Jill Kerby

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

 

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

 

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

 

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

 

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

 

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

 

 

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I wonder how many parents have worked out how much more their child’s private secondary school would have to charge them if the government was to withdraw the €99 million annual subsidy it pays every year just for the teachers wages in the state’s 56 private secondary schools?

 

According to the most recent audit of private fee-paying schools by the Department of Education, the average fees are in the region of €5,000, and the Department pays for the salaries of just under 1,500 teachers, or approximately €66,000 each.  Some of the larger schools, like Blackrock College received nearly €4 million in subsidies; others like the smaller Loreto College on Stephen’s Green, €1 million.  

 

You don’t need Leaving Cert maths to do the arithmetic however. If someday, the government decided that subsiding private education was a luxury that taxpayers could no longer afford and abolished it altogether, the school with 800 students who have enjoyed a €3 million euro subsidy will either have to increase their fees by €3,750 just to maintain the existing teacher student ratio, or reduce the number of students it takes in.  The final option to increase the number of students per class is a non-starter since most parents send their children to private tuition for the smaller class sizes. 

 

Private secondary education is coming under the spotlight for a very good reason:  either the government continues to subsidise the fee-paying schools or the university sector.  It can’t afford to do both anymore, no matter how popular the subsidy is to middle class voters many of whom,, despite having very good schools in their comfortable, leafy neighbourhoods have turned private school education for their children into a ‘must-have’ lifestyle choice. 

 

The private school sector, no more than any other business, is unlikely to survive this recession unscathed as parent’s jobs and businesses struggle with the downturn. There are anecdotal reports already that ‘this boy’ or ‘that girl’ may not be coming back in the next year and that principals in state schools are getting more calls from parents wondering even now if there will be a place available for their child next September. 

 

This should set off a few warning bells and have parents with more limited budgets to pull  outa calculator now and work out the huge financial commitment they may end up facing if secondary fees rise sharply and third level fees are re-introduced.  Ten years of private education could easily amount to €60,000 or €70,000 or even more, per child.

 

Unless you make provision early for a bill like this, the local convent or CBS may not be such a bad alternative after all. 

 

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It isn’t just the banks that are feeling the cold wind of the credit squeeze and the collapse of asset values; international insurers have also seen their own investment portfolios and reserves come under pressure as their customers lose their jobs or find their incomes squeezed.  The days of cheap insurance may be coming to an end. 

 

Insurance companies make money by taking in more premiums than they pay out for catastrophic events and for the more mundane ones like motor and workplace accidents, fire and theft, lost luggage and of course, an untimely death. But they also expect to earn profits from investing premium income, some of which of course is diverted to meet their substantial reserve fund requirement. 

 

While it would certainly appear that insurance companies are in far better fiscal shape than the banks, every report I read about the insurance sector says it too is under pressure and that we should be prepared to higher premiums. 

 

Forewarned is forearmed.  Use a good broker when shopping around for your insurance, but make sure to call a few of the direct insurers yourself as well. Know what you are buying – you may be taking on more cover than you need. 

 

In fact, the Financial Regulator has just produced it’s latest motor insurance cost comparison survey at www.itsyourmoney.ie  and while itdoesn’t look to me as if premiums have gone up significantly compared to the 2007 survey, there are still significant savings between the insurers:  the example of a 27 year old office female office administrator seeking comprehensive cover for her 2003 Ford Focus show how she would have paid a whopping €663  more for her insurance by buying it directly from one of the insurers mentioned, rather than going through a broker. 

 

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High maintenance yummy-mummies might want to keep an eye on the example the new Mummy-in-Chief, Michele Obama and the good spending example she’s setting as the recession deepens, at least so far as her own dress budget is concerned. 

 

While he certainly earns a good salary and perks as President – the Pennsylvania Avenue and Camp David digs come with the job – Barack Obama doesn’t earn as large a salary as our own Taoiseach, Mr Cowan and doesn’t have great family wealth to fall back upon, unlike his predecessor.  Book royalties have helped to boost the new First Family’s income, but unlike the Bush’s, the Obama’s are only just comfortably wealthy, rather like Tony and Cherie Blair were in their early years in 10 Downing Street. 

