Jill Kerby

Tax-relief gives pension the edge over repayment 

JH from Cork writes: I am 31 and employed full-time and avail of a company pension scheme. I recently had a pension meeting with the company and it seems that I will need to increase my contributions to get a decent return. I was thinking of doing this while the top rate tax relief exists. Currently I contribute 4.5% and the company contributes 2.5% but that only gives me projected earnings of 12% of my current wage once I retire. An extra 3% contribution would cost me €75 a month, an adjustment I could handle. My question is, what level of my own wage should I be investing as a general rule, and is it realistic to expect a decent return from these pensions in the long run. Would I be better off repaying my mortgage at a faster rate and then saving more once that is paid off?  Currently the mortgage will be paid off when I am 53. If there are other options that are better at this stage please let me know.

You are very lucky that your pension review has taken place at the age of 31 and not 51 - you’ve plenty of time to adjust and increase your contributions and work out an effective investment strategy.   

Go to the Pensions Board website, www.pensionsboard.ie and click on their pension calculators. By its reckoning, based on today’s money terms, a 31 year old male, earning, say, €50,000 a year, with an existing fund of, say, €20,000, should be contributing 17%, not 7% of salary into a pension every year in order to secure a retirement income, worth two thirds of final salary or €33,330 at age 65.  This income includes the state pension worth €11,976 but does not make provision for a spouse’s pension.  Even if you were satisfied with only 50% of your final salary or €25,000 a year at retirement, of which nearly half was accounted for by the state pension, you would still need to contribute at least 10% of salary. By filling out your actual details, you should get some idea of the level of funding you need to make for a comfortable retirement. 

It appears that you are on schedule to pay off your mortgage long before retirement, but with mortgage interest rates likely to rise, you might want to consider fixing your mortgage rate if you have a variable rate loan.  Over the next 22 years inflation will also play its part in reducing the real cost of your mortgage and if you can afford a fixed rate you will be in an ideal position to benefit from such an impact, all the while secure in knowing exactly the size of your repayment for the fixed term.

No prizes here

DMcD writes from Dundalk: I am a regular purchaser of prize bonds.
I am now thinking of investing a significant part of my life savings in them.
How safe would my money be? In recent times I have been confused as to where to find safety.

Prize Bonds are guaranteed by the Irish state, just like deposits in An Post and up to €100,000 deposited in Irish banks. You can check the Financial Regulator’s consumer website for details of the bank guarantee schemes: http://www.itsyourmoney.ie/index.jsp?n=757&p=125  

Your Prize Bonds participate in tax free weekly and monthly draws but they pay no ongoing interest and are vulnerable to inflation, which will eat away at the purchasing power of every bond.  Just 2.8% of the entire value of all prize bonds is repaid, though not necessarily to every prize bond holder. Someone who purchased 2000 pounds worth of prize bonds 30 years ago – a down payment on a small house back then – may have received some winnings over the year – or not – but if they encashed their original stake today, that original £2000 might provide a down payment on a modest, family sized car. 

By all means hold some Prize Bonds, but leaving your entire life savings in any single asset – cash, property, stocks and shares, precious metals or Prize Bonds is not advisable.  Finally, the state of Ireland’s finances is so precarious that voluntarily handing over all your savings to the government, strikes me as foolhardy.

Golden Future

FO’S writes from Dublin: I will inherit approximately €80,000 shortly and not sure where we should put this money. I read your recent reply regarding the purchase of gold, but it does seem expensive at the moment. I am also worried about the stability of the Irish banks and the euro, and am considering depositing some of the money in banks in Newry and the likes of RaboDirect or Nationwide UK here in the south, but would prefer if I could open a sterling account in Dublin rather than travel to Newry. Is gold still a good investment?

As with any windfall, you need to take advantage of your good fortune by reviewing your immediate financial position as well as considering what to do with this money in the medium or longer term.  If you have expensive debt – like a credit card, hire purchase contract or even a high cost personal loan – you should consider clearing it and thus avoid future interest payments. Next, if you don’t already have one, you might want to set aside some of the money into a contingency savings fund – a good bank account into which you ideally have three to six months worth of discretionary income that is only earmarked for emergencies, such as car troubles or a furnace repair, illness or even temporary unemployment. 

Once you’ve reduced your debts and have an emergency fund in place, you can concentrate on investing and/or spending your inheritance.  You don’t say how old you are, but this money may be an important source of retirement funding.  Tax incentives for Revenue approved pension funds will be reduced from next year for higher earners, so this may be the last year for you to top up an existing private or occupational pension.  If your pension is already in place, funded and on target, you’re in the enviable position of being an investor who can take your time to pick and choose assets that will hopefully perform well and increase your wealth.  Take that time to investigate all the different options that should include precious metals, if only because they are a ‘real money’ substitute for the increasingly devalued and debased paper and ink currencies that are issued by indebted governments and are backed by nothing but empty promises.

I suggest you seek a good, independent, fee-based advisor who can help guide you through the various low cost investment funds, ETFs, shares, bonds, commodities, etc that might suit your needs, expectations and budget. 

Don’t take the easy route and just leave all your money in cash, or purchase the first investment fund that is recommended.  Finally, most of the retail banks will allow you to open a non-euro account  (RaboDirect and Nationwide UK do not offer this facility) but be sure to ask what interest rate, if any, is paid and whether there are any other fees or charges.

