Jill Kerby

BIG LOTTERY WINS COME WITH MORE THAN JUST LOADS OF MONEY

As I write this column – a few days before it appears in your newspaper – rumours are swirling that a consortium of 30 shift workers at a pharmaceutical firm in Cork have won the EuroMillions windfall jackpot of €88,587,275.

Good for them. That works out at a tax-free prize of €2,952,909 each, more than enough money to pay off their bills, to buy a new car and house, and put all their kids through graduate school and probably buy a house for each of them too.

They’ll probably have enough left over to fill up a retirement fund and maybe even quit the day job and follow a few dreams.

A €2.9 million windfall is enough to change your life for the better but is less likely to result in the downside risks that come if just one person had scooped the c€88.6 million, a massive sum to have to navigate, probably for the rest of your life. That is, of course, if you don’t blow it recklessly or give most of it away, perhaps keeping a modest million or two for your own enjoyment.

I’ve only met one lottery winner, about 20 years ago and the sum he won was about £3 million.  By the time I spoke to him, he had about a million left having bought the inevitable new home, car, holidays and had generously given the rest away to his extended family, some friends and charities.  He was now concerned about the implications of his children possibly receiving very large inheritances while still at relatively young ages.

I passed him the names of some good financial and legal advisers, but I remember him saying that the process of giving away a large share of a million and a half pounds to his loved ones hadn’t turned out to be as happy an experience as he thought it would.

This is a common outcome for many lottery winners who nearly always say that you really find out who your friends are when you win millions.

Winning a huge windfall like c€88.6 million means you will certainly need a highly trusted team of financial, tax and legal advisers who might end up on the payroll for a long time. Even working out what do with €3 million, especially if you want to preserve much of the capital (after buying that new house, car, etc) will take time and probably more understanding of money and tax than you have. Too many are tempted to hand over the management to “the professionals”.

Whether it’s a huge jackpot or a diluted one, responsibly investing and divesting yourself of that kind of money requires a measure of faith and trust in the advisers you employ.

But it’s your responsibility in the end. Their respective roles are to help you work out a financial, tax and legal plan of action that reflects what you want to do with the money.

The financial planner should be experienced, trained and fee-based. (They shouldn’t necessarily charge a percentage fee of the winnings. 1% of €88.6 million is an annual payment of €886,000!)  Should the process of selecting a diverse, balanced, mixed portfolio of assets with capital protection and a modest risk/reward income return cost 1,000 times more than it would for a comparative pension fund?

The tax adviser will work with the Financial Planner to explain all the tax implications of your great windfall: there is no capital gains tax on lottery winnings here but all deposit returns (such as they are) is subject to 39% DIRT. Irish investment gains will carry up to a 41% tax bill. Investments in other jurisdictions will carry their own liabilities, including any inheritances that may be generated from the foreign investment. 

Gifts and inheritances in Ireland carry relatively small, life-time tax free thresholds:  just €310k between parents and child; €32,500 between siblings, to nieces/nephews and just €16,250 to non-relatives. Winners who want to set up family trusts for the benefit of future generations – and doing that badly could be catastrophic for your children if it’s not thought through with great care - will need tax and legal advice.

The solicitor you hire will also play an important role in setting up those trusts, completing property deals, preparing complicated wills, (perhaps in more than one country), even pre-nuptial agreements (where possible) and Enduring Powers of Attorney. Your lawyer will come in handy if disputes arise, especially if €88.6 million is at stake.

I’ve heard lots of suggestions about how the big winner (or maybe, the smaller ones) should proceed. “Take your time” and “protect the capital in the short term” sounds about right.

Finally, forget the notion that winning millions (or tens of millions) won’t change your life. It will. But the last thing you want is that your good luck turns into someone else’s misfortune.

(The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)

WOULD YOU WELCOME A UNIVERSAL INCOME FROM THE STATE?

Could the idea of a ‘basic income’ take off here?

