger suffered its massive heart attack.  Meanwhile, health insurance prices, mainly dictated by state imposed costs, have doubled.

One thing is apparent at most GP practises:  they don’t employ the same number of ancillary staff as they once did, such as a part or full-time doctor and practice and staff nurses. Since my GP is just down the road I can only assume that his light and heat bill and his bin charge has gone up, just like mine.  I also presume he has to pay rates on his (albeit residential-type) premises on top of equipping his practice, paying liability insurance and corporate tax, all on a budget that has seen an HSE payment reduction of 38% in the past four years.

As one Galway GP recently wrote in her blog, the Government wouldn’t deign to treat private sector hairdressers the way they do private sector GPs, who under the new, revised primary GP contract must now absorb another 240,000 children aged under six for a single, annual payment, regardless of whether they are equipped or able to do so.

If the GP’s do not sign the revised contract, they’ll lose their existing GMS (general medical service) child patients, warn the government. All this will do, say their representative organisations, will be to encourage older doctors to retire sooner, encourage younger ones to immigrate and force the struggling ones to go out of business. (About 100 are already insolvent, said National Association of General Practitioners last spring when they conducted their town hall meetings around the country.)

I’d like to think a reasonable solution could be found. But if the worst happens – and remember this is just a rehearsal for the real fireworks show if and when universal GP care and universal health insurance is rolled out in 2019 – every parent of a child attending a GP (with or without a medical card) who has refused to sign will have to pay up. And that fee is likely to be higher for every patient, and may even have to be a different fee, warn some GPs, depending on your age and state of health.

Is there time to pull everyone back from the brink? Is there time to convince the government to re-think the way it intends to deliver health services in the future?

I’m guessing, no.

The Department of Health has convinced the cabinet that the introduction of ‘free’ GP care is necessary for all children and adults in the run-up to the 2019 when under Universal Health Insurance, the payment of that cover switches from direct subvention by the HSE to private insurance companies under the regulation and supervision of seven new health quangos. 

This makes so sense:  between now and 2019 the government intends that everyone will have primary care paid for by the state, even those among the two million health insurance members whose GP fee is covered in part or full by insurance plan.  Then, from 2019, everyone who had their GP treatment paid directly by the state from 2014 will have to buy a private health insurance plan… that will pay for their GP care. Previous medical card holders will receive a subsidised or free policy.

What would make more sense, of course, is for the government to encourage greater voluntary take-up of private health insurance now, by re-instating full tax relief on premiums; lowering the health insurance levy-cum-subsidy to its wholly-owned and unregulated, undercapitalised insurer VHI; ending the arbitrary pricing of public hospital beds for private health insurance customers (which now costs €830 a night instead of the standard €75) and by privatising the VHI in order to encourage more health insurers in the market.

 

The Canadian model

If primary care, like hospital treatment based entirely on need is the goal of this government, perhaps we should be adopting the Canadian Medicare model and not the Dutch insured one.

The Canadian system recognises that GP’s are self-employed professionals. Each province’s Medicare system pays them per visit and treatment, not by single per capital fee per annum. GP’s mainly work in clinic-based teams that manage patients based on need and by appointment, but the system is efficient because it shares costs and bills a single paymaster. It by-passes insurers.

Private health insurance in Canada, mainly an occupational benefit that mainly purchased a semi-private or private room in a Medicare hospital but never allowed anyone to jump queues in acute hospitals, now covers elective treatments in wholly private specialist clinics, a consequence of growing waiting lists for elective treatment.

Under the draft UHI plan here, we are told there will be no queue jumping at all since all hospitals (public and private) will be required to treat every patient based on need.  The rich man with the more serious hernia or wonky hip (who could get treatment via insurance in Canada) will in Ireland be treated before the poor man, with the less worse-off hernia.

That’s a funny kind of equal access.

I once said I’d sell my car before I got rid of my health insurance. I may have to yet.

Universal health insurance, plus the risk rated (not community rated) supplementary insurance to cover all the benefits I currently receive from my private insurance is going to cost a lot more money.

Get used to it.  Start saving.  Equality doesn’t come cheap.

 

 

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OUR RETAIL BUSINESSES NEED A SERIOUS SALES BUMP

 

 

The Bump.

Not the bump in the road.  Not the baby bump. Not a bump on one’s head, but rather a retail concept where the seller gets their customer to go that extra euro to buy another item or extend or upgrade the service they purchased.  It’s the selling device that made low cost Ryanair’s turnover soar. Grocery stores too are the grand masters of bumping.

You’d think getting a bump and grind working in Ireland would be a priority for Irish retailers too, what with spending still just a fraction of what it was before the 2008 crash.  Yes, there’s been a modest rise in spending in the last six months, but that’s more a testament to the fact that the great Irish economic downturn is now nearly seven years old and that in that time stuff that was getting old, broken, out of date and no long fit for purpose (like a lot of computer gear). This stuff needed replacing.

There are also new jobs being created – about 40,000 in the past year - and these new employees and newly re-employed people are beginning to make up for lost time.

So where’s the bump?  Where’s the spike in microwaves to go with the new dishwashers?  The new carpet to go with the new sofa (that was so saggy it wasn’t worth respringing?)  The metallic finish for the new car (that replaced the 12 year old one.)

Our 21st century Irish economic model doesn’t only just need steady consumption, ideally funded with debt (say the sage economists and politicians) but it also needs that extra bumping to ensure that we not only have our needs fulfilled, but also our ‘wants’.

So it might help if retail and services industries focussed on who has money and is more likely to be tempted to spend even more of it if they were targetted better.

In a perverse sort of way – since I don’t buy into consumerism quite as enthusiastically as a lot of other people – I don’t see much evidence of Ireland’s biggest cohort of debt-free, asset and cash rich consumers, the 50 and 60 something’s and older pensioners figuring very large in the campaign to get the country spending again.

Not only are they not being bumped…they’re practically ignored if you exclude SpecSaver ads and the Over50s Shows.

Just for the record, according to the CSO, there are nearly 100,000 more people aged 55 - 75 in 2013 than there were in 2008:  806,300 versus 707,900 with 404,500 being women (in ’13). Meanwhile, nearly 90,000 mainly younger people emigrated in 2013. Nearly 35,000 of those were in the 15-24 age group.