Social charge is universally unfair for the self-employed

Here is an important personal finance tip for 2011:  Avoid self-employment if your business earns you more than €100,000 a year, or else get yourself a very good tax advisor.

Last Tuesday morning, the Minister for Finance Brian Lenihan, who was under pressure to get the Finance Bill passed, unexpectedly amended the terms of the detested universal social charge, which is supposed to replace income and health levies and widen the tax net.

The previous evening, on RTE’s Frontline programme, Labour’s Sean Sherlock, a self appointed champion of the lower paid, demanded that the Bill be amended in order to “penalize high earners”.  

The widening of the nation’s tax base in the budget is clearly not popular and there is no sympathy for anyone who earns €100,000 or more in these straitened times. The USC, Sherlock insisted, is ‘regressive’ because low earners must now pay the same percentage rates as high earners who also pay the charge: 2% on their first €10,036 earnings, 4% on the next €5,980 and 7% on any earnings over €16,016.  The high earner however would see a reduction by paying the new social charge compared to the 2010 health and income levies. 

A low earner on €20,000 a year now has to pay €719 in USC while the higher earner on €200,000, will this year pay €13,319 USC compared to €16,250 a ‘savings’ that is more than offset by higher income tax.

Anyway, last Monday night, Brian Lenihan must have been impressed by Sherlock’s passionate attack on how gently he believed the new USC treats high earners, because the Finance Bill was amended the next morning.

Not only did the finance minister reduce the USC from 7% to 4% for all medical card holders with chargeable income, he increased the highest rate by 3%, from 7% to 10%, on any earnings in excess of €100,000 …but only for the self-employed.

Every higher earner was slightly advantaged by the abolishment of the old levies, but only the self-employed have been targeted to pay what is an €80 millions shortfall once medical card holders’ USC rate is reduced.

“If you want to ensure that some person doesn’t pay tax, someone else has to pay,” the Minister said. “That’s now how we’re going to operate as a State. Policies have to be costed. We can’t make promises that are not costed anymore. Politicians have to respect the fact that this country is under fiscal

discipline now. We can’t just promise money we don’t have.”

This is an astonishing admission for Lenihan. It’s too bad he and his predecessor failed to operate such lofty principles earlier, when they couldn’t resist slashing income and property taxes to unsustainable levels.

Yet it still doesn’t explain why he’s taken such an unprincipled stand now by applying a 10% universal social charge to just one set of high earners, when every other similarly renumerated private employee or civil or public servant, including Dail politicians, will only pay 7% on earnings over €100,000.

(Well off pensioners, of course, are the most special category of all:  not only is their state pension of €11,897 totally exempt from the universal social charge, but they were singled out in December’s Budget as being liable to only the lower 4% charge, regardless of the size of their total income.)

The application of the USC and the income to which it applies is riddled with such anomalies.  It is a very badly constructed tax and it should be reviewed and revoked by the new Dail.

This additional 3% surcharge  was a disgraceful, final act of tax discrimination against a single category of worker who doesn’t enjoy the same social benefits as those who are employed in the private or public sector, despite paying the same amount of PRSI. The self-employed work longer hours with less security and unlike higher paid civil servants or high paid company directors have no powerful unions to protect their interests and no financial resources to cultivate powerful political friends. 

The self-employed, about 340,500 people, have, like other categories of small business people, taken a beating in this recession.

A universal social charge of 10% lifts them into a 55% tax bracket.  It’s an ugly precedent, even if it does only apply to the self-employed, especially when the Labour Party openly advocates a third, 48% tax bracket for all earners over €100,000 and Sinn Fein is keen to introduce a wealth tax on private assets.  

We might want to consider past experience of 50% plus personal tax rates. Inevitably, once all the legal avoidance measures are exhausted, some people choose to reduce the amount they work; they turn to the black economy or shut down their businesses altogether and seek paid employment.

I doubt very much if the Revenue will collect that €80 million tax shortfall from the self-employed in 2011, but that tax burden will have be carried by someone else.

Like they say at the National Lottery, ‘it could be you’.

Past performance is no guarantee of good funds

SG writes from Dublin: I was on RaboDirect’s website and I came across its 2011 investment top picks. I’m thinking about investing €10,000 I have in another savings account between the various top picks listed. Have you any advice for me regarding same? Looking at the last couple of years they have performed fairly well.

The attraction of an on-line investment website is that the fund information is very transparent and the fees and charges are usually lower than if you buy one through a life assurance company or via a broker.  Once you have an account in place, the purchase – and selling - process is also quite easy. Past performance is just one part of the story you need to check out when making an investment, however. Keep in mind that nearly all stock markets and the vast majority of investment funds have recovered since the financial collapse of 2008 but that markets are volatile, and quite irrational given the scale of the debt in western countries.

More important is knowing what you are buying and that you both understand, and are comfortable with, the risk you take in buying the assets under investment in your fund(s) of choice. You should also be careful about the fees and charges and keep in mind that there are even lower cost ETFs – exchange traded funds – available to buy, many of which mirror the shares and assets that can be found both on-line sites like Rabo or in the list of funds that life assurance companies sell.  You can buy ETFs from a stockbroker or your own lower cost share trading account. Check out the online brokers, www.tdwaterhouse.ie where direct, execution-only trades cost just €15.