 

Michele Obama gave up her job over two years ago, but she’s always been surefooted about her spending, say her friends. While always fashionable, she isn’t a clothes horse they say, and she favours up and coming young American designers rather than the pricey old haute couturiers favoured by other First Ladies  and even relies on stylish catalogue companies like JCrew for her casualwear. 

 

From what her friends say, there will be no thousand dollar, let along five thousand dollar handbags surfacing to embarrass her or her husband as the economic crisis worsens. 

 

No one expects Mrs Obama to embrace austerity. The clothes she wears will give American fashion a big boost tat a tough time, but I expect what she buys and how much it all costs will be judged just as critically as the hundreds of billions her husband intends to spend. 

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AMcC writes from Dublin: I am considering cashing in a small occupational pension that I earned while I worked in America and I have been told that I am obliged to pay US taxes of 20% on the lump sum.  As I am now tax resident in Ireland, would I also be liable for additional Irish taxes if I then repatriate this cash to Ireland. 

 

As an Irish tax resident you are obliged to pay tax on all your worldwide income – in this case, capital gains tax of 22%.  The double taxation agreement with the United States means that you do not pay tax twice on this encashment and you can claim a tax credit for the 20% US payment. 

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EC writes from Co Kildare: I hope that you might be able to guide me because I don't know whether to encash my policy or hold on and hope for a good return on maturity date.  I took out an Irish Life, indexed linked Treasury Plan starting with the equivalent of €110 (£86.66) a month back in January 1995 and it matures in 2015. I now pay €48.25 per week.  Last September 25th my fund was valued at €22,873.79. The lady I spoke with suggested that unless I needed the cash, she would encourage me to hang on in there.

You still have six years before this policy officially matures but chances are that its value has continued to fall since last September.  Your contributions have probably exceeded the fund value at this stage so you need to decide for yourself whether the growth prospects going forward will be positive enough to make up for your current losses and produce a decent profit (after the 26% exit tax on profits is also taken into consideration.) This was almost certainly an investment plan that carried substantial fees and charges and one thing you certainly should consider doing at this stage is stopping the index linking of your contributions. Most of the indexing every year is probably being paid to the salesman, and not into the fund.  If you do cut your losses, you could use the €2,500 you are paying in every year to pay off your mortgage or other debt, as a tax deductible contribution to a low risk, low cost pension fund, or to save it or invest it in assets that will hopefully survive the recession intact and/or come out the other side having paid you steady dividends or interest – physical gold and silver, consumer durable shares, oil stocks, good farmland, etc.  Before you make any decisions make sure you have all the facts, and that includes urgently finding out exactly what the fund is worth today and your contributions to date. 

 

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EB writes from Dublin: Since the US is in so much debt and the federal reserve is printing vast amounts of money do you think there will be a collapse in the dollar? I have some cash available for investing for the long-term and I would like to take advantage of some low stock prices. I would like to buy shares on the NYSE but I believe a collapse in the dollar is inevitable. Would I be right in saying that if I use euros to buy shares quoted in dollars and the dollar subsequently collapses, will my investment be devalued? I understand that if I buy shares in, for example, a Brazilian company quoted on the NYSE, and the dollar loses half of its value against the Brazilian currency, then the price of the stock will double on the NYSE to reflect the true price in Brazil. If I buy this stock with euros, will my investment still be devalued by a collapse in the dollar? 

 

Predicting currency movement is a mugs game and not even the professionalsalways get it right.  That said, the contrarian view of the dollar – which has recovered some of its strength since the credit crisis began – is that the creation of trillions of dollars of new loans, credit and cash (printed out of thin air by the Federal Reserve) will inevitably result in the devaluation of every dollar already in circulation, and ultimately in the long-term viability of the dollar. (You can read more about the Austrian School theory of economics here:  www.mises.org).  If you buy shares on the US stock exchange, first converting euro into dollars, and the dollar collapses, it means your share will be worth that much less.  If you buy Brazilian stocks and the dollar collapses and the Brazilian currency strengthens against the dollar, but the dollar remains weak against the euro, your loss may be less when you sell the Brazilian shares.  The thought of these permutations is giving me a headache however, so I’ll just repeat what I’ve written many times in this column: The only reason to buy any shares, anywhere these days, is because they represent sound, long term value relative to their assets, management, cashflow and dividend payments. You have to accept that the moment you invest outside the eurozone, you take a currency exchange risk and incur extra costs. 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

“So, here’s the plan:

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

 

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

 

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

 

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

 

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

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At least one side of the regulator’s office seems to be earning their keep:  the financial Ombudsman has seen a 36% increase in the number of complaints, or nearly 6,000 over the past six months, arrive across his desk, compared to the same period in 2007.