The fall in the younger population is striking, yet there has never been any shortage of goods and services being designed, promoted and advertised at this debt-free cohort. If anything, the marketing world is black with account executives who reflect the age and interest of their favourite, target audience; they not only anticipate their every desire, they also convince them that those desires are eminently affordable, whether in a high street boutique, a big department store chain or on-line.

Maybe I’ve missed something but it doesn’t seem to me that anywhere near the same effort has been made to snatch a bigger share of the rapidly growing ‘grey’ euro – the Baby Boomer generation that has access to a vastly more powerful spending pool that the heavily indebted Generation X or the Millennials. It is the Boomers, not the Millennials who own much of the €100 billion in savings accounts and €80 billion in pension funds.

Baby Boomers are the most entitled and demanding generation ever. They downsize by choice and purchase less, but they can afford to spend more. Age often brings discernment, though I’m still waiting I’m still waiting to see a major Irish fashion campaign on capsule wardrobes for my age group – ideally in silk, linen and cashmere.

A lot more could be done to get purse strings loosened starting with the government committing itself to reducing high personal income taxes, wealth levies like the €2 billion pension levy and the annual health insurance levy which is nothing more than a subsidy for their own unregulated, undercapitalised health insurer, the VHI.  (Note to government:  this is also the secret to getting the rest of the population spending more and to more job creation, too.)

The biggest disincentive to older people spending their income and savings - the latter is down to about 8% per capital of disposable income after being nearly twice that a few bleak years ago - is the high cost of government services like energy, health, education, transportation and local government and the fear of high long term care costs.

With every earned extra euro over €32,800 now being taxed at 52% (and 55% for self-employed earnings over €100,000) any reluctance by working Boomers to spend is an understandable reaction to the financial mugging they’re getting at the hands of government and the realisation that retiring is going to be more aspirational than attainable if it doesn’t stop.

Yet the spending doldrums among older and mostly financially unencumbered consumers isn’t entirely the fault of government or the youth-obsessed advertising and marketing agencies. 

Irish retailers continue to languish far behind in the good service stakes. They spend ludicrously few hours and even less money actually training staff how to sell and especially how to bump up turnover.

I recently heard a cranky young shop assistant, sorting clothes near a changing room say to a colleague about a manager who must had admonished her for her long face: “Can you believe it?  She thinks they pay me enough to smile?”

Maybe retailers in particular (but let’s throw in maitre d’s and bar staff too) believe that only the young and beautiful buy clothes, makeup, electronic goods, food and alcohol. They too often treat older shoppers as if they’re invisible, completely ignorant of the fact that their bank balance and cash flow may very well be healthier than anyone else shopping that day.

Boomers have always been spenders (and borrowers). They came to adulthood just as the greatest credit boom in history began in the 1970s and 80s. I know, because I am one of them.

So just as the Christmas sales were ending, I went shopping in a well-know city centre department store. I hate the sales, and I’m not a regular shopper at this over-priced store, but I wanted to buy a wedding gift, (always luxurious bed linen) and I was keen to get a new pair of leather boots and to replace my favourite colour lipstick in my favourite French brand.  I was also meeting a friend for lunch.

I was in a rare mood to spend some serious money.

I was ignored by the skinny black-draped girl with the bored eyes in the linen department.  When she did glance over, she saw me not just holding a package of pricey sheets but feeling and admiring a beautiful woollen bed throw.  She resumed ignoring me. I only bought the sheets.

Downstairs in the shoe department, the boots I bought matched all sorts of bags, but just like in the linen department there wasn’t a hint of bump:  “This bag/throw would be perfect with those boots/sheets, don’t you think?” 

I even gave the girl at the makeup counter a chance to match the lipstick (at a whopping €28) with the nail polish. 

She didn’t. So I didn’t either.

Maybe things really aren’t as bad in the high streets as all those empty shop fronts suggest.  Maybe Irish retailers really don’t think it’s worth spending big money on ad campaigns that don’t focus on 20 year olds and are happy advertising new fascia boards or hearing aids or mid-week hotel breaks for two.

But that’s not the trend in other places where the unencumbered grey dollar, pound and yen is being fiercely targeted by everyone from luxury goods manufacturers to neighbourhood cafes and gyms.

No wonder the Boomers like spending their money abroad. It’s all about the bump effect.

 

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WHAT THIS ECONOMY REALLY NEEDS IS A BUMP

The Bump.

Not the bump in the road.  Not the baby bump. Not a bump on one’s head, but rather a retail concept where the seller gets their customer to go that extra euro to buy another item or extend or upgrade the service they purchased.  It’s the selling device that made low cost Ryanair’s turnover soar. Grocery stores too are the grand masters of bumping. bumpers.

You’d think getting a bump and grind working in Ireland would be a priority for Irish retailers too, what with spending still just a fraction of what it was before the 2008 crash.  Yes, there’s been a modest rise in spending in the last six months, but that’s more a testament to the fact that the great Irish economic downturn is now nearly seven years old and that in that time stuff that was getting old, broken, out of date and no long fit for purpose (like a lot of computer gear). This stuff needed replacing.

There are also new jobs being created – about 40,000 in the past year - and these new employees and newly re-employed people are beginning to make up for lost time.

So where’s the bump?  Where’s the spike in microwaves to go with the new dishwashers?  The new carpet to go with the new sofa (that was so saggy it wasn’t worth respringing?)  The metallic finish for the new car (that replaced the 12 year old one.)

Our 21st century Irish economic model doesn’t only just need steady consumption, ideally funded with debt (say the sage economists and politicians) but it also needs that extra bumping to ensure that we not only have our needs fulfilled, but also our ‘wants’.

So it might help if retail and services industries focussed on who has money and is more likely to be tempted to spend even more of it if they were targetted better.

In a perverse sort of way – since I don’t buy into consumerism quite as enthusiastically as a lot of other people – I don’t see much evidence of Ireland’s biggest cohort of debt-free, asset and cash rich consumers, the 50 and 60 something’s and older pensioners figuring very large in the campaign to get the country spending again.

Not only are they not being bumped…they’re practically ignored if you exclude SpecSaver ads and the Over50s Shows.

Just for the record, according to the CSO, there are nearly 100,000 more people aged 55 - 75 in 2013 than there were in 2008:  806,300 versus 707,900 with 404,500 being women (in ’13). Meanwhile, nearly 90,000 mainly younger people emigrated in 2013. Nearly 35,000 of those were in the 15-24 age group.