A number of countries are experimenting with paying a selected group of citizens in different cities a basic monthly income as part of a wider social programme to address, they say, the profound changes in the nature of work, jobs and social support structures.

The best known pilot projects have begun in Finland, Holland and Canada where thousands of people are being paid monthly amounts in lieu of conventional unemployment or social welfare benefits, or are receiving universal monthly payments that will be subject to some income means tests, that is, some higher income is clawed back in the form of taxation.

The theory behind the basic income payment is that conventional social welfare payments are complicated, expensive to administer and distribute and act as a work disincentive because of the loss of social welfare benefits once you get a job. In Ireland, this disincentive has already fostered a range of supplementary ‘back to work’ benefits and family support payments for the job finder who remains on a low income. These extra schemes require extra bureaucrats to manage them and little or no savings for the state.

In the case of universal payments, rejected by a large majority of voters in Switzerland, the idea is that everyone receives a monthly or annual income from the state that eliminates the convention unemployment and welfare payments with higher earning clawed back by degrees.

In Ireland’s case this bill is over €20 billion, divided between a variety of pensions, unemployment and illness/disability benefits, child focussed benefits (from universal child benefit to school uniform and book allowances) and other family related benefits and supplements.

Basic income and universal payments are catching the attention of both private policy analysts and governments that recognise that the old benefits systems no longer seem very suitable given the changing nature of work and life long careers. (The coming robotics revolution is predicted to result in the loss of even more conventional manufacturing and service jobs.)

The huge cost of running our current social welfare systems is set to rise as western populations age and make increasing demands on pension and health services. In nearly every country these are paid on a ‘pay as you go’ basis direct taxation, not from invested sovereign wealth funds, Norway being the notable exception in Europe.

So how do these pilot projects work?

The most advanced one, but limited one is Finland’s where 2,000 citizens already on unemployment benefits were randomly selected in December to participate in the pilot for the next two years. Their first payment arrived this month.

Minimum unemployment benefit in Finland amounts to €560 a month and for the 2,000 is replaced with the equivalent in a basic income payment.  This time, however, even though the person remains registered with their unemployment office, there is no weekly signing on, though they may still be offered a job placement. Turning it down could result in up to 40% loss of the payment. However, any casual, part-time or full time income earned will not result in any clawback of the payment, though housing benefit, for example, could be affected by the additional income the person earns while receiving the basic income.

The question the Finn’s want answering from this pilot is whether a basic income results in better employment outcomes or job creation among the sample group. Unemployment is 8% in Finland.

While the Swiss have rejected a referendum for introduction of a universal income payment of c€2,330 a month to every adult and c€583 to every child last year (the total cost would exceed their annual welfare bill), in the city of Utrecht, the Dutch authorities have begun a more detailed pilot involving six different basic payment control groups and basic income payments.  One group will receive the benefit with no impact on additional income they earn; some will be paid extra for voluntary work; some will see some of the benefit clawed back depending on higher earnings, etc. The basic monthly payment has been set at €1,000.

The province of Ontario has begun a similar experiment in four centres with a no-strings-attached payment of Can$1,320 a month to selected individuals age18-65 on existing unemployment benefits (of about $700 a month) and $1,820 to people with disabilities(who currently receive $1,130).Their employment, health, education, food security, living arrangements, rates of illness, etc will be monitored and then compared at the end of three years.

This conversation will come here eventually.

So far, polls suggest that a majority of Finns, Dutch and Canadians support the idea of basic or universal payments. But the polls also show that people are not willing to pay higher taxes to embrace any new system. 

Pitching just the right size basic or universal payment will be the ultimate key to the success or failure of this radical proposal.

(The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)

IRISH LIFE BRIEFING PULLS NO PUNCHES ON FINANCIAL HEALTH

Every January Irish Life, the state’s largest purveyor of life insurance, investment fund and especially pensions, outside of the state itself, produces an annual report, which it shares with the financial media.