Ends

Bank overseas 

NR writes from Co Tipperary: Do you have any advice on how to open a non-resident account in either France or Germany? Germany seems to need an address in that country. Do you have to go to either country to open the account or can you do it by post? I only need a savings account. I am a pensioner and am afraid of keeping my savings here.

I’m afraid that different rules or conditions apply in different countries and even with different banks. I’ve written here a few times before that the European Union/Commission itself sets no restrictions on the opening of accounts by EU citizens or residents in member countries.  However, individual banks have leeway when it comes to setting the conditions for opening non-resident bank accounts.  They all require that you fulfil strict anti money-laundering terms and conditions but some require that you attend in person to open your account or that you fulfil their residence requirements.  You will simply have to contact the bank to determine their rules. 

The easiest solution to this question of moving some of your savings out of this country (and even out of the euro) – though not to France or Germany - is to open a euro or sterling bank account (but not a building society account as they do not accommodate non-residents) in Northern Ireland.  You can follow a good askaboutmoney.com post on this subject here: http://www.askaboutmoney.com/showthread.php?t=147596

 Inherited house

HR writes from Limerick: I inherited my late father's house two years ago in March 2009) and it has depreciated in value since. It has been rented and income declared and all taxes paid on said rent and NPRP tax paid. At the time when I inherited it the value was at €230,000 and now I have it on the market at €160,000 euro. Do I have to pay capital gains tax as it has depreciated in value? Also do I have to use a solicitor when said property is sold and if not how do I go about transferring ownership?

When you inherited your father’s house, the transaction was tax-free because its value was below the tax-free threshold between a parent and child.  The property is not your principal private residence however, so any gain in value from its market value when you inherited it and when it is sold would be liable to 25% capital gains tax.  If, as you say, the house has lost value these past two years you will not have any tax to pay.  As for not using a solicitor to complete the transaction, I’m told it is possible to do the conveyance yourself if you understand what contracts and deeds need to be compiled and exchanged. However, the buyer – and their lender – may not be willing to proceed with the transaction unless they are satisfied that the legalities have been done properly. Self-conveyancing is relatively common in the UK. Check it out here for some background: http://www.diyconveyance.co.uk/ but a straight forward conveyance in Ireland shouldn’t cost a great deal of money and solicitors are more than willing these days to negotiate their fees.

 Emergency exit

GB writes to Navan: Surely if we were to pull out or are pushed out of the euro, it would not happen overnight, can you please advise if that is so, or is it possible it could happen without warning, it would I'm sure put a lot of people at ease including me.

Unfortunately, I don’t have a crystal ball, nor do the politicians or central bankers, and so no can accurately predict if and/or when Ireland will leave the euro, or if and when the eurozone will break up. Nevertheless, the euro’s future is high on the agenda of not just eurozone top finance officials, but also the Americans, Chinese and Japanese whose central banks are now all supporting the currency by purchasing Portuguese and Spanish bonds in an effort to keep the borrowing costs of these countries affordable.   If you are worried about the safety of your life savings, don’t leave it all in euro or the eurozone.  If the currency does collapse, you will have done your best to mitigate some of the worst effects.

Houses are cheap,  but you’ll pay with peace of mind

How far do house prices need to fall before you take that financial leap of faith and buy your first home or trade up to a bigger property?

With prices down just over 15% in Dublin last year, according to the Permanent TSB/ESRI index and just over 8% in the rest of the country, and by their estimation, 38% since the end of 2006, there’s probably still some way to go if you subscribe to the theory that an economic correction “is equal and opposite to the deception that preceded it.”

The pace of decline slowing down - so is unemployment and wage reductions in the private sector.  But repossessions and emigration are still on the rise, the banks are still tightening their lending and it is expected that all the lenders will have to hike mortgage interest rates soon.

All of this simply cannot be interpreted as a sign of anything but a very unhealthy property market.

Prices will continue to decline because the huge inventory of unsold, unfinished and empty properties all over the country and consensus that some kind of property tax (and not the nonsense €100 levy being proposed for next year).  The decline will continue for as long as it takes to unwind the excess inventory. Recovery will require demand to exceed supply and banks to start lending again. Owners will need to emerge from negative equity and everyone must accept that owning a property will end up costing them, as it does most people in western societies, the equivalent of about 1% in the form of a local authority charge.

Rachel Doyle, a spokesperson for PIBA, which represents many mortgage brokers, claimed last week that the fall in house prices means it is “virtually as cheap to buy a house as rent one”. 

Well, not quite.  When you rent rather than own a place during a catastrophic economic collapse you don’t have to worry about negative equity, rising mortgage interest rates, property tax or the loss of job flexibility when you’re legally tied to a property (on top of the insurance, maintenance, security and depreciation costs associated with ownership.

If you are a young renter, count your blessings.

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Everybody hurts

The diminishing class of tax-paying earners, have just seen their incomes drop, for example, by another €30, €50, €75 a week .

Disgruntled listeners to popular radio call-in programmes like Liveline fell into at least two camps – those very low earners who thought going on dole would be better than continuing to work at a dead end, low paying job for even less money; and the middle and higher earners who bemoaned the future loss of children’s ballet lessons, and digital TV packages and private health insurance. 