The fall in the younger population is striking, yet there has never been any shortage of goods and services being designed, promoted and advertised at this debt-free cohort. If anything, the marketing world is black with account executives who reflect the age and interest of their favourite, target audience; they not only anticipate their every desire, they also convince them that those desires are eminently affordable, whether in a high street boutique, a big department store chain or on-line.

Maybe I’ve missed something but it doesn’t seem to me that anywhere near the same effort has been made to snatch a bigger share of the rapidly growing ‘grey’ euro – the Baby Boomer generation that has access to a vastly more powerful spending pool that the heavily indebted Generation X or the Millennials. It is the Boomers, not the Millennials who own much of the €100 billion in savings accounts and €80 billion in pension funds.

Baby Boomers are the most entitled and demanding generation ever. They downsize by choice and purchase less, but they can afford to spend more. Age often brings discernment, though I’m still waiting I’m still waiting to see a major Irish fashion campaign on capsule wardrobes for my age group – ideally in silk, linen and cashmere.

A lot more could be done to get purse strings loosened starting with the government committing itself to reducing high personal income taxes, wealth levies like the €2 billion pension levy and the annual health insurance levy which is nothing more than a subsidy for their own unregulated, undercapitalised health insurer, the VHI.  (Note to government:  this is also the secret to getting the rest of the population spending more and to more job creation, too.)

The biggest disincentive to older people spending their income and savings - the latter is down to about 8% per capital of disposable income after being nearly twice that a few bleak years ago - is the high cost of government services like energy, health, education, transportation and local government and the fear of high long term care costs.

With every earned extra euro over €32,800 now being taxed at 52% (and 55% for self-employed earnings over €100,000) any reluctance by working Boomers to spend is an understandable reaction to the financial mugging they’re getting at the hands of government and the realisation that retiring is going to be more aspirational than attainable if it doesn’t stop.

Yet the spending doldrums among older and mostly financially unencumbered consumers isn’t entirely the fault of government or the youth-obsessed advertising and marketing agencies. 

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REJOICE, REJOICE! IT’S A NEW YEAR AND A RECOVERY - IRISH STYLE!

 

Let us raise our glasses to the Great Irish Recovery, 2014. 

A new year; a new beginning.

I don’t know about you, but I can’t wait. The past six years have been a complete bummer and I’m sick to death of the Great Recession.

Isn’t it just amazing how the whole world now believes that our plucky little nation has turned itself around from basket case debtor to sterling world stage performer after just three years.

So enough of the cynicism and gloom. A quick recap shows that Ireland: The Economy has emerged from the grim, but paternal scrutiny of the EU, ECB and IMF fiscal examiners.

By lending us €64 billion they allowed us to avoid not just the banks (well, most of them from failing being shut down, with losses to depositors and the all important bondholders, but also – we are told - a mass walk-out of foreign companies, mass unemployment, catastrophic debt and price inflation and god forbid, the return of the punt.

Later they even approved an additional €33 billion Anglo Irish promissory note, to be repaid in 18 yeas, which has resulted in a bit of let up on the Budget austerity accelerator.

Without the bailout, the experts insist, no one would have ever lent to us again an we would have become just another third-world economic basket-case like… Iceland!  And worst of all – the ATM machines would… have… closed.

Whew. Talk about a close call.

Instead, for the greater good of Europe’s banks its bondholders, we bit the bullet. A troika of real, flesh and blood men (whom the Merrion Hotel must be very sad indeed to see depart) sacrificed three of the longest years of their working lives to make that Brussels/ Frankfurt/New York business-class flight to Dublin every quarter, come rain or shine.

Without them, 260 economic, financial and fiscal errors of our ways would never have been identified; tens of billions of public over-spending would never have been slashed, the fiscal deficit would not be on courser to reach that magic 3% by the end of 2015 and politicians and higher civil servants would not continue to enjoy salaries and pensions far in excess of the common citizen.

Of course, there remains the small matter of reform of the health service, the legal profession and the fragile health of the retail banks and their burdensome tracker mortgages. (Funny how the ECB inadvertently made this worse by cutting its base rate to 0.25% in November.)

                          *                               *                                  *

Three years ago we were unable to pay our bills, not just as they were presented, the definition of insolvency, but not at all - the definition of bankruptcy. 

The success of the bailout, said the Minister for Finance as the Troika departed means we are ready to go back into the lion’s den of the global money markets and by 2015 start borrowing the many billons we will still need to run the state.

You may think, like I did, before I read all about The Recovery, that borrowing yet more debt when you appear to be hugely indebted is… well, not very smart.

Silly me. Our great economists keep reminding us simple folk that debt is an integral part of every modern democratic state. (Well, perhaps not Norway.)

Creditors understand all about deficit spending and they don’t expect to ever be repaid their capital because sovereign debt is perpetually rolled-over, just like your car loans, and creditors don’t mind being paid in debased and devalued fiat currencies endlessly printed by government central banks.

Unfortunately in our case, with no access to the ECB money printer we must repay the interest payments through cutbacks, taxation, confiscation of wealth and future income and savings of our famous “unborn”.

How much debt is there, you wonder?  As of mid-November 2013, the General Government Debt was €205.9 billion, according to the national debt managers, the NTMA. At the end of 2007 it was just €47.2 billion and at the end of 2009, just before the Troika’s arrival, €104.5 billion.

That GDD were also serviced by annual interest payments of just over €7 billion in 2013, which will rise by over a billion a year until about 2016, when the by then €211.6 billion GDD will start to fall quite dramatically.

We can thank austerity and higher taxes to not just make the economy more productive by then, we are told, but wait for it …they say that global and European economies will also finally out of the post-2008 slump.

Go 2016! 

The Recovery should mean the ending of mass unemployment and emigration, the return of solvent banks and lending, decent returns for savers, the end of the mortgage and personal debt catastrophe, lots of new jobs and rising incomes, the lowering of penal taxes, the retreat of the black economy, the rebirth of devastated small towns and communities.

We can look forward to the fixing of antiquated water treatment and supply services, the upgrading of the national electricity grid and renewable energy supplies; the roll-out of superfast broadband needed in every corner of this small island.  Reform of the health service, better services for the disabled and destitute and more investing in education research and development will happen.

Lifting the great burden of debt on ordinary taxpayers – 70% of whom are employed in the SME sector -  will bring the growth that modern economies cannot survive without.