For the company itself, last year was a good year. Investment returns in 2016 were positive with global equities up 10% on average and average eurozone government bond returns up nearly 5%. Irish property funds returned c11% and their popular, diversified MAPS fund of mixed assets was up a respectable 7.7%. 

The company, owned now by Canada’s largest insurer, Great-West LifeCo, also bought out Aviva Health and the remaining interest in GloHealth in 2016. It sensibly kept GloHealth chief executive Jim Dowdall to run the new health provider, now called Irish Life Health who reminded everyone that in 10 years another 42% of public hospital beds will be needed just to keep up with the extra over-65s.

Irish Life is the only company now that provides customers with a menu of essential financial products: life insurance, investment funds, pensions and health insurance.

And while I firmly believe that the best way to furnish yourself with all these products is to carefully investigate the wider marketplace yourself, or, ideally use impartial, independent fee-based advisers to help you, this simply doesn’t happen for the majority of people.

Outside of the public sector, fewer than half the working population have a pension fund and will rely on the state pension for regular retirement income.Ditto for life insurance among working adults with dependents. Those who do have private pensions are failing to invest enough into them.

Health insurance has a higher take up rate because only because the c€15 billion collected from compulsory taxation for the HSE is so badly managed.

But is was Irish Life’s survey of pension provision in 2016 that showed just how under-prepared this country is for the surge of older people – Ireland’s baby boomer generation – that are now joining the ranks of the retired in ever greater numbers:

-       In 2016 the average age at which individual Irish Life customers first purchased a pension was 44 years, almost 10 years older than the average age in 2000. The investment outcome for those ten lost years is devastating and amounts to tens of thousands of euro less in the retirement fund.

-       Only three in 10 (28%) of those not yet retired have a financial plan to help them prepare for retirement.

-       Only half of those under 50 have ever discussed financial retirement plans with their partner. This increases to 75% for those with 10 or less years to retirement.

-       A majority of respondents said they would like at least 53% of their current income on which to retire (excluding the state pension.) They ‘expect’ to have 44% of current income.

-       Irish Life now recommends a realistic pension income target of 1/3 of final salary PLUS the state pension “yet… 90% of people currently on our Defined Contribution plans are not on track.” Instead, most will see a salary replacement of just 18% plus the state pension.

-       Two thirds of retirees (64%) surveyed said they reduced their spending in retirement; 63% of them in hindsight, would have changed the way they prepared for retirement.

-       A positive result is that 69% of adults support automatic pension enrolment at work. A separate initiative Irish Life conducted in 2016 with a client company willing to adopt auto enrolment resulted in pension participation rising to 90% from 58% and maximum contributions rising from 42% to 82%.

The most urgent message from the survey is the one about retirement income expectations.

Even assuming current income is say, €50,000, 53% in retirement will be €26,500. The current state pension is €12,391.60. A c€39,000 income would be very welcome indeed.

But to achieve a pension income of €26,500 in the form of a guaranteed annuity you require a pension fund worth at least €500,000 for a single person with no dependents and over €800,000 if you were funding for a dependent spouse, for example.  Average pension funds are in the region of €100,000 at retirement.

With average income funding of just 18%, the worker earning €50,000 would end up with a pension of €9,000 a year. No wonder most of the working population expects to depend on the state pension, which in this case would help provide total income of €21,391 a year.

It’s a brand new year.

It’s not too late to do something about retirement planning and funding. In finding better returns on savings that are currently returning nil to zero interest or in protecting dependents and your family’s health care costs. Call a good adviser.  Failing that, at least check out the Irish Life website or other life company sites. 

The alternative – doing nothing – gets scarier with every one of these annual briefings.   jill@jillkerby.ie

(The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)

WHEN SAVINGS PAY NOTHING…YOU NEED A CONTINGENCY PLAN

The frustration of ordinary savers with historically low returns could turn to horror if negative deposit interest rates ever arrive on these shores.