 

The Ombudsman’s office deals with everything from people unhappy with the way they’ve been treated by their insurance company, to those who’ve been fraud victims, but by far the most serious case over the period - at least in terms of financial value – is the one in which a credit union was refunded €500,000 of the €1 million that was all lost after they hastily invested it in a ‘wrapped around’ insurance bond. 

 

But this case ended up in a rare oral hearing with both sides found to be equally at fault by the Ombudsman – the stockbroking firm for failing “to advise the credit union of the risk of the possibility of total loss of capital”; for its “inadequate’ presentation; its lack of thoroughness of research into the bond and its failure to point out to the credit union that the bond was outside the ordinary type of investments that were typically made by the credit union”.  He conceded that the broker believed it “acted in good faith” by regarding the bond as low risk but “the true nature of that risk should have been cogently pointed out to the credit union” -  that is, that there was absolutely no capital guarantee provided.  This was especially important given that two of the three investment committee members “were not in the remotest sense experienced in investment matters.”

 

Nevertheless, the Ombudsman also found that the investment committee “could not absolve itself from the disaster which occurred” as a result of the meeting and presentation that lasted “between 15 and 30 minutes at the most”. After the stockbroker left them, they agreed, “there and then” to invest in the bond and admitted under oath that they “in effect, ‘blindly signed’ the application form and did not even read the brochure, or indeed the conditions under which they were investing €1million of members’ monies. One of the conditions included a warning that the investment could be worthless.”

 

It is unfortunate, but not always inexplicable when ordinary people, with no training or understanding of complex financial investments, but who are seduced by the idea of higher than average returns, admit to not fully reading or understanding the lengthy contracts and small print that still accompanies most financial contracts. 

 

It shouldn’t happen to an investment committee entrusted with millions of other people’s savings. 

 

Has the Ombudsman, Joe Meade, delivered a fair judgment? The credit union doesn’t think so and is exercising their rights by appealing his finding to the High Court. Meanwhile he referred this particular case to the Financial Regulator for their further attention.  

 

Oh dear.  Perhaps it would have been even more helpful if he’d suggested that all credit union members also satisfy themselves that the people they’ve entrusted with their money actually know what they are doing before they hand over surplus millions to other investment intermediaries in the search for safe and profitable returns. 

 

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I’ll certainly be watching the swearing in of President-elect Obama on Tuesday – my tenth such viewing. I sincerely hope he can deliver the leadership that America and the rest of the world needs, but I have my doubts about his ability to fulfil his first promise – to do his best to create millions of jobs and reverse the financial devastation of the past year. 

 

I don’t expect any shoes to be thrown at the handsome, young president at his inauguration ceremony, but I won’t be too surprised if it happens before he leaves office. 

 

With no government surplus to tap into, this latest trillion dollar bill for the huge stimulus package of public works, alternative energy project and mortgage bail-outs will have to be paid for, not with more taxes, which have been ruled out, but with further borrowings and ‘quantitative easing’  which amounts to the printing of money. 

 

Perhaps this is where we, the beleaguered Irish, can make a small contribution, by example, to President Obama’s new, ‘New Deal’. 

 

Here, thankfully, we don’t have the luxury of a printing press anymore or we too would undoubtedly be churning out euros to cover our huge deficit.  Instead of stimulus programmes, however, we’re finally accepting that we need a cutback programme - of civil and public service wages and jobs, of executive positions within the government itself, and in the ‘free’ healthcare, education and other public services we can no longer afford.  

 

Maybe we can show the new US administration how a country can prioritise it’s money if it must: for example, if it came down to a choice, say, between spending a billion euro a year on our army – and we are a tiny country with no known enemies and a friendly, nuclear neighbour – or continuing to pay out a billion euro worth of child benefit payments to our own children and those we support in the developing world, I expect we’ll make the right choice. 