This is just the first of four years of austerity, but I felt sorriest for the people who had worked out debt refinancing arrangements with their creditors over the last two years only to discover they don’t have sufficient income anymore to even honour those deals.

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A chance to change

It’s important to repeat that time is running out for the nearly 450,000 VHI customers who may want to remain with the company for another year, but don’t want to pay the 1 February increase of up to 45% Plan B and Plan B Options premiums. 

By cancelling your existing plan and renewing it with VHI before 1 February you can lock in the 2010 premium for another year.  By renewing on the corporate version of the plan at 2010 prices you can make even greater savings.  By shifting altogether to Quinn or Aviva Healthcare you will pay even lower premiums.

Too bad the same can’t be said for mortgage holders who are finding their options to change lenders or to refinance an existing loan with a lower cost provider is practically non-existent. 

Once the next round of interest rates rises starts – PTSB is expected to announce another 0.5% hike in their variable rate soon – the notion of low cost mortgages will also be a thing of the past. 

GIVE YOURSELF A FINANCIAL EDUCATION IN 2011: PART 2

I started off the New Year in this column by saying that you need to give yourself a financial education in 2011 if you are to both preserve the wealth you already have and avoid making serious financial mistakes and hopefully improve your position. 

As with every building process, you need some tools and I listed them in that first column starting with a sustainable individual or family budget; a safe bank account and contingency fund; regular savings and investments that are properly asset diversified; and a recognition of the dangers that exist in the investment marketplace. These currency manipulation and devaluation, high costs and charges that are particularly aimed at the uneducated and unwary and the risk of inflation.

Let’s start with the budget.  Few of us have ever done a formal one – a ledger with ‘All income’ and ‘tax’ on one side and ‘All expenditure’ – ‘essential’ and ‘discretionary’  on the other side.

Yet this is the first building block to financial control and independence and it just involves slogging through all your financial contracts, bills and bank statements and the little ledger, into which, at least for a few weeks, you've marked down every penny you've spent outside your essential bills. (I devote a short chapter of the 2001 TAB Guide to Money Pensions & Tax to budgeting. See www.jillkerby.ie to order the TAB Guide on-line.)

One of the great developments of recent years is that there are now on-line sources of financal information. Here are some useful tools and contacts you can use to see if you are getting the right price for your mortgage loans, groceries, insurance contracts, utilities, like electricity, gas, mobiles and broadband: www.irishmortgagebrokers.ie www.bonkers.ie ; www.compareireland.ie; www.freetocompare.ie; www.hia.ie (Health Insurance Authority); www.healthinsurancesavings.ie . Two of these, Irish Mortgage Brokers and Health Insurance Savings are fee-based services.

A proper budget lets you know exactly what is income and on-going spending but it doesn’t address the wider state of your personal finances.  For that there is no quick fix, though you can certainly examine your savings options easily on a site like Bonkers.ie. 

Instead, for the bigger picture you need some help to both understand what is at stake and to make changes, if necessary to the level of debt you carry (especially mortgage, credit and personal loan debt, any investment fund(s) you have, say, to help pay for your kids’ education, or your retirement or old age.

The first tool you need is information.

Sign up for Chris Martenson’s free ‘Crash Course’ on www.chrismartenson.com . This powerpoint course will take some time, but is the best introduction/explanation to money, how it works and how it's been  manipulated to all our costs, that I have ever seen.

I also recommend you advance your education by reading up about money and investments.Sign up for the free website, www.motleyfool.co.uk and start exploring their huge archive. Ditto for the free www.dailyreckoning.co.uk site. I've been reading Bill Bonner’s daily essay since 2004 and through it, I now subscribe to the following Agora Financial newsletters and magazines but a great place to start is MoneyWeek.

-      Capital & Crisis,

-      Special Situations,

-      International Living (whose office is based in Waterford) 

-      MoneyWeek magazine

-      The 12% Letter

-      S&A Digest from Stansberry and Associates,

-      The Fleet Street Letter.

If you are investing in any funds or shares this year that you first take Rory Gillen’s excellent one day investing course – see www.InvestRcentre.com <http://www.InvestRcentre.com>  .  And for the record, I am not employed by, or have ever received, any remuneration from any of these publications or companies, though I’m pleased to say that in my capacity as an Irish financial columnist I’ve been quoted a couple of times in MoneyWeek. (Once on the potential disaster of investing in Dubai!)

Readers who are concerned about their pension and retirement would do well to also go onto the Irish Pensions Board’s website, www.pensionsboard.ie . 

It’s a great source of information about the kind of pension you may have, how they work, your pension rights, etc.  This is information you need to know if and when you consult a fee-based advisor about how to amend, improve or even start a retirement fund, especially in the next few years when the tax incentives to do so start to disappear and the state’s ability to keep meeting its pension obligations to public servants and PRSI pensioners comes under increasingly fiscal pressure.

This is a lot to digest, so get moving.

 Objective, well informed information doesn’t come free. It’s not rocket science, but if you want to avoid being ripped off, you need to be diligent and to take personal responsibility for every penny you make, spend, owe or invest. 

Drop private health insurance?  I’d rather sell my car

January is always the month that many of us at least try to get a handle on our personal finances.  It has nothing to do with New Year resolutions and everything to do with sleeping better once you eliminate the overdraft.