Already the European Central Bank, charges -0.4% negative interest to discourage commercial and investment banks from leaving deposits with them (the ultimate ‘safe’ deposit taker). Negative rates also apply at the central banks of Switzerland and Denmark and in both countries some commercial banks now charge their customers negative rates. Here, Bank of Ireland charges a negative rate to corporate depositors who leave more than €100,000 overnight.

At the end of November 2016, the ECB estimated that the value of negative yielding Government bonds (the biggest form of debt that countries buy and sell to each other) in the world is was $8 trillion and rising. This means that buyers of German 10 year bonds for example, now pay the German government a small rate of interest every year, rather than receive an interest payment from the Germans. 

How crazy is that?

Would you willingly pay your bank for leaving your life savings with them, which they can then lend out at 4% (a mortgage rate) 10% (person loans), 15% (overdrafts)?

What are the safe alternatives? A mattress? A hole in the garden?  Hardly.

Not coincidentally to the negative interest rate phenomena, is the strengthening drive by governments and central banks to keep rolling out cashless banking and cashless purchases.

Denmark, where most financial transactions are now cashless happens to be where negative interest rates are being charged to commercial and individual savers: in a place where practically no one takes cash anymore, and your income and wealth is expressed as digital numbers in on-line accounts and plastic money cards, there is practically no alternative but to accept the power of the central bank or government.

Could an entirely cashless society happen here?

Cash purchase limits already apply in many EU countries, including France (€3,000, €15,000 for non-residents); Italy (€999.99); Denmark (equivalent of €1,340); Spain (€2,500, €15,000 for non-residents); Portugal (€1,000); Greece (€1,500); Belgium (€3,000 and no cash amount for real-estate purchases).  Other countries that limit cash payments are Slovakia, Poland and Bulgaria. The Swedes have no limit, but traders are not legally obliged to accept any cash payment.

What options do any of us with any surplus income or savings have to low to negative deposit yields and the encroaching threat of digital and plastic ‘money’?

-       You can try and find a genuinely solvent bank/institution that still provides a safe, positive yield. Global Finance magazine produces an annual survey of the top 50 ‘safe’ banks every September. (Not a single Irish, UK, Italian, Spanish or Danish bank make the list. The top 10 include 4 German, 1 Swiss, 2 Dutch, one Luxembourg and France bank and Canada’s Toronto Dominion bank (in 10th place). See www.gfmag.com or better still, consult a professional adviser.

-       Use your savings to pay off any interest debt you have, like credit cards, personal loans, mortgages.

-       Buy real assets that pay positive annual yields: an investment property that produces a profit from rent after all charges and tax. Shares that pay a stream of positive yielding dividends.

-       Depending on your age, ability to live with risk, use savings to buy low cost, diversified investment funds. A tax efficient pension is the best long term option.

-       Consider private, but high risk family lending with a portion of your savings or P2P lending.

-       Look into the merits – and downsides – of shifting some cash into real money, physical gold or silver coins or bullion, stored in a safe depository (where you will pay a fee.) Consider it insurance. Precious metal prices are volatile and an ounce of gold pays no yield, but gold always has an intrinsic value and has no third party (ie Central Bank) liability risk once it’s in your possession.

Before you ‘encash’ or withdraw your savings, or buy a potentially higher yielding asset or investment, or substitute some of your cash for ‘real money’, do your own research. Understand and accept the potential risks and rewards of non-deposit asset ownership.

Some stock markets and investments are booming, some are floundering.

Property in Ireland is returning big yields again due to post-crash shortages and feeble lending by still fragile banks. But ongoing costs and taxes remain high and the state remains the biggest price manipulator.

Deposits are simple and easy; getting a positive return on your savings is not.  Always search for the best independent, impartial financial advice from a professional, experienced, fee-based adviser who will model their suggestions to match your profile. 

 (The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)

WE CAN’T PREDICT THE FUTURE BUT WE CAN IMPACT OUR OWN OUTCOMES

Was 2016 as bad a year as so many people on my Twitter line seem to be suggesting it was? 