The Recovery might even mean that you might even be able to retire some day. 

Our national purse has been returned to us, the delighted Minister for Finance reported to the Dail.

We reluctantly gave it away three years ago and then it was ransacked and fitted with a device that will permanently monitor what goes into it and how much goes out. 

But no matter: the train called ‘sovereignty’ left the station a long time ago, he reminded us, when we collected our ticket for membership of the euro-club.

                                

                        *                                  *                                 *

We are now the marvel of the financial world.

The Government has exceeded in its tax collection target for 2013. The Troika signed off knowing that 2014 will be another bumber tax year with full year property tax, a bigger pension levy, 41% Dirt on deposits, 4% PRSI on ‘unearned’ income, higher excise duties on most of the ‘old faithfuls’, a bigger contribution from the sick for their prescriptions and less tax relief for pension fund holders and two million private health insurance members.

On top of this, they’ll get paid first, no mean feat given that there are 300,000 fewer taxpayers today than in 2009.

So who am - or you -  to challenge this amazing scenario?

Didn’t Herr Schaeuble, the most powerful UE finance minister of them all say back in October that ‘Ireland did what Ireland had to do. And now everything is fine’?

 

But…but…

Just in case he’s being a little premature… just in case those marvellous crystal balls the economists on Merrion Street, in Brussels and at the ECB use are slightly off kilter… just in case the 1.87 million of us in work have a few off-months before 2016… you might want to ease up on those plans to buy that new yacht, that mansion in Malaga and diamond tiara.

You are not a euro-state, you know.  There’s no central banker at your elbow guaranteeing that you are exempt from the honest pursuit of bankruptcy if you can never repay your debts. Stick with living within your means for a while longer.

Still, we’re borrowing with the big boys again.

And the NTMA, ESRI, OECD, DoF, ECB, EU, IMF, the Wall Street and City power brokers are believers… and they’re backing us 100%...er, until they don’t.

Hey, this is The Recovery. Whether you like it or not. 

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WILL THE RETURN OF CREDIT (SOME DAY) TEMPT THE RECOVERING SHOPAHOLIC?

Are you a recovering shopaholic? 

Have you abandoned your silver, gold or platinum card for …shudder…a bank debit card, or even a cash-only, no frills, no fees credit union account?

Do you still feel the urge to spend money you don’t have on stuff you don’t need as you walk down a popular shopping street or through a mall on your way to the discount grocery store?

Have you ever had a slip?

According to the Central Statistics Office, the good news (sort of) is that the entire country is still pretty much committed to its collective 12 step programme after a decade of bingeing on SUVs, designer kitchens, handbags and elaborate personal grooming services that were, frankly, the most ludicrous, wasteful  expenditure of all. (We are large boned, pink-faced Celts for crying out loud…)

Last June’s CSO statistics (the most recent at time of writing) showed that retail sales continued to drop by 1.6% that month compared to May 2013 and by an annualised rate of -1.5% for the year.  We did buy more books, newspapers and stationary in June (+3.5%) than in the previous month, but furniture and lighting shops were crucified (-12.3%) as were new car sales (-7.9%). 

Clothing and footwear was flat as a sandal at -0.5%, and even pharmaceuticals, medical goods and cosmetics, which should have been in demand given the weather up to then, were down a significant -3.8%.

The only sector with a huge boost was hardware, paints and glass sales, up nearly 10% on the previous month.

The stats are pretty much par for the course these past five years and evidence that we’ve pretty much abandoned the style, manner and volume of shopping we succeeded at during the boom years.

In that time, I think we’ve also discovered some unpleasant home truths about shopaholicism, such as, 

-       It especially strikes those who are hopeless with money anyway and who suddenly have access to cheap and easy credit;

-       Shopping is more fun than doing repetitive chores, visiting relatives or going to church during your spare time;

-       Having a line of easy credit makes you forget that your income hasn’t really been rising as quickly as the cost of living;

-       It happens gradually, then quickly, especially when your child’s teacher, the cleaning lady, the chit of a girl at the nail bar always seems better groomed/dressed than you or drives a better car;

-       Cheap/expensive stuff is just so alluring in the shop with its flattering lights, mirrors and fawning staff (ok, that never happened in Ireland) and the subliminal message for everyone to buy, buy, buy.

There are now digital libraries full of the pseudo-analysis about what happens in our brains when we buy stuff that we like the look or taste of, such as fancy red-soled shoes, chocolate and muscle cars.  They all conclude that the  “I’m worth it” factor is not just seductive, but also short-lived, which is why shopping can be so addictive. 

You don’t need to have taken Psych 101 to understand what such feelings can do to the weak-minded, or their even weaker-minded bank managers when both are exposed to endless cheer-leading by the media and markeers and tax-addicted politicians.

What I‘m wondering now, with all this talk about the bottoming out of the property market, the ending of our infamous Troika programme and the restoring of our sovereignty (that is, the return to global creditors instead of the EU/ECB/IMF), is whether there’s a danger that we could end up back on a regular fix of credit card, bank and mortgage loans?

Could the shopping virus that infected the nation in the naughties – the retail version of smallpox, successfully eradicated in the 1960s - unwittingly, or god forbid, intentionally, be let loose again on us by the politicians and their creatures in the central banks who artificially manipulate the price of money?

So far, it looks like only failed countries and banks that have been “successfully” bailed out with taxpayer’s money (and the future taxes of the unborn – a very special sort of consumer in Ireland) are being facilitated with a new crack at the credit punchbowl. 

As much as the retail banks are dying to extend the sweet elixir of credit again, they’re still unsure of exactly who’s good to pay it back.

Since modern economies are now wholly reliant on cheap credit and cheap energy – hence the global nature of this five year economic downturn – it’s only a matter of time before someone slides up to you and offers you a new credit injection.

It might look innocuous – and you really need that new washing machine – but it will be the first step back to that dark place filled with hair extensions (for the lapdog), diamante encrusted water bottles, Japanese garden features, and Croation buy-to-lets.

So consider the following:

-       Just say No!  (If it worked for the global cocaine trade it can work for the euro!)

-       Keep doing your 12 steps and stick close to your ex-shopaholic buddy.

-       Switch to an on-line only bank account with confusing, software. Your inability to manouvre through the useless website might just be enough to delay hitting the ‘proceed’ button.

-       Switch to the slowest, worst broadband/mobile package to discourage any temptation to shop the internet instead of the high street.

