Jill Kerby

IT’S A ‘BEAR’. BUT IS IT COMING FOR YOU?

A ‘hard landing’.  Now those are two words to send shivers down the spines of some readers who’ve been through it before and are wondering this week if it is happening again?

I hope not. But global stock markets have now officially fallen into a ‘bear’ market, that is, a 20% drop in values since their April 2015 highs.  Is it an “inevitable” correction, or a more serious sign that western economies are again entering recession?

More importantly, how will any of this affect you?

I’ve written many times in this column that great economic or geo-political events are outside the control of the ordinary worker or investor.  Instead, we’re debt serfs at the receiving end of the decisions taken and the outcomes directed by the unholy triangle of politicians, their unelected cronies in the world of high finance and industry and their creatures in the central banks.

Their collective ability to artificially set the price of credit and currencies for the past 43 years (since Richard Nixon arbitrarily took the United States off the post-World War 2 gold standard) has caused an overwhelming glut of state, corporate and individual debt, and it’s at the root of the massive wealth divide, with the richest insiders rewarded due to their easy access to cheap credit and the 99.9% left with the job of meeting interest payments as they fall due on this gargantuan, accumulated debt.  (The principal is so great – in tens of trillions - that it can never be repaid, something politicians shrug off as perfectly natural in our ‘modern’ world.)

My understanding – such as it is - of why the markets have been falling so dramatically this year comes from other commentators, mostly supporters of the classic, ‘Austrian’ school of economics. (See www.mises.org for a vast archive of material).

At the core of their theories, first published in the early 20th century, is that too much cheap credit, too much borrowing and spending, is a bad thing because it encourages poor and irrational investment decisions. It also artificially pumps up the value of assets used as debt collateral and it ultimately causes booms and busts.

The Austrians contend – accurately - that the post-bust process will always be unpleasant (bankruptcies, job losses, etc) but that an economic correction/recession/depression will return asset values (shares, property, bonds) to their correct values. It will clear out the corporate deadwood and allow new, sustainable investment and growth.

That didn’t happen in 2008. So pervasive and intertwined was (is) global debt at that the unholy alliance of politicians, corporations and central bankers decided to intervene and stop the inevitable bankruptcies and resetting of asset prices. Sovereign and corporate debts were either rolled over (hence the quadrupling of global debt since 2008) or paid off by ordinary citizen/taxpayers.  (We know all about that here in Ireland.)

Yet countries that were forced to reduce spending, raise taxation, pay down their debts, and to make a stab at reforming their fiscal decision-making process (like Ireland, Spain and Portugal) have seen some positive turnaround.  In Ireland we’ve had the good fortune of having an established foreign export sector, flexible work practices and emigration outlets, high levels of education and a greater buffer of personal wealth than in the past.

The commentators I follow are not entirely in agreement about why the markets have fallen (and your paper wealth if you have a pension fund.) Their views include: “The markets were overpriced due to cheap credit and a correction was inevitable”; “There is too much debt and it is a drag on investment, production, consumption”;  “Western consumers are ageing and are too indebted, contributing to the slowdown in China”; “The Chinese economy is on a rocky road from being an export to consumer economy. The party leaders are not infallible in their attempts to control this process”; “The instability in the Middle East, especially in how it has affected oil prices has spooked the markets”.

Stock market values - and volatility - are nothing more than a reflection in the collective knowledge and activity of that day (or moment), my adviser keeps telling me. “They cannot be accurately predicted…by anyone.” But you can position your holdings, he says, to avoid being wiped out by them – something that anyone approaching retirement, for example, needs to understand.

If you have taken the lessons of 2008 on board by reducing your personal debt, getting your spending under control, earning more, getting a wealth review, saving and investing wisely (especially in a low cost, widely diversified pension fund) then you are as well placed as anyone to deal with a downturn. 

It’s never too late to take action: this is your important wake-up call.

LOTTERY WIN OR MODEST WINDFALL? WHAT’S THE NEXT STEP?

