Jill Kerby

 

THE PENSION TAX DEADLINE IS HERE – DOING NOTHING COULD BE RISKIER THAN YOU THINK

 

You’ve no doubt seen the television ad or heard the radio version:  The silver haired 60-something looks into the mirror and sees their youthful, vigourous 30-something self.

They remind their younger version about the expensive clothes, cars and exercise equipment that they once bought, and how those might not have been the best value purchases they could have made.  On the other hand, that pension fund they started 30 years earlier, well, it worked out just fine…

If only real life retirement planning was that easy.

October 31st is the self-assessment deadline for making contributions into a pension fund in order to reduce your 2013 tax liability and benefit from either 20% or 41% tax relief.

But not everyone who bought a private pension plan in the past has had a good experience and they may be reluctant to make the top-up this year.  This is probably because…

-       they purchased their pension at a time when fees, charges and broker commissions (unknown to them) soaked up the first couple of years’ worth of contributions;

-       they never contributed enough into the plan, despite even better marginal tax relief than today;

-       the pension fund assets were not always suitable to their needs, were never reviewed or rebalanced as they got older;

-       they panicked when markets fell (as in 2008-9), stopped making contributions  and/or froze their pension fund, thus crystallising their losses;

-       they know someone who made the wrong post-retirement choice, perhaps locking into poor value annuities or into buy-out-bonds or ARF/AMRF’s without fully understanding all the complex implications;

-       have been discouraged by the pension levy confiscation since 2011.

While fees, charges and commissions do still exist, they are lower and more transparent. More people are now dealing with fee-based advisers, who strip out commission, but if not, they demand a written comparison of the potential impact of the commission on their investment fund in the short, medium and long term.

 

STRONG RETURNS

Pension returns have been strong over the last few years (recovering and exceeding the 2008-9 losses for those who didn’t panic) but the bull market may have come to an end say many commentators.

Getting urgent, impartial advice if you are starting a pension or a review of an existing one is recommended.

I will be meeting with my pension adviser on October 31 – filing online means my tax and file deadline is November 14 – to review my pension, with wealth preservation my priority, then the tax relief. (My adviser offers twice yearly reviews to older clients.)

Complex as pensions are – and there is no getting around that – best practice hasn’t changed, and the number one rule is to start saving and investing as soon as possible.

Delaying a pension until your 30s – and the Zurich ad, in my opinion is wrong to use a 30 year old in that mirror - makes no sense anymore given how unlikely it is that the state contributory PRSI pension will be enough to live on, entirely or in part by the time a 30 year old retires in the late 2040s when pensioners are projected to exceed active workers by over half a million!)

ACTION NOW

So what action should a young person take as a first pension step (or to maximise their tax relief for 2013) before the end of this month? 

-       First, join your company pension or group PRSA – by law your employer must offer the latter if they don’t operate the former.

-       Next, start paying in at least 10% of your gross salary and keep it at that percentage as your wages rise.  By making automatic monthly deductions from salary your lifestyle costs, which might some day include a mortgage, child-care costs, etc can be more easily absorbed.

-       Make sure you understand the assets in your pension: the younger you are, the more risk you can take in the guise of a well-diversified selection of global stocks and shares.

-       As you approach retirement you should consider lowering your exposure to riskier assets like stocks and shares and increase your fixed asset funds, like deposits, short-term bonds, property and even precious metals.

Time is running out to not just claim 20% or 41% tax relief on your pension contributions by the October 31 (or November 14) deadline but also perhaps in taking steps to safeguard the pension gains of the last few years.

No one can accurately predict market performance but corrections happen and many cautious commentators believe we might be at the early start of another one.

Review your pension now with an experience adviser.

Staring at yourself in the mirror and doing nothing, will certainly not produce a happy retirement outcome. 

 

 

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ONCE WATER AND LPT IS PAID, 2015 IS A NEUTRAL BUDGET AT BEST

 

Is Budget 2015 really the end of austerity? 

