Jill Kerby

 

DEPOSITORS LOSE, SHAREHOLDERS WIN?  WELCOME TO THE GREAT QE EXPERIMENT

 

 

 

I’m writing this just after last week’s announcement that the European Central Bank will buy €60 billion worth of government bond holdings from European banks between now and September 2016.

 

That’s about €1.1 trillion of brand new money, printed from thin air and now sitting on the balance sheet of the ECB that it intends the beneficiary banks to lend out in order to kick-start the moribund, debt-ridden, ageing Eurozone economy back into life.

 

The idea behind all this lovely new paper and ink euro-denominated “capital” is that it will be borrowed (at very low interest rates) by people who want to create new businesses, by existing business people to expand their business and hire new workers and maybe to pay the existing ones more.

 

In turn, all this new activity will generate new tax to help indebted governments reduce their own debt and to cut back on all the extra unemployment and social welfare payments they’d had to pay out since the great economic crash of 2008.

 

At least that’s the plan, just like it was the plan Japan after its economy crashed in the early 90s and in the United States when it started its mass QE/moneyprinting in 2009 (about $2 trillion that ended last year) and the UK where about £800 billion has been printed in the last two years.

 

The results have been mixed with the US having the ‘best’ experience, mostly because of the success of oil and gas fracking which has helped lead to a resurgence in manufacturing. Official unemployment has fallen there, but the fewer people are employed in the US than in 2008 and wages, adjusted for inflation, are back at about 1989 rates.

 

What had been a clear consequence of all the US and UK money printing was a surge in some asset prices:  stocks and shares, certain land/ property, art and precious metals. Even government bond prices and corporate debt. (Some think these are in bubble territory.)

 

In Japan, nearly two decades of the Bank of Japan first pushing interest rates down to zero and then buying its own bond issues with printed yen has been so unsuccessfully, that this year the government announced it would start directly buying Japanese stocks and shares to boost stock prices and put more yen directly into the hands of shareholders. This, they hope, will boost sales of Japanese goods and services and circulate the printed money that way.

 

So will QE actually work in Europea and kick start our domestic economies, create tens of thousands of new jobs, get prices and profits going up again (ie “good” inflation), and help reduce the cost of debt?

 

I don’t know, but neither does Mario Draghi. Neither of us have crystal balls.

 

But I’m going to take a guess and suggest that if the US or British experience is anything to go by, this c€1.1 trillion of new euro (remember this money hasn’t been earned in any productive manner; it isn’t a profit from the sale of a successful venture; it isn’t anyone’s hard-earned savings that has been taxed) could also drive up stock prices and other assets like property and fine art and precious metals.

 

It could also drive down European interest rates further, including government lending rates, making it easier for governments, corporations and individuals (if it trickles down that far) to service or pay off their debts.

 

Some commentators suggest that because the banks that have received cheap QE money in America and the UK didn’t lend it out to ordinary folk (who they feared still had too much debt and insufficient wages to repay the new loans) that maybe the ECB should just take a chance and just lend out this c€1.1 billion of new cash directly to us.

 

The debtors amongst us could use it to pay off their really expensive loans and the rest of us could start buying all the stuff we’ve avoided doing these past 6-7 years, thus ‘stimulating the economy’.

 

This is the road to hyper-inflation say the worried Germans – a lot of cheap credit/money chasing a limited amount of goods and services always drives up prices. But it would certainly be the more ‘honest’ way to distribute what is nothing more than government approved counterfeit funds.

 

So how should we play this great European QE experiment?

 

Judging from the QE experience so far, pension fund holders, could see a spike in their fund values. Ditto for some Euro stock holdings (or other shares if the €1.1 trillion is invested outside of the eurozone, as might happen.)  If this money goes looking for other tangible investments like land/property, art and precious metals, the holders of those assets might see their (paper) wealth increase.

 

Since QE has resulted in even lower interest rates in other jurisdictions and the loss of spending power in the currency concerned, it could further punish European savers and anyone living on fixed incomes, like pensioners. 

