Jill Kerby

IGNORE THIS STEALTH INCOME TAX AT YOUR PERIL

Your private health insurance bills are set to soar.  You may not be able to afford to avoid using the public health system, which is under the greatest financial and organisational strain ever. And if you are an older person, you need to act now.

The most adamant health insurance users in this country are older people who joined the VHI back in the 1960s and ‘70s; at first they were professionals and higher civil servants.

As the decades passed and incomes were taxed so heavily, increasing number of bigger firms, especially American ones, offered health insurance to their employees as one of many employment benefits. These ‘cafeteria-style’ packages often included an occupational pension, share options and health insurance, often for the whole family.

The popularity of private health insurance grew with competition after 1996 when the VHI monopoly ended and BUPA Ireland arrived. Today, Laya (which emerged from BUPA), Aviva and GloHealth now compete furiously for the shrinking pool of money and members (now estimated at well under two million, down about 65,000 per annum since 2008.)

The fall in numbers is due to unemployment, falling incomes and higher income and other taxes (like the LPT). But also because of the surge in the annual health insurance levy to subsidize the VHI, which has a disproportionate number of expensive older members and other legacy costs.

The levy alone – at €350 per adult and €120 per child member for all but the cheapest policies, now accounts for a disproportionate portion of the premium. It is the cost every member pays for the decision not to break up and privatise the VHI back in the mid-90s and to ensure that it fulfilled the same insurance capitalisation and reserve requirements of every other insurer operating in this state.

Up until 2002 health insurance members enjoyed highest rate tax relief on their premiums. It is now the standard rate of 20% and is given at source, so the amount you are quoted is the after tax premium.

From next January, this 20% tax relief is only on the gross – not net – premium up to €1,000 for an adult and €500 for a child. A €1,000 price to you is actually a €1,200 gross or real cost of the plan.

The insurance industry claim up to 1.2 million of all their members (nearly all adults, and especially older members) will be paying at least between 4% and 15% more for their insurance next year.

Let’s do the math:  if you are an older person, and still hold popular plans like VHI’s Health Plus Choice (old Plan C) at €2,265.50 or Health Plus Extra (old Plan B Options) at €1,837 the loss of the tax relief means your premiums will be €2,632 and €2,096 respectively. (VHI offers very similar plans to these - Company Plan Extra Level 3 at  €1280.75 and Teacher’s Plan at €1,250 respectively.)

Anticipated price hikes from the insurers next month or in the Spring will add at least another 10% say insurance experts and we should assume another hike in the VHI health insurance levy. The government has also begun charging the insurers €1,000 a night for every public hospital bed occupied by their members, regardless whether they get a private room, as per their contract, or end up in a multi-bed ward. The impact of this has not yet been passed on.

The total cost of all these charges and taxes could amount to hikes of 30% for some policies.

The insurers are scrambling to adjust the benefits (more excesses, co-payments, less choice of private hospital) to keep members, especially young ones who cross subsidize older, sicker ones. Huge cancellations means this hasn’t been working very well.

If you are an older person, you need to have your health insurance reviewed before its renewal date. (All contracts are 12 months and you are penalised if you leave or transfer early). Go to a good local broker who specialises in health insurance or check out healthinsurancesavings.ie and irishhealthinsurance.ie. Ask for the cheaper, corporate equivalent of your plan and then compare these to all the insurer’s offers. You can try and do this exercise yourself at hia.ie, the Heath Authority website.

Meanwhile families with children should explore whether to drop down to the cheapest, entry-level plans and add a HSF (Hospital Saturday Fund) tax-free health cash plan. One premium of €9.50 to €17.50 a week covers all the family for a portion of both outpatient costs (GP, consultant, dentist, physio, etc) as well as a payment toward an overnight or day treatment in hospital.

Over 70s who still qualify for a full medical card, have more options than young families: the savings they make dropping annual cover can always be used to at least jump the long public consultant’s queues for quick diagnosis.

THE SQUEEZED MIDDLE TAKE BRUNT OF BUDGET 2014 TAXES/CUTS

The big post-Budget 2014 headlines that are catching attention are centred mostly on the loss of medical cards, the lowering of job seeker, maternity and disability allowances.