-       Avoid all contact with French-polished nails.

-       Move to Bulgaria, Albania (with their non-exchangeable currencies) or any other bankrupt European country without a printing press of its own. (This now pretty much includes France and Italy). Not only is the risk of getting cheap credit nil to zero, but countries like this haven’t even entered, let alone exited bail-out programmes.

Meanwhile, if you are a retailer, and still in business, you have my deepest sympathies and sincerest good wishes.

You are the true heroes of our modern age. You’ve somehow managed to keep supplying the necessary goods and services that we really need, rather than simply want, while paying suppliers and staff and keeping the banksters at bay. Hopefully, you’ve paid yourself this month as well.

It couldn’t have been easy remaining sober when everyone else was on the tear, even if it did mean some very nice short-term profits. As you have learned, too much credit not only destroys the infected shopaholic but it can spread to the relatively healthy shoppers too.

There’s a vaccine, of course. It’s called sound money. The kind that can’t be printed from thin air, has to be backed by real capital and that has to be earned and saved before it can be spent or lent out.

Thank goodness then for the October budget. I can’t imagine a more successful method of containing a new outbreak of shopaholicism.

That, and the sight of Minister for Finance, Mr Noonan reminding the nation that the medicine he’s prescribed, “is for our own good”.

 

Ends

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NO MAGIC BULLET FOR MAKING MONEY…NOT IN THIS ECONOMY

 

“I think I need to make some real money this year,” my friend said over our first New Year cup of coffee. “We’ve got €20,000 in savings sitting in the bank and we’ve got two kids who we hope will go to university some day. It isn’t going to be enough.”

Timing is everything, and that is certainly true for ambitious parents and children who end up short of both cash and time. 

Unfortunately, that sense of urgency has been the cause of so many people actually losing their money. (Especially if they leave education and pension planning too late.)

The investment industry knows this too and they take advantage of this failing by convincing desperate people that they have magic insights in order to get them to sign over their money and then, hey presto, reap the whirlwind of cash from their trading genius.

It’s easy to say and promise anything when you are trading other people’s money in the knowledge that no matter how the investment performs, you will still maximise your own remuneration by way of frequent and generous commissions and fees.

The financial markets are ruthlessly manipulated by just about everyone associated with them, something that ordinary punters are finally cottoning onto: existing regulation and the lack thereof, allows for the most appalling misselling of unsuitable products and services, the payment of huge opaque fees and charges. In Ireland, regulations even protect bad practise by imposing a six year statute of limitations on official complaints about products to the regulator: in other words, the bad guys get off scot free unless you can afford to take them to court.

The ultimate manipulator of the financial markets – and much business activity now – are governments and their creatures, the central banks which have a monopoly on the control, flow and price of the money that fuels all these distorted markets. When it is the state, and not a free market that ends up setting the price of anything, how can anyone tell if it is genuine good value or not?

The economic crash has exposed both the shortcomings of the markets – they are neither free nor fair – and the insider institutions that facilitate and uphold those shortcomings. (Like huge global institutions avoiding corporate income tax.) It’s hardly a secret anymore that nearly five years of monetary, fiscal and political interventions to save private banks, the cost to individual taxpayers burdened by their debts has been nothing short of catastrophic.

Nevertheless the profits, pay and bonuses being reported in the financial service industries at the end of 2012 now exceed the obscene payments that they collected before the great crash. It certainly confirms the old adage, if you want to make money from Wall Street, get a job on Wall Street.

Of course it shouldn’t be this way. All commerce, all financial and social interaction, should amount to noting more than two willing participants – a buyer and a seller – coming together to agree an honest price. You want the bread that I baked. I want the pair of shoes that you made.  How much bread/footwear can we offer each other to reach a fair and satisfactory deal?

If only it were so easy. 

My friend was right to think that she has to start thinking differently about wealth creation, if she has any chance of beating the system. It was a long cup of coffee, but here was the bullet point list of do’s and don’ts I suggest she consider in order to both make the most of that €20,000 education fund: 

1)    Making money requires knowledge.  Get educated.  This means finding out how stock markets and investment asset options work and then decide which route is suitable for you.  Start with Rory Gillen’s new book, 3 Steps to Investment Success.

2)    The investment route you take should be determined by the time frame in question; the target growth you want; the amount of risk you are prepared to take, the fees, charges and taxes that must be paid.  If you only have five or six years before you need the money, and you need it to double in value, you can’t leave it in deposit account. Realistically, money earning a 7% (!) net return will only double in value after 10 years. 

3)    Be realistic. There’s no quick or easy way to achieve high returns unless you are incredibly knowledgeable, lucky and/or you are an insider who makes the rules and have first go at ‘stimulus’ funds printed by the government or taxpayer’s money. (The tourist industry, says the government are the biggest recipients of the 0.6% of pension savings it confiscates every year from private sector workers.)

4)     Don’t travel with the herd, which is exactly what the financial industry count on in order for it to make their eyewatering fees and commissions. The herd is offered the lowest common denominator – pooled investment funds that are designed first, to make them lots of money, and hopefully not leave you with only losses. The idea of sharing losses with clients is unheard of and small retail clients are so used to poor returns that they are ridiculously grateful if they at least get their original money back when a fund matures.

5)    Follow the money.  Successful professional investors seldom invest their own money in pooled mutual funds targeted at the masses. They identify high quality assets, whether individual shares or large collections of shares (pooled in low cost Exchange Traded Fund vehicles, for example), and at beaten down prices.  They often have a personal ‘style’ of investing: they may be contrarians, attracted to unloved shares (with good track records, lots of cash on hand, low debt) that have fallen out of public favour.  Or they are trend followers – buying and selling shares based on their real-time performance.  Others only buy shares or funds of shares they understand, ignoring the market ‘noise’ about how wonderful this exciting new business or sector may appear to be. (Remember the dot.coms?)

6)    Speculating is not a dirty word. It isn’t ‘investing’ in the conventional sense of buying a quality asset to keep forever for its dividends or capital growth. (The Warren Buffet method, except that Buffet gets special purchase deals no ordinary buyer could ever achieve.)

Speculating isn’t the same as gambling – speculators learn to anticipate events (like massive money printing causing the price of gold to go up for 12 straight years) and to take advantage of all the poor or dodgy regulatory decisions and special tax treatments that favour certain industries to the inevitable disadvantage of others. These ‘edges’ give those companies competitive advantages and they make more money.  The speculators make money too.