The Lotto jackpot might have hit €10 million but that's the kind of money that only appears in our dreams …and even comes with its own set of pitfalls.

For most of us lucky enough to enjoy any kind of windfall, the sums involved tend to be a great deal more modest, perhaps €20,000 or €30,000 net after selling a little piece of land or receiving a small inheritance. Middle-income earners in the public or private sectors with annual salaries of say, €60,000 and with 40 years of service can expect lump sums of €90,000 or 1.5 their final salary at retirement.

There’s an enormous gap between €10 million and €20,000, but the decisions that have to be made are very similar:  where do I get the safest, best return for this money?  What are the tax implications of this sudden wealth? How much risk am I willing to take?

The lucky person who wins a €10 million Lotto draw (or the Californian who won last week’s $1.5 billion Powerball win) is going to have access to the best (and most costly) investment advice. The person with the modest windfall will have to search a little harder for assistance. For both, the first step is to stick their money into a bank…but which bank?

Here in Ireland just €100,000 is secure against a single institutional loss or closure under the Deposit Guarantee Scheme, so you need to deal with the safest savings bank. Here, the Dutch owned RaboDirect would certainly top the list.

The next dilemma is what kind of interest you can expect. Deposit returns are so low right now that even large tax-free lump sums will produce just a fraction of interest after 41% DIRT tax and your personal rate of inflation is taken into account.

It may not bother you too much if you had a €10 million windfall: after all, a mere 0.5% net yield (which is what most of us will get from an account that pays interest of just over 1%) will still pay annual interest of €50,000.But getting just €100 interest over 12 months on a €20,000 savings account balance is a bit of a kick in the financial teeth. (It’s only €450 a year on a €90,000 balance!)

So the biggest dilemma for everyone with savings - at the very least – is how to get the right mixture of safe, accessible returns that beat the impact of taxes and inflation. It’s certainly the perennial question that I receive from readers and the one that every financial adviser will face constantly in 2016.

Whatever strategy a good adviser comes up with is likely to consider some or all of the following. (This list might be worth taking with you if you do engage one.)

First, they’ll probably suggest that you consider paying off your expensive debt, like credit and store cards or personal loans. For retirees this could also include a mortgage, unless it is a super-low tracker.

Next, they suggest you keep a certain amount of cash in a demand deposit account, especially if you don’t already have an emergency or contingency savings fund worth 3-6 months worth of net household expenses. Check out RaboDirect’s 90 and 30 day gross notice accounts (1.45% and 1.25% annual interest.)

You need to be clear about what you want from your windfall: do you need this money to help supplement existing income? Is it earmarked for an expensive purchase, like third level education for your children, a new car, or home. Will you need it to boost your retirement income, or to provide a legacy for your grandchildren? This choice can determine the level of risk you will need to achieve the needed return, especially after fees, charges and taxes are taken into account.

This is where it starts getting tricky. Historically, deposit accounts and bonds produce the lowest, least risky returns and stocks and shares, followed by property, the highest.

For example, last year, Irish Life’s Irish Property Fund returned 20% and their popular new mid-range, MAPS 4 balanced investment fund (which includes a wide mix of assets), a 9% gross return. 

Can the company repeat this performance in 2016? They hope so, but no one can predict the future. There is plenty of evidence however, to show that the best returns of all are produced by widely diversified funds with the lowest costs.

If you don’t have that luxury of time, you need to take even greater care – in both choosing the right destination(s) for your money… and the right adviser.  We live in volatile times and it will pay to get them both right.

Do you have a personal finance question for Jill? Write to her c/o this newspaper or directly at jill@jillkerby.ie  Her latest TAB Guide to Money Pensions & Tax 2016 is now in all good bookshops.

TIME FLIES: YOU NEED TO PLAN FOR RETIREMENT NOW

In a recent column I reminded readers that with approximately half of all private health insurance renewals coming up in the first three months of the New Year, you needed to give yourself enough time to shop and compare prices if you want ed to avoid overpaying for your cover in 2016.