Overlooked are the more subtle taxes and cost adjustments to disposable incomes that far exceed the value of all the cuts above together: These include,

• the extending of the local property tax to full year payments, which will amount to another €250 million plus taken out of your pockets in 2014 on top of the €250 million already collected in 2013;
• the extra €120 million (bringing the annual total to €600 million!) that will be collected from raising the private pension levy on savings to 0.75% from 0.6%;
• up to €100 million that might be raised from increasing DIRT from 33% to a whopping 41% on €100 billion worth of bank savings (or to 45% for non-pensioners). People who shift savings to tax free An Post state savings will avoid all DIRT.
• the estimated c€40 million from the loss of standard rate 20% tax relief on full private health insurance policies. The tax relief affects adult policies that cost up to €1,000 and child policies up to €500.

Together, these four new Budget 2014 tax items alone could amount to over a half a billion euro worth of additional revenue to the state in 2014 and will be mainly paid by the ‘squeezed middle’, chiefly the 1.8 million productive earners and pensioners who are home owners, who have prudently saved for their retirement and who continue to pay, reluctantly, the increasing cost of private health insurance.

There is no avoiding Budget 2014 if you are a pensioner: You will still receive free travel and TV license and reduced electricity/fuel allowances and full or GP only medical cards, but 2014 will be the year that well off pensioners over 70  (earning more than €500/€900 per week) will again pay for all non-GP expenses. Non medical card holders who keep their medical cards will see their prescription payments rise from €1.50 to €2.50 an item.

All pensioners will lose their €114 a year telephone allowance but they can appeal this on hardship grounds to Community Welfare Officers. All pensioners should consider one of the increasingly competitive phone/mobile phone, TV, satellite/broadband packages. You can compare prices and packages www.bonkers.ie

The reduction in private health insurance tax relief will also disproportionately affect older people, says Dermot Goode of www.healthinsurancesavings.ie: “If there was ever a wake-up call to review your policy, this is it.”

He said that older people are most likely to have expensive, comprehensive health insurance plans “that cover all of their regular ailments and don’t have big excesses that they cannot afford.” The 20% tax relief on premium amounts over €1000, could cost them €200, he said. If the health insurers increase premiums again in November and next February/March – as has been their pattern – and the government hikes the health insurance levy again in January, these combined price rises could be so high as to force older people entirely out of the market, predicts Goode.

Aside from moving to a lower cost (but poorer value) plan, dipping further into savings, or dropping cover altogether, pensioners could consider adding or substituting health cash plans like those available from www.hsf.ie, the Hospital Saturday Fund, a registered charity.

Their schemes are available to individuals and families and for a single premium will pay tax-free cash payments for a range of medical events, including all dental treatments, optical and hearing checks, x-rays, physio, consultants and GP visits, plus up to €80 a night for hospital stays. This payment alone will cover the €75 a night (max 10 nights) charged to non-medical cardholders for public hospital stays.

Next, the 0.75% pension savings levy: it not only reduces workers’ pension fund savings but the actual income many companies pay their retirees for whom they did not purchase an annuity.

Unfortunately, the levy cannot be avoided, but pensioners who earn above the tax-free income threshold can avoid the huge new 41% DIRT tax on bank, building society and credit union savings. (The exit tax on growth from investment funds is also now 41%) by moving their money to DIRT-free Post Office state savings products.

Some commentators believe the surge in DIRT is intentional – to permit the state to borrow more cheaply (1.34%-2%AER interest) from its own citizens via state savings rather than pay 4%+ interest from international hedge funds once we leave the Troika bail-out.

The longer term impact of billions in savings leaving the more fragile high street banks and credit unions for An Post is another matter - and another risk to your money - that I’ll return to in another column.

CANADA IS GETTING OUR GRADUATES – HERE’S WHY

It’s Budget Day today, so we’ll have to wait until next week for some suggestions on how to cope with this latest round of higher taxes, levies and spending cuts.