 

President-elect Obama hasn’t talked much about cutbacks, except perhaps in the context of their own military spending: these last eight years of war, without a war economy, and the expansion of the US social security, Medicare and Medicaid programmes for the poor and the elderly during the Bush years, is reckoned to have helped expand the real US deficit to well over $60 trillion. 

 

There is no possible way all that those promised entitlements and existing debt and credit commitments can be met by this or even future generations of US taxpayers.  Obama’s choices were always limited to acknowledging the existing massive financial hole and drawing up plans to tackle it… or by doing as he appears to be starting his presidency – by deepening the hole in the hope somehow that the extra shovels full of debt and credit can stop the walls of the economy from collapsing, at least on his watch. 

 

Enjoy the inauguration ceremony.  Reality sets in on Wednesday. 

 

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Here’s a couple of intriguing Irish ‘stimulus’ ideas that a reader sent in, who might very well be a taxi driver in the market for a new house. 

 

The first one gives the taxi industry a boost while also reducing the huge cost to the state in policing speeders and the carnage they leave behind: “Allow any taxi in the country to be fitted with speed cameras and share 50% of the revenue with them on speeding fines that they generate.  The real loss of life is late at night in rural areas; pretty soon all late night partygoers would know that they’d be caught.”   

 

 

Suggestion two is to “reduce the stamp duty payable on any dwelling by the percentage improvement in the energy audit certificate level, post-sale.  If I purchase a house with a D1 energy classification and within a year it’s improved to a C1 level, then a 26% rebate on stamp duty would reply.  This should give a boost to the building sector and clear unsold houses.”

 

 

So would eliminating stamp duty altogether, but probably not until the housing bottom is reached and as the auctioneers have finally acknowledged, that won’t be this year. 

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MS from Dublin: I will retire in two years (age 65) after 20 years in my present employment. At that time I will have €250,000 in a directors pension plan. I believe I can take 1.5 times salary in a lump sum, tax free, and agree a pension with remainder. How is salary calculated at this time? I have my direct pay, bonus and a company car, all taxable. Are all three elements included in salary? I also have an old personal pension plan of €30,000. What are my choices of benefits on this? If I do not reach retirement date, can my family claim the entire amounts in cash?

 

Your final salary will be deemed to be the average of the best three consecutive years over the last 10 years of employment, and this includes basic pay, bonuses, overtime “and any other payments that are subject to schedule E tax liability including the value of any benefits in kind,” says financial advisor, Gerard Geraghty of Geraghty & Co in Westport. You have a number of option for the remainder of your pension funds: you could buy a pension annuity, but “unfortunately rates to include a similar aged spouse are poor and are likely to be around 5%. An index-linked joint annuity would be significantly lower again. If your reader is a 5% Director he wouldn’t have to buy an annuity but could take 25% of the fund as tax fee cash and use the balance to buy an AMRF/ARF for the future use of all his family.” Similar options exist for your €30,000 pension fund but Geraghty warns that “if he has taken 1.5 times final salary from the main scheme he is not entitled to any more cash.” As for the question about you dying before retirement, your dependents would be entitled to up to four times your final salary as a tax-free cash payment with the balance of the pension fund used to buy them a pension annuity. Pension scheme members with 15 years or less of pensionable service can avoid this by transferring their fund now to a PRSA, the proceeds of which are paid out tax-free to their family upon the death of the account holder. 

 

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MB writes from Co Laois:  On November 16 last you wrote about American shares like Palmolive, Coca Cola etc and also about junior gold and silver mining companies that might be worth investing in. I have €5,000 euro at my disposal and would love to dabble in shares like these. I do not have any experience of buying shares and wonder if you could give me some advice about how I might go about doing so. I would be very grateful if you could help me out with this matter.