Health insurance is now a very big ticket – and essential - annual expense for the two million plus people who have this cover. A couple can easily expect to pay €2,000 or more for a good, fairly comprehensive hospital plan and a typical family of two adults and two or three children, about €2,500. 

Anyone paying more than these amounts, or who has not changed their plan or provider in the last 2-3 years “is almost certainly paying too much”, say well known specialist healthcare brokers, like Dermot Goode of www.totalhealthcover.ie and Roisin Lyons of www.lyonsfinancial.ie . Shopping around for better value in the huge marketplace of plans every year is a must.

But another ‘big ticket’ purchase that certainly should be addressed in the New Year is a personal pension.

Retirement planning should get as high a priority on the personal finance spending scale as health insurance but it doesn’t:  the numbers of working Irish adults with a private occupational or personal pension is well below 50%, few of these people contribute enough and the state pension is failing to keep up with public expectations (since PRSI contributions are compulsory) and the ability of the state to meet those expectations.

So before this first month of the New Year is over, consider adding a pension or retirement planning as your second personal finance priority (after that health insurance renewal).

Here’s a useful checklist to consider:

-       If you work in the private sector, do you have a personal pension in addition to an expectation for a state pension at age 66?  Is it a defined contribution or defined benefit pension? Do you know how much your fund is currently worth? How much deferred income do you contribute? How much does your employer contribute (if it is an occupational scheme)? 

-       Are you claiming all your tax relief on your contributions?  Private pensions attract top rate tax relief for anyone paying 40% income tax and every €100 paid into your pension will only cost you €60.

-       If you are within 10 years of retirement age (which can be as young as 50 for some occupational scheme members) have you had your pension fund and the underlying assets independently reviewed? A proper review means no ugly surprises when you hit retirement – like discovering the fund is worth a lot less than your expectations. (The average personal occupational pension fund, according to Irish Life is worth only about €100,000 which, if annuitised, will only produce an income for life of between about €3,000-€5,000.)

-       Pay an independent, impartial, fee-based adviser if you are setting up a pension, for a review or if you need post-retirement pension advice.  Finding such a person is not easy. You can ask friends, family or colleagues for a recommendation, contact one of the broker organisations or check the inter-active member’s map on the website of the Society of Financial Planners of Ireland (www.sfpi.ie).

-       A good pension review will include questions about your employment history, both here in Ireland and abroad. Foreign, repatriated pensions may have tax implications. Pension funds left abroad if you return to Ireland to keep working could have inheritance tax implications if the holder dies prematurely.

-       The qualification rules for an Irish state pension have changed in recent years and you will now need 520 full rate employment contributions and a yearly average of at least 48 contributions. A minimum state pension can be paid if you have contributed at least 10 full-rate contributions from 1953 or later to the end of the tax year before you reach age 66.

-       Pension Freedom Day last April in the UK means that private pension fund holders – even Irish holders - can access their pensions from age 55.

-       Irish people in receipt of a UK state pension also have an opportunity to top up their weekly pension by £1- £25 by making a lump sum payment to the UK Department of Work and Pensions between now and the deadline for the top-ups which is April 5, 2017. (See MoneyTimes, 3/11/15)  A good pension adviser can explain the benefits of the top up or even the voluntary purchase of UK social insurance contributions if you do not qualify for a full, UK pension at retirement.

-       If you are one of the thousands of new, often young, employees in Ireland, the best thing you can do this year is to join the company pension or group PRSA and make a minimum contribution of 10% of your gross salary. The tax relief will reduce that bill significantly and you won’t notice the ‘loss’ within a short few months. Your lifestyle will quickly adapt to the bottom line on your payslip.  Your retirement lifestyle will be all the better for it.

Jill’s 2016 edition of the TAB Guide to Money Pensions & Tax is now in all good bookshops. If you have a personal finance question for Jill, email her at jill@jillkerby.ie or write to her c/o this newspaper.