7)    Learn how and when to take profits.

 

“So much for a straightforward answer,” my friend laughed.

“Sorry, but making money is never simple,” I replied.  “You asked what you could do to try and beat the unprofitable returns that deposits offer. This is how you do it. But there are no guarantees of success. Losses are a possibility.”

Unfortunately, my friend is not an entrepreneur. She positively blanched when I suggested that one of other way to make her €20,000 outperform a deposit account is to start a business and not automatically hand over 33%-36% of any interest or dividend to the state. (37%-40% from 2014 when a 4% PRSI charge is added)

I left her with this idea:  “You can take a risk and hand this €20,000 to a fund manager – a perfect stranger – in the hope that they’ll grow and return your money over the next decade, after they and the state take their cut first.

“Or you can go out and find a real person who you can meet and get to know who is already building a good company and would sell you a little share of it for your €20,000.  Every great company started exactly this way, raising capital from friends and family, many of whom became very wealthy indeed.”

Small acorns. Big trees.  Maybe even a doctor in the family some day. 

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Anything but Barney…and joint bank accounts

 

“Sharing is caring, mummy” The Child used to say to me in his sing-song little three year old voice.  He picked the phrase up from Barney, that hideous, purple, US children’s TV fur-bag that had a cult following amongst the under 5’s back in the 1990s and naughties. 

I couldn’t bear the sight of him or the chirpy American kids that were clearly pretending to be his playmates. They had to be in it only for the money. So I would encourage Jack to abandon Barney for just about any other programme, including his other favourite, unsuitable viewing  - Judge Judy - which he watched three afternoons a week with his beloved minder, Joanie. 

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I was reminded of the ‘sharing-is-caring’ episode twice recently when asked my views about the merits of married couples having joint current and savings accounts and credit cards.  (Co-habiting couples don’t usually have such accounts, at least not right away.)

Marriage, of course, is all about sharing things: a life, a home, negative equity in that home. Respective families.  A big bed. And the children that often arrive after sharing that bed for long enough.  

Yet there are plenty of things married couples don’t usually share, quite correctly, like toothbrushes. And certain hygiene products. Nights out with the girls/boys. And the minutiae of menstruation and car engines.

Why then would you want to share a current account, or a credit card? 

I appreciate that free banking isn’t what it used to be – the only bank that provides a semblance of nil charges is Ulster Bank and I’m not sure that’s much of an advertisement for them anymore. But if you choose your bank account carefully and do most or all of your business on-line, then the fees are minimal and hardly an issue.

It never dawned on me, more than half a lifetime ago, to share a bank account with my husband.

We both worked. We both had periodic bank loans and overdrafts. We knew we had joint living expenses, like the rent (later the mortgage), food, utilities, our one one car and its expenses and all important holiday costs.

Separately, we had our own personal expenses, like clothes, healthcare, hobbies that we didn’t share (he doesn’t go to the opera or musicals; I don’t go to football or Leinster rugby matches). We don’t usually mix with each other’s work colleagues.

We do buy prodigious numbers of books and DVDs and in the days when we used to eat out a lot (pre-Barney years), who picked up the tab was often determined by who suggested the meal/take-away that night and the choice of restaurant.

Without making a huge song and dance of it, we worked out the cost of all the joint essential and discretionary expenses, like holiday/family anniversary spending. We could do this because we always knew how much money we collectively earned and the state of each other’s finances.

And there’s the rub.

Too many couples never bother to find this out.  I have known newly married couples that didn’t have a proper handle of what each other earned – let alone the size or their car loan or overdraft – until after the wedding.

Credit cards?  Sure, we all have them. But one groom was shocked to inadvertently discover - after he and his new wife got back from their honeymoon, that not only was the credit card he knew about, completely maxed out, but so were her other two - surprise! – cards.  She had total outstanding credit card debt of nearly €10,000 with c18% annual interest.

Detached

It isn’t just newlyweds who are stumble around each other in the financial dark.

Long time marrieds’ – usually the ones with the joint bank accounts – can often end up with one spouse being more detached than the other in their stewardship of the joint or family finances. 

Again, my experience is that couples who keep their banking arrangements separate, pay joint bills proportionately to their incomes (think golf handicaps) but have full regular reckoning of accounts, tend to experience fewer unwelcome surprises than those who leave their money matters almost exclusively to the main earner.

A professional couple, earning decent money with no children and each partner taking personal responsibility for their individual and joint expenses is always going to be able to cope best in this ‘sharing is caring’ experience.  Money, is literally, no object.

But they can have their pear-shaped moments too if latent stingy or spend-thrift impulses start appearing too often.

I once knew a couple where the husband decided that business/first-class travel was now essential every time he travelled when before, steerage was acceptable. She thought it was an extravagance that should only be reserved for really long haul, once-off sorts of flight.  It turned into a big row, but it was really a sign of a shaky marriage than about their joint finances or the difficult compromises about money that every couple – even well-off ones - experience now and again.

Having children, or a period of unemployment is where the pro-joint bank account argument needs careful teasing out. Women – mostly – are the ones who stop working at their jobs when a couple’s children arrive. She suddenly goes from having her own income to receiving a monthly €140 child benefit payment that she may feel guilty about spending on herself.

This is when the joint account really comes into its own, insist its supporters. 

“When you have a joint account or credit card, nothing changes when the baby arrives. The stay-at-home mum just continues to use that account, just like she did when she had an income and it was paid into the joint account,” I’ve been told.

Yeah, yeah. Except it doesn’t always work that way.

Husbands who are already feeling a bit neglected by the baby’s insatiable demands on his wife, adult meals that are very much on-the-go, or don’t happen at all; the sleep deprivation and dearth of sex can take it’s too. Now he’s seeing that there’s not a lot of money left in what he’d always treated, naturally, as his bank account as well as ‘their’ account once all the usual bills, the new baby’s bills and now his wife’s personal spending, is accounted for.  

Some husbands – normally the sweetest of blokes - have been known to question the size of grocery bill that she is running up – groceries that she still buys, loads into the car with the baby, unloads and cooks with.

I think if the joint account is to work, it should be opened only when the baby arrives and it is agreed that a direct debit is set up with an amount transferred every months into the stay-at-home spouse’s own account for their personal expenses.