 

Consumer durable shares are those whose companies create goods and services that people feel compelled to buy, no matter what their financial position:  goods like soap and other personal hygiene items, food items, petrol and heating oil for their homes, fast food (like McDonald’s, whose share price is rising).  The most successful companies in these sectors have huge turnover, little or no debt, world class management and lots of money in the bank.  Their share prices have fallen (though not as much as most) but they continue to pay strong dividends and are seen as steady, longer term (ten years or more) buys.  The gold and silver companies are a much riskier punt but commentators believe the mining shares are underpriced compared to the physical metal prices; the shortage of gold and increasing demand is what makes these shares attractive, at least over the short term. Do your homework.  A good place to start is by reading the financial pages, (many of which are free on-line), to keep up to date; The Economist for a global view, and free web-based on-line newsletters like www.fool.co.uk  and www.dailyreckoning.com  and www.mises.orgwhich provide mainly contrarian views to the Keynesian commentators who support governments borrowing and spending their way out of recession.  (The Austrians believe you cut spending and taxes and let the recession correct itself.)   Learn about ETFs – exchange traded funds – which are low cost alternative to expensive mutual funds of shares; ETFs also spread your risk amongst many shares or commodities in a sector.  The Irish Stock Exchange (www.ise.ie) now sells ETFs and you can purchase these and other shares via a stock broker or by setting up your own lower cost share dealing account with the likes of Sharewatch.com (Ireland) or even via the share service that National Irish Bank offers its on-line current account customers. 

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DESPERATE TIMES CALL FOR DESPERATE MEASURES?

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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With a US private equity fund looking as if it will acquire at least some of the assets of the Waterford Wedgwood group, which is in receivership, the question on workers’ minds in Waterford (and no doubt those at the Derbyshire china factory) is not just whether they will still have their jobs, but also their pensions. 

Last October the precarious state of the vast majority of defined benefit pension funds was raised at the Irish Association of Pension Fund’s annual conference by Maurice Whyms, a director of the Dublin pension and actuarial consultants Attain. He said then (and I reported his comments here) that a combination of the credit crunch, collapsing stock market asset values, pensioner longevity and tough accounting and funding standards had created a perfect storm that could pack a devastating financial blow to members of defined benefit pension schemes like Waterford’s which has a funding deficit of €110 million and several thousand existing and future pensioners. 

In the UK, the increasingly burdened Pension Protection Fund (PPF) offers 100% pension income guarantees to existing pensioners and a limited guarantee of up to 90% or £27,770 whichever is the greater to remaining pensioners as they reach retirement, but here, there is no such scheme. Under our statutory rules, when a defined benefit pension scheme is involuntarily wound up, pensioners and AVC fund-holders gets first crack at what money is available; only then will existing worker members of the scheme and deferred members, who left the company early but still expected to collect a partial pension, receive any payment from what is left in the fund. 

The great injustice of this system, says Mr Whyms of this payment priority, is that someone who is 64 and three quarters, and had worked alongside others for decades but who retired a few months earlier, will have no more entitlement to his life’s savings – the pension fund - than a young worker who may have only been in the scheme for a few years. 

 

The Waterford insolvency and the involuntary winding up of its defined benefit scheme probably won’t be the last one this year. Last October it was reckoned that 75% of DB schemes were in deficit; that number is undoubtedly higher as stock market losses continued through the final quarter and the trading environment worsened for so many firms. 

 

Even in the UK, where the PPF has been in operation only since 2007, it has only £2.7 billion in assets and a deficit itself, and is struggling with a £517 million deficit. 

 

So what happens to the thousands of Irish Waterford group pensioners and employees if the new buyer buys the company assets, but not its pension liabilities?  With no compensation scheme of any kind in place here, should the Irish government step in and even part-guarantee those pensions? 

 

The members of the Waterford pension scheme and their representatives will no doubt demand such an intervention, given how Irish bank depositors and creditors have been bailed out. 

 

But then so will every other worker and retiree whose company and defined benefit pension fund ends up in liquidation or receivership.  

 

 

the total value of the fund, which is funded by employers and not the taxpayer it’s total value is just £2.7 billion and it is quickly being drained by large, high profile insolvencies like 

 

Three months later, as predicted, the 8,000 existing and future pensioners of Waterford Wedgwood – 800 of whom still work in the Kilbarry factory - are about to find out exactly how vulnerable they are. 

 

The Waterford DB scheme is reported to have a funding deficit of c€111 million. Under current legislation, existing pensioners If the Irish government isn’t willing to act quickly to address the apparent unfairness in the priority payment rules – and it would require a change of legislation to do so – a similar case currently in the UK courts could become very significant, says Maurice Whyms. 