With the December budget skimming another 4% or so off your income in 2011 and no sign of wages actually rising, if you’re a typical €50,000 earner the rise in taxes and cuts in child benefit payments and other cutbacks means you need to find another couple thousand euro to eliminate from your budget if you just want to tread water.

Big ticket items are the best place to reduce overheads – rent, food, utilities and insurance.  After the recent shock announcement from the VHI about how they will raise the cost of their most popular categories of plans on 1 February by 15% in the case of family plans, and by 35%-45% for Plan B and Plan B Options, you could start tackling your budget right there.  The plan members should either be moving providers altogether or at least the very least move to the corporate equivalent of their plans.

None of the three health insurers – VHI, Quinn or Aviva – are keen on selling you the cheaper, superior versions of their individual plans, but they can’t stop you asking for them.  To start you off, you might like to know that corporate plan substitutes for VHI’s Plan B and Plan Options is Company PlanPlus Level 1 which costs €805 instead of the post February price of €1,224 and €1,430 respectively.

Quinn’s equivalent corporate plan at that level is Company Care at €785 and Aviva’s is Business Plan Extra at €799. These are adult rates, but a good health insurance advisor will be able to steer you towards the most suitable plan for your children who I am told, seldom need the higher benefits available from corporate plans.

These same experts also suggest, if budgets are tight, that you drop down to a cheaper plan or drop the outpatient ‘day to day’ cover until you really need it in order to save money.  Dropping cover altogether means you have to take your chances with the public health service again.

I would sell my car before I get rid of the private health insurance cover.

No matter how dedicated the doctors and nurses in our public hospitals, I know that if any of my loved ones developed a serious, health condition, especially one that falls into the ‘elective’ category, we’d end up languishing at the end of already very long queues.

In a country where surgery to remove a child’s festering tonsils or to replace a diseased hip is considered ‘elective’, it’s no contest between the family car and the family health insurance.

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Gap’s the way to do it

Study now, pay later, concludes the just published Hunt report on higher education.

Sounds rather like a variation on the ‘spend now, pay later’ philosophy that got us into considerable financial trouble in recent years. Nevertheless, Hunt, a former government advisor is convinced that an outsourced student bank loan scheme – the NTMA might be one of the administrators - is the most sustainable solution.

As every other country that has introduced a government-sponsored loan scheme has discovered, there’s a common outcome:  they provide immediate relief for the exchequer but kicking the real cost down the road for many years, when finally the student pays back their low interest debt with income.  That’s the good news. The bad news is that the entire scheme will eventually go deficit because some students can never repay their loans and other choose not to; either way, the taxpayer still picks up a portion of the bill.

Lower income students and their families inevitably take on a lower initial debt burden as all sorts of exemptions kick in but if family assets are also considered, clever parents find ways to hide those assets – the Irish farming community could write that brochure.  As usual, it’s the middle class kids who end up with the typical €25,000 debt anchor in exchange for a liberal arts degree that doesn’t guarantee them any job, let alone a job in their field of study.

For that, they may have to return to the university to do a debt-laden Master’s degree.

Before a college or university is allowed to sign up for the student loan scheme they should have to cut their own costs, otherwise the pain is only one sided.  They should also be obliged to build their endowment and scholarship funds to cover the fees of the brightest and the best scholars in Ireland. 

The rest – the thousands of nice, but not overly bright middle class kids (and their parents) who consider attending college a natural born right as well as a rite of teenage passage – will have to just come up with or borrow the €6,000 or €7,000 annual fees.

I am beginning to wonder if using even part of that money to fund a travel gap year abroad might be a far better investment. At least at the end of the year your child might have some idea of what they don’t want to do for the rest of their lives and know at least how much effort it would take to pay back €25,000.

Bank on Australian gold but pay the tax

MP writes from Kildare: I heard you on radio last year regarding personal savings. Part of your advice said that you had put a portion of your savings in gold. From memory you said you used an Australian company.  Would you please provide the contact details of this firm? Are there any issues relating to taxation if capital gains are made? How can payment be made? * Euro Bank credit transfer, credit card, cheque?

The Perth Mint, the gold depository for the Bank of Western Australia (www.perthmint.com.au/investment_certificate.aspx) sells allocated and unallocated gold and silver certificates to investors. Their European agent is the Dublin/London gold bullion dealers Goldcore and payments are made, if I recall, when my husband and I bought our certificates in 2006, by electronic bank transfer.  Under the Perth Mint certificate programme, the precious metals, mined in Australia, are kept at the Mint in your name (as allocated metal) or in a pooled fund to which you belong if unallocated. Certificates are a cost effective way of owning and storing gold and silver, rather than buying physical gold which includes a premium per ounce, delivery and insurance costs.

The sale of any asset attracts a capital gain tax of 25% in this country, and you are obliged to file a tax return and pay your tax on any gain by 15 December each year if the disposal takes place between 1 January 1 and 30 November and by January 15 if the disposal occurs in December.  