 

It certainly raises the risk stakes to another notch for savers and investors who need higher returns.

 

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.

 

 

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A NEW YEAR POSTBAG OF PENSIONS AND PROPERTY QUESTIONS

 

A New Year, and a new postbag of your letters and comments – keep them coming…

 

Ms McC writes: We are paying a total of €823.96 monthly and a 4.5% interest rate to Permanent TSB. There is six and half years remaining on the term and a balance of about €51,000.   We are also paying nearly €79 a month for mortgage protection insurance. Could we get a better deal anywhere else? I am 60 and my husband is 64.
 
Your ages will unfortunately work against you with most of the lenders, says Irish Mortgage Broker, Michael Dowling. KBC bank, which offers one of the best new borrower rates limits it’s lending to a maximum repayment age of 68; AIB requires that its loans be repaid by age 65 “and while Bank of Ireland will allow mortgage terms to age 70, your readers would still have to take out a six year loan and the repayments might not be any better.” With the exception of AIB, none of the lenders are allowing existing clients to benefit from the lower variable rates on offer for new clients.

Dowling suggested that you approach PTSB “to see if it will do a deal and drop your rate to their new borrower rate, which is under 4%.” He suggests that you also get your mortgage protection policy reviewed.  On a decreasing balance of €51,000 over six years, the best joint life quote he found was just over €27 a month. “At €79 a month,” said Dowling “it looks as if this policy has either been ‘loaded’, perhaps due to a pre-existing medical condition or the bank has added some ‘bells and whistles’, such as indexing the premium and benefit [to keep pace with inflation] or by adding serious illness benefits.”

 

 

Mr BG writes:  I am a dual Irish/US citizen and contribute to an Irish employer administered pension. I read recently that all pension contributions as well as any annual capital gains may be subject to US tax under FBAR rules. Do you have any information on the situation for people like me?

FBAR is a bank assets reporting compliance requirement for Americans living abroad (and US Green Card holders).  There is a great deal of confusion about whether or not employment pension contributions must be included in an annual FBAR return, especially since the introduction of FATCA – the US taxation reporting regulation since 2010 for Americans. FATCA appears to exempt trust-based occupational pension schemes from the annual filing requirement.

You need to discuss your pension position with your scheme trustees and with an accountant/financial adviser who is familiar with FBAR and FATCA filing requirements.  I’ve furnished you with two names – good luck.

 

 

Ms UC writes:  I am a nurse, age 58 who has worked in both the public and private health service. I wasn’t always able to join the private pension scheme. I will only have 25 years accumulated service in the HSE superannuation scheme and while I have been buying back years, I have been told that my pension will only be worth €7,000 p/a.  I really don’t know who to ask about my entitlements.

Interrupted service and service in both the public and private sector is very common in your profession. A spokesperson for the INMO told me that in addition to the superannuation pension value, you will also receive a lump sum payment relative to your years of public service in all the different hospitals. What you now have to do is find out what your accumulated private sector benefits may be; even a few years of pensionable service in a private hospital scheme will result in some kind of pension benefit at retirement age.  The INMO information office in Dublin (tel 01 664 0610) can recommend a fee-based, independent pension adviser who can help you gather and interpret all this information.

 

 

 

Ms DM writes:  I was left an inheritance by an elderly relative and am considering buying a nearby bungalow in ‘walk-in’ condition, with an asking price of about €85,000.  Do you think property prices will keep going up and would this be a good investment?

 

House prices did go up in 2014 - by about 14% nationally – but every property and every location is different and you need to be confident that the annual

net yield - that is, the rent after ALL costs, charges, taxes and your time as the landlord meets all your costs and expenses and provides a profit that would exceed the net return from a deposit account.

 

Those costs and expenses will include insurance, maintenance, repairs, wear and tear, advertising, ITB registration (as a landlord), local property tax and void periods when the property is empty. Only some of these expenses, at a 75% rate, can be offset against the rent.  Whatever profit is left will be subject to 20% or 40% income tax, USC and PRSI (if you are under age 65). Also, do you have the time, energy and inclination to be a landlord? If you use a property management company, expect to lose up to 20% of the rent as their

fee.