The coalition government certainly thinks so.  It has met the all-important 3% budget deficit figure (in fact, it has brought it below 3%, and nearly a year early) The official meaning  - ‘severity, plainness, or shortage’ and in the economic sense, a period of enforced thrift – pretty much defines the last six years for most people.  

But this budget is leaning more towards a loosening of severity and shortage and while some analysts are unhappy at the ending of spending cuts and more taxes to end the borrowing altogether as quickly as possible, the Minister certainly did not return to the wild windfall and high spending that pre-dated the 2008 crash.

Of course this is the first of two pre-election budgets and even though the tax and higher benefit giveaway of €1 billion is relatively modest compared to the €30 billion that has been taken out of the economy since 2008, it gave a little something to everyone …at least on paper.

However, once the 2015 property tax and the new water charges kick in from January, there will not be much cash to spend for most homeowners.  Tenants, if these costs are not passed onto them, will see a few more euro in their pockets.

Below are case studies (earnings only) that I keyed into the PwC Budget 2015 tax calculator which illustrate the impact of the change to the top rate of tax (40% instead of 41%); the raising of the marginal tax band from €32,800 to €33,800 and the lower universal social charge rates of 1.5% up to €12,012; 3.5% between €12,012 to €17,576; 7% from €17,576 to €70,000 and 8% over €70,000. (The self-employed will pay 11% on income over €100,000).

Where applicable, I’ve added the extra €5 per month child benefit, the 20% tax credit (max €100) on the annual water charge and for pensioners, the €100 rebate on their water charge. I then deducted the water charge balance payment and added an LPT valuation, but not the reduction that 14 out of 31 local authorities have voted in for 2015.  These examples may give you an idea of your potential savings.

In your own case, be sure to check to see if your local authority (or http://www.revenue.ie/en/tax/lpt/liability.html ) has reduced the LPT for next year before you work out similar calculations. 

SINGLE PERSON

A single person earning just €17,576, the minimum wage, will gain €174 from the tax and USC changes. They will receive a €35 water tax credit if they live alone. When the balance of their water tax of €141 is paid, the total gain falls to €32.

 

SINGLE PARENT, one child

A single parent of one young child, earning €40,000 a year will gain €446 from the tax/USC changes. The €35 water tax credit and €60 increase in annual child benefit brings their gain to €541, but when the €141 water charge balance is paid, it reduces to €400. If the parent owns a property worth €150k-€200k the LPT of €315 leaves them with a net gain of just €85 for the year.

 

MARRIED COUPLE, one income, two young children

A couple with an income of €59,000 will receive tax and USC savings of €546 in 2015. The additional child benefit of €120 and the €56 water charge tax credit brings their gain to €722. However, when the balance of the water bill (€222) is subtracted, their gain is reduced to €500. An LPT bill of €584 on a property worth €325k would wipe out this gain.

 

MARRIED COUPLE, two private sector incomes, three children, one over age 18

This couple earns €110,000, and between the tax and USC changes (including the 7% rate on their income over €70,000) they will gain €1,192. The extra child benefit of €120 and the €114 water charge tax credit (20% of €380) will raise this amount to €1,426.  But the balance of the water charge €260 and the LPT for 2015 on their €450,000 value house (€765) reduces their gain to €167.

 

WIDOWED PENSIONER, age 68, home worth €250,000.

With a total income of just €23,5000, this pensioner will gain €259 from the tax and USC changes. The €100 water charge allowance and the €57 Christmas bonus brings their gain to €316 but when the balance of the water charge of €76 and their local property tax of €405 (on a property worth €249,000) will wipe out their gain.

 

PENSIONER COUPLE

This pensioner couple, age 75 and 72 has a combined state and private pension income of €52,000. He is blind. The tax and USC changes results in a gain of €492.  Their combined €200 water charge exemption plus the €114 Christmas bonus brings their gain up to €806, but the balance on their water bill (€78) and local property tax bill of €945 on their €510,000 house will wipe it out.