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Flat solution

AR writes from Dublin:  I have a two bed apartment in Dublin which I bought for €275,000 in 2004 with a €30,000 downpayment.  It has been valued at no more than €200,000, but my sister, who has been living with me says she is willing to take over my mortgage balance, which is now about €235,000.  She will have a tenant to help make her repayments.  The problem is that my lender has just informed us that they will not (cannot?) lend for an apartment, even though they said they would in November. I/we have never missed a mortgage payment, my sister has a good job, some savings which she could use as a downpayment on her own mortgage and she has a good tenant lined up who also has a good job.  Can you recommend a bank that will lend to her?  I have a new job in the UK lined up and am getting a little desperate.

Banks are increasingly reluctant to lend for apartment purchases because of the huge overhang of unsold properties around the country and the fact that so many are in negative equity – yours included.  With prices still falling – about 15% lower on average in 2010 according to the latest Daft.ie house price report and no guarantee that they will bottom out anytime soon, their reluctance to lend is understandable.

You don’t give much information about your mortgage but from the outstanding balance you quote I suspect you are on a very long repayment term and may not have a tracker rate.  Mortgage advisor Karl Deeter of Irish Mortgage Brokers says it could be difficult for your sister to get a better finance deal. Since you will be taking a loss to whomever you sell this property, he suggests that if your sister is happy to take over the apartment, you might consider circumventing the banks altogether: instead of legally transferring the deed, set up a tenancy in common agreement with her your sister to take over the repayments on the existing mortgage, ideally with her paying you some of her savings as a ‘downpayment’. 

Defacto ownership of the property can be transferred slowly from you to her with an annual, tax-free capital gift worth the equivalent of €3,000 per annum, says Deeter, represented by slivers of the apartment – with the balance of ownership left to her in your will.  If she wants to sells the apartment some day, you can come to an agreement with her over your share of the sale, based on how much capital you both now own. Speak to a solicitor about how this private arrangement should be set up and be clear about the tax implications should she unexpectedly inherit the property.

The risk to you in this arrangement, says Deeter, is that your credit record could be affected if your sister doesn’t keep up repayments, but without a lender or a separate cash buyer for the property on the horizon, this might be the cheapest and most suitable arrangement if you really want to be shot of the property.

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Insurance options

MMcC writes from Dublin: After last week’s news about the VHI price hikes and how the other companies will also probably be raising their rates this year I went onto the HIA website (I couldn’t contact VHI directly) to try and find out what the corporate equivalent of Plan B Options is and the benefits.  Frankly, if was very confusing. 

Last week the VHI’s website and Health Insurance Authority comparison website (www.hia.ie) were very busy, as were all the customer help-lines, including those at Quinn and Aviva. With over 200 different insurance plans available and lots of subtle differences – especially about pre-existing medical conditions and the cost of child membership - it isn’t easy to shop around which is where a good, fee based advisor comes in. In my opinion, the three, best informed health insurance advisors in the country are consultants Aongus Loughlin at Towers Watson and Kevin Kinsella at Mercer who deal with corporate clients and Dermott Goode of healthinsurancesavings.ie who deals with both corporate and individual clients.

According to Goode, the corporate equivalent of VHI’s popular Plan B and Plan B Options, which are going up by as much as 45% in February is Company Plan Plus Level One which will cost €805 for an individual instead of the February renewal price €1,430.  The corporate plan equivalent for Quinn’s popular Essential Plus Plan is Company Care which costs €785 instead of €995 while the corporate equivalent of Aviva’s Level 2 Hospital Plan is Business Plan Extra which costs €799 instead of €825.

ACT NOW TO CUT HEALTH COVER COSTS

Is the private health insurance industry model ‘broken’, as the VHI boss Jimmy Tolan has suggested?  Have older people been priced out of the market as a result of the latest price hikes?

While a rise in your health insurance costs are probably on the cards no matter which of the three insurers you belong to, VHI’s shocking announcement that it will increase premiums by 15%-45% goes much further than it not having sufficient premium income this year to meet the cost of servicing their disproportionate number of older members.

At the heart of the problem is that VHI remains under the ownership and administration of the second most dysfunctional department of government (after the Department of Finance) – the Department of Health. Despite last May’s announcement that the company would be privatised and sold off within two years, most likely at an additional cost of about €350 million to already beleaguered taxpayers, no reform has taken place.   No structural reform – to reduce staff numbers, cut pay and pensions – have take place despite the continuing loss of membership and VHIs inability to meet reserve requirements.   

Instead, the health levy has gone up – it now costs €205 per every adult and €66 per child member but the €55 million subsidy to the VHI is still not sufficient for it to meet its claims.  Nor will doubling the price of popular plans like Plan B and Plan B Options and increasing all the others by c15%-25% be sufficient to sustain the VHI long term.

Older customers are intentionally being priced out by the company and should switch, though stay with the same level of plan if they have a pre-existing medical condition.

All health plan members should review their policies with the help of a fee-based insurance advisor who will diligently look at the plans of all three companies and not just recommend Aviva plans because Aviva is the only one who pays commission. Aviva is extremely competitive, but you should still have a look at should also be considered.

For that fee the advisor will make sure you are in the correct plan  - most people are not. They’ll help you with any paperwork if you switch from one company to another and tell you how to collect your refund.

Dermot Goode (www.healthinsurancesavings.ie) is one of the best known fee-based advisors:  “Even if you stay with VHI, you should cancel your existing policy before the end of January and then renew it immediately in order to lock in 2010 rates before they change on February 1st. VHI corporate plans will probably go up in April.”  Quinn and Aviva customers, even those in group schemes, should cancel and go onto an individual plan at 2010 rates.