 

In that case, a man called Robins, who believed he was unfairly treated when his company DB scheme was wound up went to the European Court.  He claimed that his government hadn’t done enough to enact an existing EU directive that directs member states to protect all worker’s pension benefits in the event of a scheme wind-up. He won that case but it is back in the UK courts.

 

Let’s hope it doesn’t take similar action to bring more fairness to the Irish pension system. 

 

I’m looking forward to reading the new Fine Gael universal health insurance strategy when it is published later this month, and I’m sure the three existing health insurers are keen to see it also, if only to see what role FG see for the wholly owned government insurer, the VHI.

 

Universal health insurance, in which insurers and hospitals compete for clients under community rated regulation that eliminates the gross inequality of our existing two tier system, will undoubtedly attract many more insurers into the Irish health insurance market which only has two genuine private sector companies competing against the dominant government-owned VHI. 

 

If universal health insurance were to work as well here as it does in Holland, which is the model that Fine Gael are advocating, the VHI cannot remain in the ownership of the Department of Health, which should be reducing its role in the day to day operation of the public health service anyway.  

 

Under a universal health insurance system the government’s role should be confined to setting the standards of care and service that the hospitals and all health providers must meet and of course, ensure that those who cannot afford even the most basic insurance package are still fully covered.  It will certainly have to result in changes to the volume and method of, effectively, double taxation – that currently applies to those 2.2 million people who both contribute to the public and private systems. 

 

If we eventually get a universal insurance system conquerable to that of Holland, the queue jumping that exists for the insured will hopefully end, but so will the terrible waiting lists.  

 

The Minister for Health says this will happen anyway under the new hospital consultant’s reforms, but the difference is that the army of HSE and Department bureaucrats will still be in control, rather than consumers, their insurers and the people who actually work in and run the hospitals.

 

In the same way that we would never want the government running the way food is distributed and sold in this country, we should commend Fine Gael for finally realising that under their watch, at least, they wouldn’t be entirely running the delivery of health services either. 

 

My Canadian family and friends were stunned to hear how the Irish economy had suddenly collapsed.  “I couldn’t believe it when I read how people are immigrating again,” my brother remarked over Christmas dinner with the extended family in his cottage in the snowy Laurentian hills, north of Montreal. “Every year that I visited you in Dublin, things seemed to be getting better and better.”

 

He was right about those years during the 1990s and early 2000s, but that was before we abandoned genuine commerce and trade to blow up a property bubble. 

 

“Oh, we started doing that too in the last couple of years,” the brother replied, “but a lot of people remembered the crash of ’91, and the Canadian banks are heavily regulated so subprime and 100% mortgages never really took off to any huge degree.”

 

Lucky Canada.  But some property bubbles have burst – in the Mont Tremblant ski area where a flurry of for sale signs litter the ski hills and, says a nephew who now teaches at Memorial University in St John’s Newfoundland, at the exclusive Humber Valley holiday development which was aggressively flogged to UK and Irish investors about five years ago.

 

Back in 2003 the Humber Valley development on the remote west coast of Newfoundland was literally, a million dollar, all year sporting paradise. Last November, it lost its single direct air link to the UK.  The credit crisis didn’t help and property values plummeted and an appeal by the management company, which arranged sales and rentals, for help from the Newfoundland ministry for tourism was turned down flat. 

 

Newfoundland is a beautiful place, but it’s freezing cold in the winter, bleak, damp and foggy for much of the rest of the year and is regularly cut off from the Canadian mainland. Canadians shook their heads in awe at the million dollar price tags on the Humber Valley properties…and mainly left it to Americans, Brits and any Irish foolhardy enough to do so, to pay those ridiculously inflated prices. The Algarve, it is not. 

 

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MAKE A WILL:  HAVE A GOOD ‘HEIR’ DAY 

 

Over the next few weeks of this New Year, this column will take you through the basic steps of what constitutes good personal financial planning:  I can’t think of a more appropriate year to get your money and spending behaviour into order – if 2009 is anything like 2008, you won’t be disappointed by the effort. 

 

I never start a personal finance seminar without mentioning something that anyone with dependents or assets should consider:  making a Will and considering the impact of your ‘succession’ decisions.  Yet typically, no more than a third to half of any audience I address has bothered to write their last Willand Testament and that includes people with young children.  