 

 

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GOOD NEWS FOR DEBTORS…BAD FOR HOME BUYERS

Today is Budget Day and while we may all hope for good news from the Minister for Finance, I for one will be happy with a ‘neutral’ budget – one that doesn’t turn the screws any further on ordinary folk – workers, pensioners and social welfare recipients.  We’ll know tomorrow (and I will have a few comments to make in next week’s column.)

What is certain, is that there was both good and bad news last week from two other state institutions – the Insolvency Service of Ireland (ISI) and the Central Bank.

It has taken them longer than it should have, but the ISI last Tuesday has finally admitted that their own fees have been discouraging people with serious debt issues from coming forward for help. 

So from now until the end of 2015 its €100 fee to apply for a Debt Relief Notice certificate, €250 for a Debt Settlement Arrangement certificate and €500 for a Personal Insolvency Arrangement certificate will be waived.

Meanwhile, in an effort to address another problem – that of Personal Insolvency Practitioners (PIPs) rejecting many seriously indebted clients because they were afraid they would be left empty-handed should their debt settlement proposal to creditors (especially the bank mortgage lender) be rejected – the ISI has agreed to compensate PIPs for such rejections with a payment of up to €750.

The upshot of both of these moves, and the new ISI nationwide information campaign (see www.backontrack.ie) should be to encourage many more people tois come forward if they cannot cope with their debts.

 

CENTRAL BANK INTERVENTION

 

Last Tuesday’s bad news came from the Central Bank: from next January, bank mortgage lending will be restricted to no more than 80% of the purchase price of a domestic property and to 70% for investment properties.

 

Borrowers will not only have to find 20% (or 30%) of the cost of the property but loans can be no more than a multiple of 3.5 times annual earnings. There is some flexibility permitted, but for the most part, buyers who, for example, want to buy at €250,000 house, will need a €50,000 down-payment and an income of at least €57,000. 

 

The purpose of these lending restrictions says the bank is to protect banks and buyers from the risk of over-lending and negative equity if there is another price downturn. It predicts that the tighter lending conditions will dampen down surging property prices in Dublin especially but end any risk of another boom and bust.

 

What the Central Bank has underestimated – and this continually happens when government agencies interfere in the property market – are the unintended consequences.

 

First, some context: high down-payments are commonplace on the Continent and this move originates in the EU, where efforts are underway to standardise all banking activity. The Central Bank appears to be following that dictat.

 

In countries like France, Germany, Italy, there is a highly regulated property sector, especially for rentals and for house building. Property is more reasonably priced than here mainly because supply and demand issues are better monitored and acted upon.

 

Second, while a 20% down-payments is the norm in those countries, it has never been so here. In pre-Tiger days, a 10% down-payment was the norm, along with lending limits of three times the first income and half the second. Mortgage indemnity bonds, which effectively insured mortgages greater than 75% of the purchase price, were also commonplace.

 

An unintended consequence of the 20% down-payment rule will be to force first time buyers with 10% savings to buy in haste – before January 1.

 

It will force others to abandon their plans to buy this year and keep renting. This will push up demand further for rental properties, causing rents to rise.

 

Renters will find it difficult to save the additional 10%, prices may keep rising, albeit more slowly, and some people will undoubtedly try to get around the new rules by surreptitiously borrowing the extra 10% from other banks, credit unions or their families.

 

Buyers with better off families who can lend (or give) them the higher down-payment will enjoy a market advantage over those who don’t.

 

There is also a concern that builders – already short of credit– may not be able to build houses cheaply enough, especially on expensive Dublin land-banks – to meet the tighter credit restrictions that will apply to first time buyers.

The supply problem is also unlikely to be relieved in the capital – if anything, the new rules will give a boost to cash buyers and investors who will relish the higher rental yields.

What a mess.  And a hard one to sort out even for someone buying their first home outside Dublin.