 

 

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.

 

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AUTO-ENROLMENT PENSIONS IN 2015? UNLIKELY. BUT DON’T LET THAT STOP YOU

 

January throws up all sorts of déjà moments as people express their New Year intentions.  And that includes the government.

Almost like clockwork, the ticking time-bomb that is our inadequate pensions provision, is raised every January and this year is no different. 

Surveys are done that confirm that the state cannot keep paying out pensions at the current rate and like clockwork, the Minister (in this case, Joan Burton) defends the pension payments, but says that reform is necessary and the government is working on it.

The preferred solution is now the universal insured model into which every new worker and anyone who is employed but doesn’t have a pension, is signed up automatically. A percentage of their pay is contributed to a low cost, but private investment fund by both the worker and employer with the state providing – at the very least – generous tax relief and ideally, a contribution of its own.

The expectation is that the model will eventually replace the current PRSI-related state pension and current defined contribution pension plans. The idea is to make sure that every worker retires with some long-invested savings and pressure is taken off the state’s finances which will come under increasing pressure as our older population grows. The current pay-as-you-go state pension requires the PRSI/taxes of younger workers to pay retirees’ weekly pension incomes.

Last week, at Irish Life’s January media briefing, the company, now owned by the Canadian insurance giant, Great-West Lifeco (with a trillion Canadian dollars under investment), threw its weight behind auto-enrolment.

Their own survey of typical Irish Life occupational pension customers today, showed that at age 43, on an average salary of €46,000 with just six years worth of contributions, the typical IL customer’s pension fund value is worth just €45,000.

If they maintain such pension contributions until age 65, (5.7% by the employer and 4.6% by the worker) their final pension fund value at retirement could be €190,500, said Irish Life. From this the member can expect a pension income (in today’s values) of €7,900. Their state pension will be c€12,000 (assuming that value continues.)

Not everyone could live on a fixed income of €19,900 a year, and Irish Life concedes that as in Canada, many people will have other resources like cash savings or other assets that they will end up using or cashing in, to bump up low pension values.

Unfortunately, unlike Canada where state pensions are now funded (and not pay-as-you-go) the Irish state pension is unlikely to remain at €12,000 a year – one of the highest flat rates in the OECD – as the older population soars in the next 10, let alone 30 years.

Just half the working population holds any kind of occupational pension and today, the average employee retires today, at age 65, with a fund that is less €100,000, said Irish Life. This will only produce a pension income worth about €4,000. The state pension is absolutely essential if there are no other resources.

Saving earlier and increasing contributions by even a little amount, is the solution.

Using the example above, Irish Life said that by increasing both the employer and employee contributions to 7.5% each and by doing so from age 28, not 37, the employee’s pension fund can grow to €325,000 by age 65. This would produce an annual pension €13,300, which combined with the state pension would produce an income of €25,300.

There are no guarantees with invested pensions – as the Australians and New Zealanders with their auto enrolled pensions have discovered: Australians are now having to increase their contributions due to income shortfalls. But Irish Life’s latest survey suggests that the majority here favour it “as the most effective way” to get young people saving.

Will Minister Burton announce the start of the auto-enrolment pension this year? I doubt it. In every country where it’s been introduced, including the UK, employers and employees raise cost and affordability objections, which is why the lead-in time is long and the initial contributions are set very low.

You shouldn’t use this as an excuse to do nothing.

If your company has a pension scheme, join it this year. Save more and regularly.

But most importantly find out how your money is being invested. Following its Canadian parent, Irish Life is adopting a high diversified, global investment risk management strategy that better matches client risk tolerance.

Compared to Canadians (8%) and the British (12%), the Irish keep up to three times more money (25%) in cash than in other financial assets other than property, where the percentage is roughly the same.