 

The main reason to write a Will is so that you, rather than the state, gets to decide exactly to whom you would like to bequeath your money, property and possessions.  If you die ‘intestate’ or without a Will, the terms of the Succession Act 1965 take over, and your estate will be distributed first to your spouse, who gets it all if you have no children. If you have a spouse and children, they receive 2/3rds and 1/3rd in equal shares respectively. If you have no spouse or children, your parent(s) get your entire estate; if they are dead, your siblings take equal shares (or their children, equally, if their parents are dead), or your cousins and then nieces and nephews if there are no siblings, etc. 

 

The Succession Act is very fair, but it is also completely detached from the nuances of your own personal relationship with any of these people:  I love my brothers and sister dearly, but if I were a single person, I wouldn’t want them to exclusively inherit my house, pension fund, savings and all my personal effects. 

 

And as a married person with a child, by not having a Will, under the Succession Act, my son would inherit a third of my estate, which isn’t a big problem since he’s just 15 and my husband, as legal guardian, would have full control of its value until he turned 18.  By then, he would be entitled to what was left of his inheritance and if there was insufficient cash to give him, assets – perhaps even the family home – might have to be sold. 

(It isn’t unusual for adult children to gift back their inheritance under the Succession Act to a surviving parent if claiming it causes undue financial hardship, but there is no legal compulsion to do so.)

 

Given these sorts of unintended consequences – and the fact that it takes even longer to complete the probate process of an intestacy than it does a legal will, and that can typically take 3-6 months) – it is far better to write a Will and spare your family and friends the inconvenience of you dying without leaving clear instructions about what happens to your estate. You should also know that you can’t entirely disinherit a spouse, and that children left entirely out of a Will often successfully challenge that decision in the Courts.

 

Most solicitors charge modest fees, usually well under €200for writing up a simple will, which should also include the names of any guardians of any children under age 18.  If you want to set up a trust for your children, in the event, say, that both parents were to die or simply because you don’t want any of the children to inherit too much money too young,this will cost you more.  But a trust can be a very good idea on tax grounds as well, in order to postpone the payment of capital acquisition tax (CAT) if your estate is particularly large and their individual inheritance exceeds the parent-child tax-free threshold of €521,208 in 2008 (it is expected to rise by at least 3% inflation in 2009 to c€536,844 – the actual increase had not been published by the Revenue at time of writing).  (You can write your own Will via www.wills.ie).

 

So how much tax will your beneficiaries have to pay?

 

First, there is no transfer, inheritance or gift tax between spouses and the above mentioned amounts apply between parents and children or grandchildren, as well as adopted and step-children (and foster children under certain circumstances) if your son or daughter pre-deceases you.   The next group of beneficiaries – siblings, nieces and nephews and other linear ancestors/descendents - are entitled to a tax-free inheritance of €52,121 in 2008 (c€53,684 in 2009), while a stranger – someone who is not a blood relative – can receive €26,060 tax-free in 2008 (and c€26,842 in 2009).   

 

The Finance Bill increased the CAT tax rate in 2009 from 20% to 22%, so a child who inherited say, €600,000 worth of assets (ie a property, cash or life insurance benefit) would pay €13,894 in inheritance tax to the state compared to €15,775 in 2008.

 

 

There are some exemptions to CAT other than that enjoyed by spouses: the family home is exempt if the beneficiary(ies) have been living with the deceased for at least three years prior to the inheritance (or transfer in the case of a gift) and it is also their only, principal private residence. (The property must not be disposed of for the next six years or the tax relief is withdrawn.) 

 

Some relief from CAT for businesses being passed on and for agricultural land is also available; in the case of the latter, its value is assessed at just 10% of actual value. 

 

So as a New Year gift to you family, sort out your succession planning.  Write your will.  Have a good ‘heir’ day. 

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FF from Dublin writes: I have a personal pension fund in addition to my employer's. When I claim tax relief on my contributions to this fund can I include my PRSI contributions as well? 

You may be entitled to claim relief from the total PRSI and health levies of 6% of your net relevant earnings on your contributions which would result in total contribution relief of 47% if you pay tax at the higher, marginal rate and 26% if you pay tax at the standard rate. Pension contribution/PRSI tax relief is restricted however, and is based both on an age-related percentage of net relevant earnings/remuneration and on a total earnings/remuneration figure of €275,236 in 2008 and €150,000 in 2009.  This generous tax and PRSI relief may not last forever, so you should ensure that you’ve claimed it all up to this current tax year.