That way, there is no debate abut how much or why they spent X-amount in a particular department store that he never frequents and no chance – ever - of her wondering if “the housekeeping” money in the joint account can possibly stretch to a new jumper (that doesn’t smell of baby sick) or a decent haircut.

Run Away Money

Every woman also needs ‘run away’ money. 

Once upon a time, in another century, the farmer’s wife kept hens and the pennies she got for selling the surplus eggs was ‘her’ money, that she kept in a biscuit tin or in the post office.

Those were the days when marriages were even more unequal than they are today and when the husband legally owned the farm, the farmhouse and pretty much everything in it. Wives were pretty much chattel and if they didn’t have their own money, in the hidden biscuit tin or post office account, there was no chance of ever running away.

Marriage is not a zero sum contract anymore. Every woman needs her own bank account. She needs her pension fund. A joint account with a spouse is just fine, but it’s a discretionary convenience. 

This is really about being your own person as well as being part of a couple. 

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THE PROPERTY MERRY-GO-ROUND THAT JUST WON'T COME TO A HALT  

 

“I was just in Ireland and was amazed at how people believed that the worst was over and that a rebound in the real estate sector is now. The Irish economy is years away from bottoming out – as long as the country insists on paying off corrupt creditors instead of simply defaulting.”- Max Keiser

Sometimes you really need to listen to outsiders.  Outsiders, that is, who don’t have an axe to grind, like our ‘friends’ in Europe, or at the IMF. 

Keiser’s apocalyptic prediction was made in the same week in April that the first distressed auction of over 80 repossessed properties took place at the Shelbourne Hotel. 

You may recall the picture that appeared in the papers the next day:  crowds of people jostling on the Shelbourne’s steps as the Bail Out Troika boys from the IMF, EU and ECB were walking past from their gig at the Department of Finance.

Anyway, April was an eventful month, just like the previous 30, since that fateful night in September 2008 when the property-imploding bankers and the government set in train the process of bankrupting the state. 

Max Keiser (of Keiser Report fame on RT.com) was just the latest international pundit/journalist/broadcaster to pay us a visit and declare what is resoundingly obvious:  the Irish state is broke and should admit it. 

Meanwhile, he isn’t the first outsider to scratch his head about our continuing obsession with property. 

After addressing his many Irish fans at a public seminar that evening, the exuberant, irreverent Keiser (who is a big hit on Al Jazeera after calling for a fatwah on ex Goldman Sachs chairman and US Treasury secretary Hank Poulson), Keiser appeared on Tonight with Vincent Browne.

He was clearly unfamiliar with how the contrary Vincent is a national treasure who is supposed to instill fear in all who sit before him. Keiser, who described our failed bankers and regulators as crooks that we should have clapped in irons long ago, couldn’t believe his ears as Browne defended their right to their good names prior to appropriate legal action.  (At that point one of the other panelists should have explained to Max about the ‘best boy in the class’ syndrome from which we suffer.)

The Shelbourne auction was just another display of how delusional we remain about property, how easily we fall for scams.  It was astonishing to me – and no doubt to Ajai Chopra and his sidekicks that all those people who packed into the Shelbourne and who bid up nearly every property to as much as 30% over the reserve prices, were convinced they were getting bargains. 

They simply couldn’t wait to be parted from their money. 

Did any of them wonder if the 8%, 9%, 10% rental yields that some of those apartments and houses boasted would hold up when their capital values fall another 10% or 20%? Or when a real property tax is introduced?  When interest rates keep rising? When it dawns on the market that strict lending conditions become the norm?  These are not the circumstances by which one makes much of a capital gain. 

From a strictly investment perspective, property will be worth buying again in this country when absolutely no one wants to and when the idea of home ownership becomes so repulsive (because of all the above) that we all suffer from buyer’s regret. 

The gullible, the stupid, the clueless, the optimists, the carpet baggers and the deranged will by then have all thrown in the towel.  The newspaper property pages (such as they are) will have turned into a property column. 

That is the how a true bubble-inspired economic bust finally ends, and only then does Mr Market realize that the bottom has been reached and the asset class – property really is truly cheap, represents good value and is worth buying. 

That clearly hasn’t happened yet, not when some people think that the first repossession auction itself is ‘bottom’ signal.  You should know that the opposite is true when estate agents and mortgage brokers are jumping up and down again suggesting that first time buyers should now be confident about snagging their bargain dream house. 

This is a compendium of some of the remarks I’ve heard or read:  “These discounts show just what great bargains are out there”;  “These are ‘real’ prices and don’t forget, stamp duty is just 1%’’; “Yields on property are fantastic”; “There’s a shortage of property in Dublin and as these bargains are snapped up, future auction prices might not remain this low”.  

And the grand-daddy of all quotes:  “Negative equity doesn’t matter so long as this is your long term home”.
*                             *                                  *

It has been suggested that the majority of the auction buyers last April were cash-rich culchie farmers and fat cat professionals from Dublin’s leafy suburbs.   

Who knows, but let’s hope for their sake that their pockets really were stuffed with wads of euro and that if they were financing these so called bargains with mortgages that they fixed their rates.  Inflation, at least will help whittle away their debt. 

The collapse of property prices in Ireland isn’t over.  You buy into this market as an investor at your peril. You must buy into it as an owner-occupier in the clear realization that unless you make a substantial downpayment you will be in negative equity and will find it difficult to sell up, switch lenders or borrow more for many years. 

In a country as burdened by debt as ours, you’d really, really have to be besotted by the look and location of any house to actually slap down hard earned savings and brave a mortgage. Given how taxes, interest rates and the cost of living are all going up – but wages are not – this is a love affair that had better last.

That said, even uber-bear Max Keiser would probably agree that Irish property will someday be worth buying and owning again.  Bricks and mortar have a long track record in every western country, notwithstanding periodic bubbles and inflation-adjusted depreciation, of modest, capital growth.  

Someday, when our economic depression finally burns itself out, when the property overhang has been cleared or bulldozed, when NAMA is long gone and no longer distorting the market and when, someday, genuine demand returns for nice houses and apartments …then it will be worth investing in and owning property again.

Someday.  Just not right now. 

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We have stuff…or we have stuff and kids and husbands.  Just no pensions.  

 

Still no pension?  Join the club. Fewer than half of adult working women in this country have an occupational or private pension. Thousands won’t even qualify for a contributory state pension.  We have stuff…or we have stuff and kids and husbands.  Just no pensions.  