Goode also recommends that everyone switch to the equivalent corporate plan, which you are within your right to do under Community Rated pricing. “The providers won’t necessarily make it easy for you to do this”, says Goode, but the savings can amount to up to 40% and you can check the Health Insurance Authority website www.hia.ie to find the corporate equivalent of your plan. 

Another way to lower your cost is to drop any stand-alone outpatient benefit plan, like VHI’s ‘Day to Day’ and save hundreds of euro. Goode again: “If someone is under age 55 ends up with a condition that is going to result in lot of visits to the GP or consultants, x-rays, etc, you can call your broker the next day and renew the day to day cover from that day.  It’s as easy as that.” 

All three providers have introduced free cover in the past year for children under 18 who are included under popular family plans. Yet families who were already on those plans before the offers were introduced may still be paying for their children.  Cancel and renew – at the 2010 rate - AND get the children free for 2011, says Goode. 

Even if you do switch from the uncompetitive VHI, many people could still find the cost of their equivalent Quinn and Aviva plans are still going to be too expensive.

The danger of simple dropping down a plan, without carefully checking the benefits, is that the low cost entry plans are often inadequate now that so many hospitals are cancelling elective surgery and treatments and where private beds are very few. You will still be able to jump the queue to see a consultant, but after that, you join a long waiting list. 

If none of these cost cutting options work for you, you may still be able to afford a healthcare cash plan for the whole family form the likes of HSF (see www.hsf.ie) that will pay you and each member of the family a tax-free cash payment for an assortment of treatments, from GP and consultant visits, daycare and in- hospital stays, dental and optical treatment and even maternity grants.

No one knows what’s going to happen to the VHI or the health service in the near future, but the picture is already grim. 

Private health insurance has never been so essential as the HSE budget is cut by nearly €1 billion.  Act now to mitigate 2011’s higher costs.

Now the screw will start turning on the public sector

It’s little consolation to anyone whose taxes are rising or income falling, but we are not alone in our economic misery in this country and not only will it be worth keeping close track of how other countries handle their debt crisis, but how individuals manage as well.

The 19 December edition of CBS’s 60 Minutes, the US flagship news documentary programme, spelled out to the biggest US audience yet just how serious is the state and municipal debt problem.

“Financial meltdown” and “the biggest threat to the US economy” is how these $1 trillion deficits being experienced by just the top 15 states and municipalities, led by California, Illinois and New York are described by bond and bank analysts.

State governors like Chris Christie of New Jersey, who slashed the state budget by 26%, has cancelled building projects that would have employed 6,000, and cut $1 billion from education spending making 3000 teachers redundant is now at loggerheads with the state unions: “The bottom line is I don’t have the money [to pay people].  I literally don’t have it. The Day of Reckoning has arrived.” 

Christie says it isn’t a revenue problem they face, but a benefits one in which years of overspending and over promises by previous administrations to public sector unions has pushed New Jersey, which also has the highest state taxes in America, to the brink of insolvency.  He doesn’t expect the Federal government can afford to bail them out.

Sound familiar? 

A lot of the job loss pain has been felt by private sector workers since 2008, but 2011 is going to be the year that the 300,000 civil and public servants on the state payroll discover that there is no such thing anymore as a guaranteed job for life, an incrementally rising income or cast iron defined benefit pension. 

The pay cuts and pension contribution increases of 2009-10 are just the start of what is a rolling programme of job cuts and pension reform, assuming of course that the famous National Recovery Plan actually has the four or five years that the IMF, ECB and EU are committed to keeping us on life support if we behave ourselves and do as they say.

 Since their plans are based on the same false premise that the Irish government subscribes to – that adding more debt to already catastrophic levels of debt will reverse your state’s insolvency - every civil and public servant who is in the least bit worried that their job is expendable may want to consider their existing financial position very carefully, not to mention what would happen to them in retirement when the DB, 50% of final salary pension disappears.

When you live in a bankrupt state, the niceties of life disappear for anyone who has been relying on other people to meet the cost of your weekly pay cheque or pension payment.  That means not just dusting off your CV, but saving a chunk of whatever income you do have in a retirement fund you control yourself, ideally an ARF and PRSA that at least attracts some tax relief going forward if you are a standard rate taxpayer.  

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Tesco gold

When grocery giant Tesco starts selling gold – and not buying it – is when the metal will be in price bubble, not before.

It’s not happening here yet, but in the UK, 15 pilot Tesco Gold Exchange stores offer £7.81 per gram for 9 carat gold (€10). It must be confident it will earn significant profits by buying its customer’s cast off jewellery, which is packaged up in envelopes provided at the checkout, sent to a special address where it’s weighed and checked for its gold content.  Tesco then sends you a check plus shopping bonus points.

If Tesco thinks there’s money still to be made by buying – not selling - gold, then you should thinks so too.

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Coal adds light

Grim as the huge floods in Australia are, anyone invested in US and South African coal shares has probably seen their values spike recently.

Many coal mines in Queensland are either shut or unable to ship their coal due to the floods and with these coal stocks bound for mainly China and India, where demand is insatiable, it’s no surprise to see a rise in the share price of non-Australian coal producers. Analysts say that coal that was priced at $225 a ton for the first quarter of 2011 could reach $300; it all impacts on the cost of goods we import from the Chinese. 