 

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TL writes from Dublin: I recently lost my job in the media. I have been thinking about writing a book for some time and this might be just the opportunity (I’m trying to stay positive). Just wondering how I could apply for the artist’s tax exemption status and when it applies - only from when you get a book published, or sooner? If sooner, can I get the exemption status while I am researching and writing my novel?

Under Section 195, Taxes Consolidation Act, 1997, income earned by writers, composers, visual artists and sculptors from the sale of their works is exempt from income tax in Ireland, but only under certain circumstances, according to the Revenue Commissioners. (Certain literary non-fiction works are also considered exempt.) The key features that you need to fulfill to the Revenue is that your work “is original and creative and whether it has, or is generally recognised as having, cultural or artistic merit” and that you, the artist, “must be resident, or ordinarily resident and domiciled in the State and not resident elsewhere.”   You are also exempt from paying any income tax from any bursaries or grants you might receive from the Art Council, or even an advance payment from a publisher, for example, to help support you as an artist, but only in the year in which you make the claim and only after you achieve your tax exemption status from the Revenue.  Any income earned from your work before you are given your artist exemption status will be liable to income tax.  The Revenue have full details of this scheme on their web-site, www.revenue.ie . Finally, while this may not affect you immediately, since January 2007, artistic income is regarded as a "specified relief" and may be affected by something called High Income Individual Restriction which takes into account various tax reliefs that higher income earners use to reduce their income tax liability. The restriction will only apply to those individuals whose "adjusted income" is over €250,000 per annum. 

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MB from Dublin writes: I received my annual Christmas bonus this year which was in the region of €60,000. I plan to spend €10,000 on home improvements would like to put the rest away for about six months. Could you tell me where I would receive the best return over a six to 12 month period? I don't mind if it is locked away and inaccessible for that period. 

Interest rates are coming down as the ECB lowers its base rate and savers will find their annual yields will come under even more pressure in 2009 due to the extra 2% Dirt (now 22% instead of 20%). While you naturally want to maximise your return, a quick glance at the ‘best buy’ interest rate charts in this newspaper and on the interest rate website, www.irishdeposits.ie shows that Anglo Irish Bank, Irish Nationwide, and the EBS are offering some of the highest six and 12 month fixed rates.  At time of writing their long term futures were still being determined by the government.  I suggest that before you go for the highest return on your money, that you are equally satisfied not just about the return of your money at the end of the fixed term but that the institution you leave it with is still around then too. 

 

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PB writes from Limerick: I have €19,000 on deposit with National Irish Bank and I'm wondering what to do after January 1, when the rate of interest drops to just 1% from the 5% I’ve been receiving since reinvesting my original SSIA fund in the NIB tracker deposit account. Can you advise me of how I might earn a better return? I might consider risking a portion of it, in the hope that any losses I might incur would be covered by the return earned by the portion I leave on deposit. I like the idea of forestry, but it seems to me that you have to wait ages to make a return. I'm very sceptical about stocks and shares though I’ve read that the best time to invest is when values are low. I invested in a tracker bond in the past but made very little money - and that was when times were good. I'm also wondering which is the best deposit account at the moment. Your Best Buys tables lists Anglo Irish Bank as one of the best but, after the scandals that have emerged recently, would my money be safe?

You’ve already given quite a lot of thought to this process and have come to some sensible conclusions: the security of the bank you choose for the funds you want to leave on deposit is just as important as the return you are offered on your money and also that when a global market collapse happens, bargains will be available among those strong, well capitalised companies with little or no debt, that pay dividends despite falling share prices.  There are also sectors and funds that should produce good returns over the longer term – like energy and other natural resources (including timber and water), consumer durables, food and infrastructure companies that will be able to take advantage of the massive building projects governments intend to pursue as part of their national stimulus plans. You should start doing your own research and compare the cost of different funds (check out the RaboDirect.ie and Quinn-Life.ie investment funds) and low cost ETFs (exchange traded funds) that represent these sectors. The Irish Stock Exchange has just dropped its charges on its new selection of ETFs (see www.ise.ie) and is also a good place to start. 

 

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