Financial advisors I know – even the good ones who take their work seriously and charge appropriate fees for their time and expertise and genuinely care that their clients don’t get ripped off – say that ‘pensions’ is a hard sell no matter how well or badly the economy is doing. 

It’s especially impossible to get younger people to think about them, said one, rather nostalgically, “though clearly when you have extra dosh in your pockets and you’re liable to higher rate tax and PRSI, dangling the tax deduction carrot in front of people can, well, used to, secure a sale.”

The biggest problem isn’t even the lousy fund performance racked up by the vast majority of Irish managed pension funds – near zero over ten years, or less than zero when adjusted for inflation.  Instead it is the idea that you need to lock away 15%, 20%, 30% or more of your monthly salary for 30 or 40 years with no access to this money and no guarantee that you’ll end up with an investment fund that represents anything near the 5% or 6% projection growth rates that are used to illustrate how your new pension fund might perform once the 30 or 40 years worth of charges, fees and commissions to all the salesmen, middle men, administrators, actuaries, fund managers and regulators get paid off first. (Yes, even the regulators – in our case the Pensions Board get a tiny slice of your pension contributions via a levy the industry must pay them.)

The c 47% tax relief certainly helps (41% higher rate tax and 6% worth of PRSI contributions) but it now only represents a part of the tax that higher earners pay when the income and tax levies are included. But even the tax advantages of a pension are being clawed back as the Government roots around for ways to keep its fiscal head above water and the IMF from the door. 

Taxing ‘the rich’ – including the so-called middle class ‘rich’ with incomes over €36,400 who are amongst the largest contributors to private pensions – is their preferred solution rather than cutting their own wasteful spending, shifting public servants off unaffordable defined benefit pensions (though they say this will happen, eventually) and widening the tax pool to include everyone who uses or benefits from public services and programmes and earns an income.

Already there are caps on the amount that can be saved into a private pension, on the maximum retirement income and on the amount that can be claimed as part of the tax-free part of your final pension fund.  (Ask your advisor for the details – and fund accordingly.)

Frankly, the details are no longer all that important in the wider picture.

Pensions are becoming a luxury in this country, for the old age pensioner living on €230 a week who can’t live on such a small sum and needs to supplement it, to the young person out of work or the one working for an employer who needs to cut her cost-base; for the young family living on less money (thanks to levies, wage reductions and stealth taxes) and with massive negative equity in their home; to the established worker who is now being told by their employer that they need to stump up more every month to - just about - ensure that their pension will actually be there when they come to retire in five or 10 years.

If I’m painting a depressing picture about pensions – and I am a strong proponent for putting away money, lots of money, to fund retirement – it is because it is a depressing picture.

Pension funds have not delivered what the people who invested in them expected of them. 

Why?  Because in the case of the final salary, defined benefit occupational model, that model no longer works.  Not only are scheme members living far too long, but the investment decisions that were made were shown for what they were when the great 25 year bull market finally ended around 2000 and the level of contributions need were seen to be inadequate for both the company and worker.

For members of defined contribution pensions, which rely on contributions from employer and employee and the pot luck of investment markets to produce the final pension fund, and so can’t project the actual size of the income in retirement, the problems are not much different. 

Bad investment choices in the form of doing what every other investment manager did (which in Ireland was to buy too many Irish shares and property), increasing longevity and too high charges, fees and commissions have done their dirty work.  Ironically, the rare fund manager who did nothing but leave the workers’ money in the post office for the past 10 years would have outperformed every Irish fund manager over the same period.  (Ironically, there are pension funds that take such a risk-free route – mostly in bonds and cash – but they operate, successfully, but mostly on the continent.)

The only people who have emerged from the past 10 years to date, and especially the last three years with positive pension funds, are those few who were lucky enough to have invested in widely diversified, low cost pension funds or who had either the great good luck to be world-class asset pickers or just had great good luck.  Mostly, all over the world, but especially in the indebted west, pension fund holders have lost their shirts and skirts. 

So what do you do?

As someone who only lost half a skirt on her pension, and who has taken professional, independent, fund management advice for over 25 years… you need to take even better professional, independent, fund management advice.

A comfortable retirement isn’t going to happen unless, a) you have very little debt as your approach the typical pension age of 65 or 60, b) you have maximum service, ideally in a big, strong, solvent company with a solvent defined benefit, final-salary pension. (That doesn’t describe about 98% of Irish DB pension funds, by the way.)  And c) if you have other assets – a paid off property, shares that produce income, lots of cash, etc.

I say this because without some or all of the above in place you are probably instead going to be relying on the state pension, currently €230 a week (plus the rest of the social welfare package for pensioners that includes free travel, fuel and electricity allowances, etc) or a combination of state pension and personal savings.  And if you thought your home or perhaps more correctly, your mortgaged home would be your pension, that was never very realistic and certainly isn’t going to happen until the property market recovers to even a point where it can be sold, if needs be.

Before you try and find a decent advisor, not an easy task in itself if you don’t even have sufficient information about pensions to know what to ask them, the best thing you could do is to go onto the Pensions Board website and download all their brochures – a sort of ‘Everything you need to know about pensions but were terrified to ask’.

Then go on their pension calculator (http://www.pensionsboard.ie/index.asp?locID=458&docID=500 ) and fill in your details:  if you’re 35, earning €50,000 a year and haven’t started a pension yet, but hope to retire at 65 on 60% of your salary (using today’s figure for ease of illustration) you’ll need to start saving €833 gross a month right now for the next 30 years. 

That’s right, every month for 30 years. This will produce a private pension (only if your fund performance achieves a steady 5% per annum) of €18,024 and the state pension of €11,976, which will then be taxed at the highest rate of tax, currently 52% (and 56% for some higher earning self-employed.)

Yes, I know that doesn’t make much sense even if with the 47% tax rate is still available (which reduced the net monthly contribution to a more palatable €492.)  How long higher rate tax relief is going to last is another question that will only be answered when the government gets around to issuing its long delayed White Paper on pension reform. 

The danger is that political pressure will result in the creation of a standard 33% (give or take a few percentage points) tax relief to everyone.  If that happens, higher taxpayers will have to rethink their pension plans altogether…or get used to the idea of living off the state pension, ideally in a warmer, sunnier, lower cost jurisdiction.

Now where are those Spanish property brochures…

 

 

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