(Correction: in last week’s column, the value of the 21,000 free water allowance for children was written as €10.25. It should have read, €102.5.)

 

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WATER CHARGES ARE HERE – HOW MUCH DO YOU USE?

 

Well, thanks to the final decision of the Commission for Energy Regulation last week, we now know exactly what Irish Water will be charging us for water, at least from October 1, 2014 to until nine months after our homes are metered..

After this flat rate charging period is over, the size of your household bill will depend on how much water your household uses over and above the 30,000 litres worth of free water every household will receive and the 21,000 free litres for every child multiplied by €4.88 per 1000 litres.

Here’s my blow-by-blow account of the start of the Great Irish Water Charge: 

-       Water charges started racking up last Wednesday, October 1, whether your household (whether you are an owner or tenant) is metered on not.

-       A flat rate charge will apply to every household for up to nine months after your meter is installed. If you have an Irish Water meter installed now, you will still receive three, flat-rate, quarterly bills that record your water usage since October 1. The first quarterly bill (Oct-Dec 2014) arrives in January, 2015.

-       Un-metered households will pay the flat rate charge until they are metered, plus another nine months, that is, three metered, billing periods.

 

-       The flat rate period charge is:  €176 for a one-adult household and an additional €102 for every extra adult:  €278 for two adults, €380 for three adults, €482 for four adults, €584 for five adults, etc.

 

-       Children under 18 go free during the flat-rate billing period.

 

-       Every household will get a 30,000 litre allocation of free water a year worth €146.40 based on a price of €4.88 per thousand litres. Each child under 18 will be allocated 21,000 free litres which is worth €10.25.

 

-       Once the entire flat-rate billing period is over – that is, nine months after your household is metered, you will pay €4.88 per every 1,000 litres of water consumed, less the free allocations that apply to your household.

 

-       Households with their own water supply or a septic tank will only pay €2.44 per 1,000 litres used, less the free allocations.  If you provide your own water and wastewater disposal, you are not an Irish Water customer and will have no bill.

 

-       Holiday homes will be billed a flat €125 a year.

 

-       If your household is metered, and during the nine months billing period in which you still pay the flat charge a review of your bills show that you have consumed less water than is represented by the flat rate bill, you will be entitled to a refund of the difference.

 

-       There is no “standing” charge on bills, and unlike your electricity or gas bill, Irish Water bills are not subject to any VAT.

 

-       Households on boil water or water restriction notices will not pay for their water.

 

-       People with medical conditions that result in high water consumption can apply for a subsidy but there is no list of qualifying medical conditions.

 

-       People in receipt of the Household Benefits Package will receive an additional €100 (€25 x 4) payment towards their annual bill.

 

To claim the free water allocations, the householder – the person to whom the bill will be addressed – is required to supply their PPS number and that of any children under age 18. Without the PPS number, the suggestion is that the free water allocation will not be given, even if the rest of the form is filled in accurately, and the bills are paid.

 

What is not entirely clear is how Irish Water have established the flat rate, assessed, pre-meter bill.  In many other European countries the bill includes the price of the actual water (typically under €2 per 1000 litres in the UK), a standing charge and VAT. Here, the price of the water - €4.88 per 1000 litres - is the only base price we will get on our bill.

 

The amount of water the average adult and child use every day is only an estimate based on a small number of metered households and has varied from 150 litres down to 110 litres, the amount now being used.  Child usage has gone down from 104 litres a day (38,000 a year) to 57.5 litres (20,000 a year.)

 

For the assessment, flat rate period my family of three adults will be charged €380 a year. After that, if we only use 110 litres each a day, we will pay €441.40 (that includes the free allocation).  If we use a more likely 140 litres each, the bill will be €601.70.

 

The important thing is to try and accurately monitor your daily use multiply it by 365 days, subtract the annual free allocations and then multiply however many thousand litres used by €4.88.

 

 

 

 

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