The interruption in Australian coal production – just like the drought in the Ukraine this past year and the row over rare earth metals - shows just how vulnerable the world economy is to climate events or geopolitical risk. 

Energy and food shares or commodities should also have a place in your pension or investment fund this year.

Readers who would like Jill to organise a personal finance seminar for their group or organisation this year, can contact her at jill@jillkerby.ie for more information about topics, venues and cost.  Sandra Gannon, the TAB Guide co-author and tax expert is also available during the seminars to answer individual tax questions. 

<!--StartFragment-->Inherited house has the potential to split the family

AG writes from Co Galway:  We are in the middle of a family dispute over a will. Three of us have inherited a property from an elderly uncle who died in October.  My husband and I believe it should be sold at whatever the market value is in order to get whatever money it produces. My two brothers want to hold onto it for when “the market recovers”.  It is a 1950s bungalow on just over a quarter of an acre but the location is not great – on a relatively busy road on the way out of the town – and it is not in great condition. Between it having to be repainted and redecorated at the very least, and the inevitable repairs and then property taxes being introduced, I think we should just sell it. I’d appreciate your view about where the property market is going and also, will the lower inheritance tax-free amount that was announced in the budget apply to us, or the 2010 thresholds? 

Given how far property prices have already fallen – perhaps as much as 50% - from their peak in 2007, I think it will be some time before you and your brothers see anything like those levels again.  If and when the bottom is reached, prices will probably bump along that bottom for a few years and then only start to rise in line with inflation.  That is the usual pattern after a property bubble bursts. You are right to be concerned about upkeep and taxes but if you are unwilling to wait for the market to recover and don’t want to keep shelling out money on this unoccupied property, you and your brothers should at least consider renting it out to meet the ongoing costs.  If that doesn’t happen, you could always insist that they buy out your one-third share at the current market price. If they don’t cooperate, you may have to seek the assistance of your solicitor in persuading them, with all the negative family consequences such action might generate.  
 
Meanwhile, the Revenue will be looking for their share of your inheritance, whether it is sold or kept until the market turns. Any inheritance or gift received (on the date of death) in the previous 12 months to the end of August must be included in a pay and file Capital Acquisition Tax return by 31 October. You and your brothers have until 31 October 2011 to fill out your Form IT38 to the Revenue and pay the appropriate tax.  The 2010 CAT tax-free threshold for Group B (which includes uncles, nieces and nephews) of €41,481 will apply in your case.  Any amount over that sum is subject to tax of 25%.  If, for example, the property has a market value of say, €200,000, the taxable balance of €75,557, divided by three means that you will each have to pay 25% tax on €25,185 or €6,296.  Check with your solicitor or tax advisor about what expenses and costs can be deducted from this CAT bill.

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Devaluation derby 

CMcC writes from Cork: I read with interest your column in the Sunday Times in the past two weeks regarding the handling of debts / mortgages in the event of a return by Ireland to the punt or devalued euro and my question addresses the other side of the story i.e. savings. If I had €1,000 in a savings account with an Irish bank or post office and Ireland was to return to the punt valued at say 0.90 pence would my savings then be worth: a) 1,000 euro, b) 900 euro or c) 1,000 punts? Alternatively if my €1,000 euro were with a bank in Germany / France or Holland what would be the outcome? Or finally if my €1,000 were with a "foreign" bank here in Ireland e.g. Investec / RaboDirect / Ing what would happen? I realise that it is always difficult to say with certainty what will happen in these kind of hypothetical situations but I would be very interested to hear your opinion on the above points.

This question of what happens to our euro if Ireland leaves the eurozone has become a national obsession – and quite right too since there is great uncertainty about what will happen to the highly indebted countries of the eurozone.  In the case of savings, there is a view that if we were to revert to the punt, the punt would be worth less than the euro.  No one knows what level of devaluation would apply, but if, as you suggest your €1,000 was converted to punts at par, with the punt then devalued by 10%, your new punt savings would then be worth £900. The real question is not so much what the devaluation of the new currency would be against the euro, but what the break value from the euro would be.  When we joined the euro back in 2002, every punt was valued as 1.27 euro.  If we were to break from the euro, would the reverse be the case – that is, would every €1 euro revert to being a new Irish punt that would have a value to the euro of 0.79 cent?
 
Finally, no one, even in the foreign banks that operate here, has been able to come up with the definitive answer about what would happen to euro held in non-Irish banks (that are also outside the remit of the Central Bank of Ireland), or even the ones, like NIB and Nationwide UK, whose parents are based in non-eurozone countries. Would your euro remain euro, or would they be automatically converted to the new Irish currency, which may or may not be devalued?  The only way you can mitigate against any such scenarios is not to leave all your savings in euro, or in Irish-owned banks, or entirely in Ireland or entirely in the eurozone. If you are worried, speak to a good, fee-based advisor about all your options. 

Readers who would like Jill to organise a personal finance seminar for their group or organisation this year, can contact her at jill@jillkerby.ie for more information about topics, venues and cost.  Sandra Gannon, the TAB Guide co-author and tax expert is also available during the seminars to answer individual tax questions.