I suppose if you are mildly obsessed with the passing of celebrities, the pro-Brexit vote and Donald J Trump becoming US president, then 2016 may not be your favourite years.

As a pessimistic optimist, who has finally admitted to herself that I’m only as good a forecaster as my decorative, but not very bright King Charles Spaniel, Jet, I’m only willing to predict that 2017 is - again - going to bring with it all sorts of personal finance surprises. 

This might be because of Brexit and its potentially negative impact on prices, and because of Trump’s vague promises to cut the US corporate tax rate in order to lure offshore US companies back home.  That might very well impact on existing and future job growth from this key economic sector.

But for every swing there is a roundabout and if I had a young person about to graduate from secondary school I’d be encouraging them to think about working in IT and finance/banking/insurance:  there is a already of shortage of workers and graduates to service both these industries based especially in the IFSC in Dublin and that’s only going to escalate if we attract foreign and UK banks and re-insurers from a post-Brexit City of London.

With interest rates finally turning – first in the US after the Fed raised its base rate to 0.25% - and the great bond bull-market coming to an end (yields are jumping as the price of bonds fall), 2017 may very well be a watershed year for American savers.

As anyone living on either side of the Atlantic with life savings or surplus income sitting in a deposit account knows, there has been practically no return on their cash once inflation and the cost of living is taken into account. Throw in the cost of banking and the hidden subsidies that savers unwittingly pay to keep borrowing rates low (especially Irish tracker loans) and 2016 was an even worse year than 2015, 2014, 2013, etc.

Will the ECB eventually follow the Fed and finally end its vast programme of ‘quantitative easing’- the purchase of government and corporate debt from private financial institutions in order to supply them with cheap credit to pass on to the market?  QE hasn’t dragged the eurozone out of stagnation but has furred up the ECB’s own balance sheet with what is surely going to become depreciating bond assets. 

When bond market bubbles meets their pin, the outcome, say the experts I read, could be uglier than when the sub-prime mortgage derivatives market met theirs back in 2007-8. At the very least, they think some serious direct money printing in the US will be one consequence and that will feed into higher prices, wage demands and higher interest rates.

Expect some ‘trickle down’ effect on this side of the pond, though the ECB cannot, under its rules, just turn on the printing presses to meet any inevitable price/wage demands.

Outside the realm of speculation – I don’t have a crystal ball and neither does anyone else – there are plenty of things you can do to make 2017 a better financial year than 2016 might have been.  This week we’ll start with spending/savings actions you can take that will make a difference.

-       Work out a family budget – everyone’s income, including pensions, child benefit, teen’s part-time earnings; tax paid, savings, debt, household outgoings and discretionary spending. These are your personal finance building blocks.

-       Price compare all your insurance and utilities as they fall due. Check out www.bonkers.ie. You will save c20% on average, claim Bonkers. Gas/ electricity/phone/broadband; motor, home, health insurance bills of say, €5,000 a year means a €1,000 savings.

-       Price compare the cost of servicing your loans at bonkers.ie. Then arrange a cheaper, consolidated credit union loan. CU interest is not compound, but charged on the diminishing balance of the debt.

-       If you smoke – at €11 a pack – cut back or quit. 20 fags a day is costing you €4,015 a year.

-       Cut out €10 a week worth of junk or processed food from your weekly g4ygrocery bill and you save another €520.

-       Bring that €3.50 daily café latte (x 240 days) with you to work in a thermos cup and you’ll save c€840 in 2017 minus the cost of the coffee from home.

-       Bring a lunch to work and save at least €5 a day or €1,200.

-       Cut up the credit card and replace it with an interest-free debit or top up card. Save a FORTUNE.

Next week, an investment and wealth creation plan for 2017. 

I wish you a very Happy New Year…and so does Jet!

(The new TAB Guide to Money Pensions & Tax 2017 is now out. The first 10 readers who contact me at jill@jillkerby.ie and includes their home address gets a free signed copy.)