With zero deposit returns and 41% DIRT, convincing Irish savers to spread that risk could be the toughest nut of all for the new Irish Life to crack.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.

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PLAY THE DEFLATION GAME TO YOUR ADVANTAGE IN 2015

 

Prices matter. Especially oil and gas prices. Food prices and even the price of money, for both savers and debtors.

As private sector deflation takes hold, defying every effort of central banks to conjure up price inflation that will help countries, companies and individuals pay off their unsustainable debts more easily and help (they think) create more jobs, the prices we pay for the stuff we need and want will matter even more in 2015 than any of us can imagine.

Let’s start with the price of oil and gas.

It’s at least six years since we’ve seen oil as cheap as it is today and I certainly appreciate the fact that my seven year old Nissan Almera’s tank costs less than €70 to fill.

The price of home heating oil, gas and electricity hasn’t dropped significantly yet, but we should all see lower bills at some point this year if the ‘beggar thy enemy’ game being played out by the Saudi’s, Russians, Iranians and Americans continues to play out.  The Saudi claim that its oil industry can remain profitable even at $20 a barrel is doubtful, but when your miserable dictatorship is stronger than the competitions’, chances are you will come out on top…at least until the next big crisis.

For us, being at the tail end of the Russian/NorthSea and Middle Eastern energy supply chain has been mainly bad for prices, but we’re now paying for cheaper oil with a pretty strong currency and that certainly helps.

Low energy prices, it is hoped, will not just give our manufacturer/exporters a boost but the domestic economy too – assuming that we actually spend our 2015 fuel and energy savings on Irish goods and services.

This is a big if. The anticipated Christmas spending blow-out didn’t happen for a few reasons. One, there’s still a lot of debt to clear. Two, relatively mature economies with ageing populations have less need for discretionary consumer goods. And finally, low energy prices feed lower consumer prices and today that means that there are endless sales happening – for goods and services.  Deflation (as the Japanese can attest) results in delayed purchases of non-essential items as people wait to see prices come down further.

Meanwhile, as the price of money and interest rates fall, people who have lots of stuff use that savings to pay off the last of their debts and to save for longer retirements and the soaring cost of medical care in advanced old age.

So how should we play the money and deflation game in 2015? 

First, accept that it only happens in the non-government sector:  the fastest rising prices are those still controlled by the Irish state:  health care, education, transportation, legal services, utilities and the public/civil service. 

With an election looming, the government is keen for as much of its huge debts to be renegotiated at the artificially lower bond rates arranged by the ECB and to use this interest savings to increase civil and public service wages. 

It won’t be easy to avoid paying higher prices for state services, especially if low fuel prices mean less excise tax; that shortfall will have to be made up somewhere – ironically probably via cost increases in what are now the real ‘old reliables’ - health, education, transportation, legal services utilities, etc.

The best way to prosper in 2015 is to earn more, pay less tax and reduce your debt: 

-       The top paying sectors remain high-tech, big-pharma, financial services and state employment and all four are recruiting. So re-train, re-skill. Dust off your CV.

-       Anyone can earn up to €12,000 tax-free in 2015 renting out spare rooms in their homes. 

-       Increase your income by reducing the tax you pay: you can claim refunds on all unclaimed tax credits and reliefs for up to four previous years. Get a tax review.

-       Renegotiate your loans and debts. Use a good mortgage or debt broker to switch where possible and make interest savings.

-       Control and save on your discretionary spending by buying at sales after scanning prices directly or on-line.

-       Use reliable brokers to reduce the cost of all your 2015 insurance contracts – life, motor, home, health, travel.

Interest rates will stay low until the EU wider economy improves. Until then, 2015 will be a good year for debtors, for new borrowers if they can access credit and anyone who patiently watches high street prices for stuff they really need to buy.

Once interest rates and energy prices start going up again… and they will, all bets are off.  Inflation is no one’s friend.

Until then, play the New Year energy and money game to your advantage and enjoy the little windfalls, wherever they land.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.

 

 

 

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