But not everyone is sticking around for the aftermath.

Graduates are leaving here in record numbers and they’re going to Britain, the US, Canada and Australia where job prospects are more plentiful, career opportunities are better, taxes are lower and, at least in the case of Canada and Australia, they won’t be brutalised by decades of high personal taxes and state debt.

“Young educated graduates and job holders are leaving [Ireland] because they see a decade, perhaps longer, of debt servitude, suffocating taxes and the thinning out of public services while the establishment continues its act of self-preservation. Families whose kids have the potential for stellar careers are encouraging them to go,” wrote Eddie Hobbs in his Irish Star column last week.

I think he’s right. My child, 19, who has just starting college, is being prepared by his father and me for a working life in Canada when he graduates: prudent Canada rewards hard work and ambition. Its taxes provide public services that reflect the needs of its society, but not at a cost that discourages personal ambition.

Compared to here, the highest tax rates apply on much higher earnings:  the 29% top Canadian rate is paid only on equivalent euro earnings over €96,675. The provinces also impose income taxes and in Ontario, where so many young Irish now live, the 13.16% top rate applies only on earnings over €364,370.

Here top rate tax of 41% applies on all income over just €32,800.

Someone in Ontario earning the equivalent of a gross salary of €50,000 will pay combined federal/provincial income taxes of €10,897(each have four tax bands.)  Here, on that income, with two tax bands, that worker pays €13,552.

However, the Canadian worker only pays 4.95% or €1,682 and 1.88% or €606 in pension and other social insurance contributions up to a €33,000 income ceiling. Compared to this €2,288, the Irish worker pays 4% PRSI (€2,000) and 7% USC (€3,500) on their entire €50,000 earnings. The Irish worker’s gross income tax and social insurance bill amounts to €19,052 compared to €13,125 if he worked in Ontario.

These gross income deductions don’t take into account tax credits and other deductions, but these are also more generous in Canada and the net effect is the same: you get to keep more of your earnings there.

Co-incidentally, on the day the UCC survey on third level emigration was published, I attended the Ireland-Canada “Gathering” of respective joint chambers of commerce and business associations. It was addressed by a former deputy prime minister of Canada, John Manley, who now heads the Canadian Council of Chief Executives.

He explained why doing business with Canada (and indirectly why emigrating there) is such an attractive prospect:

• Canada will have the highest real growth rate (albeit only 2%) in 2013 among the G7 nations;
• Canadian unemployment is c7.1% and falling.
• It has the lowest debt to GDP ratio of all leading industrialised countries (c85%) with only Germany having a better record. (Ours is 123%). Canada will balance its budget again by 2015. 
• The Canadian GDP deficit is c2%, second lowest to Germany. (Ours s 7.5%, the highest in the OECD.) If it was in the EU Canada would have the 7th largest population, the 6th largest GDP and the 4th largest GDP per capita.
• Canada has the world’s soundest banks (the US banks rank 58th). It was ranked this year’s top global place to do business.  
• It is 41% more tax competitive on all business, corporate, sales, and capital tax fronts than the United States. At the other end of the spectrum, France is -80% less tax competitive than the US. Only the UK nears the Canadian competitiveness rank at +27%.
• Canada ranks in the top three global rankings for leading natural resources: potash, titanium, uranium, forest products, aluminium, crude oil reserves (it is 6th in crude oil), natural gas, hydroelectric power (6th for electrical power).
• Canada ranks 7th in clean technology innovation (Ireland is 9th)

Canada is still too dependent – and vulnerable – to US trade; individual Canadians are carrying too much personal debt and its national health service is not delivering the care it promised.

But trade with Ireland is growing and we are now the 5th largest recipients of Canadian outward investment. 120,000 Canadians will visit Ireland in 2013 and five million Canadians claim Irish ancestry. Next spring both Aer Lingus and Air Canada Rouge will start daily, year round flights to Toronto.

I am trusting Canada to keep doing the right things so that my Irish child can build himself a future there some day soon.

IT’S NOT A PROPERTY BUBBLE…IT’S A DISTORTED MARKET

All this talk about new property bubbles makes me very uneasy.

First, the only evidence I see of serious price inflation is in certain areas of Dublin where there is heightened demand for family homes near good schools and transport links.

It’s being fuelled by older cash desperate to get a better yield than tiny deposit rates and from young professionals with substantial, safe jobs and a sense of desperation because there is so little available supply.

The number of mortgage approvals in the last year – approved, mind you, not actually drawn down – is up 11.1% between August 2012 and 2013 according to the latest statistics from the Irish Banking Federation. Approvals fell 5.3% in August from July 2013 and were worth 8.5% less, but the annual value of these approvals were up 11.3% (to €297 million).

Meanwhile Dublin prices are up just over 10% in the past year and by 2.8% in the rest of the country. Official inflation is very low at the moment (less than 2%) but in a normal economy, with historic house price inflation of c2%-3%,that 2.8% increase suggests that it is probably a more authentic rise than the Dublin one.

Property prices are artificially high, says mortgage broker and financial adviser Karl Deeter of Irish Mortgage Brokers because the property market in general and bank-lending remains dysfunctional. There is insufficient lending because the banks are afraid of any future losses at a time when they have 150,000 existing customers in arrears and restructuring arrangements and the risk continues of mass repossessions, losses, and ultimately, debt write-off.

Meanwhile, says Deeter, young couples looking for family homes in good areas of Dublin are being forced to overpay for this property bottleneck that is forcing up prices.  Large tranches of repossessed properties hitting the market will inevitably dampen all prices in the future (as could property tax, water charges and any other taxes we will end up paying to service the on-going state debt.)

His concern, he says, some of those new buyers could end up as tomorrow’s negative equity and arrears victims if their personal financial position ever deteriorates.

I asked Deeter about the increase in mortgage lending: doesn’t that mean the market is showing some sign of recovery?  He agreed, but reminded me it is off a very, very low base with even Dublin house prices still 53% off their peak prices.  As with other small signs of more consumer spending, it’s is the least we should expect after five steady years of downturn.

Anyone actually seeking a mortgage faces a very different reception than back in 2007-2008.

“Most of the banks are offering 90%-92% loans,” he said. “But how much you can borrow has very little connection with multiples of income or any percentage of disposable income.”  The calculators on bank websites that suggest, for example that someone with a certain income can then borrow three, four of five times their income, are deceptive.

“Loans are now extended after the borrower’s cash flow is determined. Someone with two kids to clothe, feed and educate is not going to qualify for the same loan as the single person with the same income.”  Loan stress testing is more about whether your lifestyle can stand any negative impact, not just a rise in interest rates, said Deeter.

Even how much you pay in rent will not necessarily translate into a similar sized mortgage repayment since someone who pays rent can just walk away from their rented home. If you walk away from a mortgage you can’t pay, the bank will pursue you for any shortfall and be stuck with a liability on their balance sheet.

So what can a first time buyer do to secure mortgage loan approval? The obvious factors include having

- a safe job, that is, working for a company that isn’t going to go bust in the next 12 months (at least). Sole traders need to show 2-3 accounts. You will probably need to get your company to sign the bank’s employment certificate.

- money for the 8%-10% downpayment (parental ‘gifts’ are not always accepted) plus legal costs, etc.

- a track record of saving and/or paying rent (ideally higher than a monthly mortgage repayment)

- sufficient cash flow to pay the mortgage, insurance, maintenance, property taxes, etc now and in the future and meet all your other essential living costs.

- sufficient other resources to pass income and interest rate stress tests.

The old loan-to-income calculation of three and a half times your combined incomes may be passé, but it still seems very prudent to me. A couple earning just €50,000 a year isn’t going to have much money left over to start a family if they borrow more than €175,000 and have to pay a variable rate, 25 year mortgage of c€970 a month (at 4.5% interest).

ARE WE ALL INCOME TAXED-OUT?  NOT A CHANCE

In just two more weeks we will find out just how much more tax we’ll be paying in 2014.

The expected €500 million, in addition to the €600 million that was already identified in last years Budget for collection in 2014 will mean that at least €1.1 billion euro will leave our collective pockets into those of the Irish state.

That leaves perhaps as much as another €2 billion that will have to be found from spending cuts (assuming the entire €3.1 billion worth of cuts expected by the Troika is implemented and not the €2.8 billion some members of the government argued would be sufficient to meet our debt to GDP targets.)

Every year the Irish Taxation Institute holds a media briefing and speculates on where those extra taxes may be harvested. First, they identified the areas from which the €600m extra tax, announced in the 2013 Budget for payment in 2014: 

-       €250 million from full payment Local Property Tax;

-       €250 million as a result of personal pension funding changes;

-       €16 million in carbon tax increases;

-       €12 million capital acquisition tax (CAT) increases;

-       €14 million DIRT tax increases

-       €58 million

The Taxation Institution suggested that the extra €500 million might be raised from:

-       Fiddling with the tax bands and lowering the 52% higher entry point below the current €32,800 earnings.

-       Increasing PRSI for the self-employed by 1.5% and extending 4% PRSI to all deposit interest earned and not just that earned by the self-employed.  

-       Increasing both capital gains and gift/inheritance taxes from current rates of 33%.

-       Increasing the DIRT rate (now €33%).

-       Further tightening of funding and income limits for personal pensions.

-       A return to 13.5% VAT for the hospitality/hairdressing industry (now 9%).

-       Increasing VAT (now 23%) and/or inclusion of more zero-rated goods in VAT regime.

-       Increasing excise duty for petrol, fuel, alcohol and tobacco.

-       Higher VRT on new vehicles.

The Taxation Institute did us a greater service in their briefing last week by putting in context the amount of tax ordinary workers (as opposed to large foreign companies) are now paying.

In 2007, at the height of the boom, a single person earning €30,000 paid 12.9% of their gross earnings or €3,870 in taxes/PRSI, etc leaving them with €29,030. Six years later that person is paying nearly 17.7% of their income (4.2% more) in tax, PRSI and USC leaving them with €24,690.

Even a married couple with one income of €60,000 and two children is now paying 26.6% more or €15,960, in extra tax than in 2007, when they paid 212,480 or 20.8%. Six years ago this amounted to just €12,480.

Even worse is that is that in Ireland we enter marginal, or highest income taxes (that include PRSI, USC, etc) with extremely lowest amounts of income:  all earnings over €32,800 since 2012 are subject to 52% marginal taxes now. In the likes of the Netherlands, the highest tax (49.3%) kicks in at €55,045; in the UK (52%, coming down to 47%) €183,285. In France the equivalent marginal rate is 52% but you need to earn over €186,749; in Germany it is 47.5% tax after earning €259,103 and in the USA, €301,163 in the US in 2012 the 43.9% was paid on income over €301,163.

Only the Scandinavians pay marginal tax rates at income entry levels as low as ours (and deliver abundant cradle to grave services with low debt ratios and high employment. None of them are members of the eurozone.) 

In 2013, 42% of all tax raised by the state will come from income tax. In 2007 just 29% of all taxes were from income sources and there were 300,000 more people in the workforce. In 2015 another €2.5 billion will have to be taking out of the Irish government spending budget and a significant proportion will have to be made up from taxation.

If you are working, it is important that you review your income, make sure you are not overpaying existing taxes and try to further reduce your expenditure.

On that note, starting next Thursday in Wexford at the Ferrycarrig Inn at 8pm, my year-long Mother & Daughter Personal Finance Tour of free seminars, in association with the Irish Countrywomen’s Association and our sponsor, healthcare insurer, HSF will resume.  The other dates are budget-eve, October 14, in Castlebar; October 24 in Monaghan town and November 5 in Carlow. See www.ICA.ie  for more details or my website, www.jillkerby.ie )

I’ll be looking at the upcoming Budget and its promise of higher taxes and many other money topics of interest for women of all ages, like bank savings, debt and insolvency, the cost of health care, insurance, retirement savings, inheritance and how to Build An Ark – a financial ark - for your family and loved ones.

You’re going to need one.