Jill Kerby

The Sunday Times MoneyQs – Nov 29 By Jill Kerby

JN writes from Galway:

Over the years I’ve received share options from my employer which I now intend to exercise, I know they are treated as income and liable to tax, my question however concerns in which jurisdiction. I must exercise the options in the US and transfer any proceeds back to Ireland. However, if I do not supply the US institution with a WBEN-8 they will withhold 28% proceeds, far better than the 41% I will have pay in Ireland. Does the dual tax arrangement allow me to pay US tax and then no further Irish tax?

I’m afraid not. According to Sandra Gannon, tax advisor at TAB Taxation Services in Dublin, the correct way for you to realise the gain from your share options is to complete the form to which you refer, the W8 form, which will allow you to be paid your options gross, then to file your return here and pay the income tax. Unfortunately, the return is subject to the income levy but there is no PRSI liability. There should be someone in your company who can help you process the exercise of your share options, or else consult a tax advisor.

JM writes from Co Mayo:

I have lived permanently in Ireland since retiring in 2003 and do not pay Irish tax but instead pay UK tax under the double taxation agreement between Britain and Ireland. Recently the Irish tax authority, whilst agreeing with this, have said nevertheless I am liable to pay a health levy of 2% on my gross annual income for 2007 and 2008 (rising to 4% from 2009 onwards) and, in addition, with effect from 01/01/2009 an income levy of 1.67%, again on my gross income (which is only my pension from my last employer). Liability for payment of the health levy ceases when I reach the age of 70 years. Is this advice correct and, if so, can I obtain a pro rata reduction in the UK tax I pay so I am not paying double for similar services in Ireland and the UK?

The advice you have received is correct, and unfortunately you are not entitled to any reduction in your UK tax as a result of the imposition of the income and health levies. At the moment, you are obliged to pay tax to both the UK and Irish authorities with a tax credit/refund on the "double" tax you pay. Once again this week, tax advisor Sandra Gannon recommends that you should simplify this by applying to the UK tax authorities for the gross payment of your UK pension. You then file your annual Irish tax return, pay the appropriate tax and levies on your income, thus avoiding the complicated business of claiming Irish tax credits and UK refunds on the two sets of tax you are otherwise obliged to pay. Finally, many UK UK pensioners who settled in Ireland in recent years have benefitted from higher value social welfare benefits and services (and even lower tax), but that could now be coming to an end, given the serious financial problems here. We’ll know on December 9th if any of those higher benefits are reduced, or it the levies are increased or new ones introduced.

KM writes from Cork:

I took out a life assurance, sick benefit and pension policy back in the early 1980s when I was working for the public sector part time. When I secured a full time position, I continued to pay into my private pension even though I joined the superannuation scheme. No one ever told me I couldn’t do so. Nor did I realise I could claim tax relief on the contributions. I will be retiring in a few years time and last summer, after a growing concern about how much it was worth, I decided to review my pension plan only to find out that not only had it fallen in value by quite a lot, but that I was not entitled to keep the policy since I was a full-time employee contributing to the superannuation scheme. The life assurance company has offered me only a refund of my contributions with interest, but it falls very short of the contributions I have made which went up steadily every year. I’m not sure if the first few years contributions, which I was allowed to make are included in their sum. There is a lot at stake and I’m wondering if there is some way I can redeem more of my money or even claim tax relief on the first three years of contributions?

I am so very sorry about the situation you have found yourself in, though it is not the first case I, or financial advisors I know have come across. The advice you received when you took out your original policy was not good, in that it was a very expensive all-in-one protection and pension plan with high charges and commissions that would have absorbed at least the first two years of your contributions. The premiums were indexed upwards at 5% each year (as were the benefits on the two protection policies) and this has resulted in a huge monthly contribution of over €800 today. It’s bad enough that the broker did not give you clear instructions on how to claim the tax relief but that when you ended up with a full-time job, that he did not inform you that you could no longer keep the policy if you were part of a superannuation scheme. The pension could have been encashed and cancelled, or at least the pension part of it put into a fully-paid up status for collection at retirement. or put into a fully-paid up status. The reason why your refund and interest is below the amount of contributions is because an increasing portion of your (rising) contributions were diverted every year away from the pension investment into the cost of the whole of life cover and income protection benefits: very simply, the older a person gets, the more it costs to provide cover. Good financial advisors never recommend that you bundle together a pension and whole of life cover (which relies in investment returns) together, or a mortgage and whole of life cover in the form of an endowment mortgage for this very reason. Your case pre-dates the setting up of the Financial Regulator and Financial Ombudsman to whom complaints about private pension plans are directed, and the Pensions Ombudsman who deals with complaints about occupational pension schemes and PRSAs. However the Pensions Ombudsman has kindly offered to review your case. You are not the only public servant who has been funding parallel pensions at a huge expense…and loss.

One of Marianne Finucane’s guests on her radio programme last weekend was a civil servant who made an interesting point about why there is such a sense of grievance on the part of public servants about the 7% gross pension levy that was imposed on them this year:  in his own case, his 13% gross salary contribution into his pension is now “greater than the size of my mortgage”. Others will substitute ‘child care’ for mortgage. 

He made point that private sector workers know all too well - that private pensions are very expensive, not to mention risky, which is why only about 50% actually have one.  

So here’s a suggestion that might help get us over the great pension levy hump:  allow civil and public sector workers an opt-out clause if they feel that the burden of a 13% pension contribution for a guaranteed, 50% final salary defined benefit pension at retirement is too high.  

Those workers who cannot afford a pension and a mortgage or child-care during the high spending years when their families are young, should be allowed to join at a later age when their incomes are not under such pressure. 

I thought Ryanair boss, Michael O’Leary’s recent suggestion that public sector pensions should be immediately converted into defined contribution ones rather than defined benefit (which include hugely valuable service and salary guarantees) was also interesting, but of course this could only happen for future contributions.  

The current total public sector pension liability going stands at €100 billion and all benefits are paid out the current tax take – that is, the Pay As You Go system.   This means that aside from what’s left in the National Pension Reserve Fund - €16 billion?  €18 billion? – there is no other pool of cash under investment to pay this massive commitment. 

I’ve been undergoing a major review of my own pension that is, thankfully, nearly over.  

I know exactly how that civil servant on Marian Finucane’s show feels:  pensions are bloody expensive, especially when you’re funding them entirely on your own, as I have since 1987.  And if you want one that’s going to deliver a comfortable retirement for yourself and your spouse, you have to forego quite a lot of spending – on big mortgages, holiday homes and lovely, new cars and furniture.   

It’s been a sacrifice I’ve been willing to make – I don’t want to be old and poor, not in this country -  but my commitment has certainly been shaken by the hammering my funds have taken this past year.

As the national debt soars just to meet the state payroll and unemployment benefits, everyone who is struggling to meet their day-to-day expenses, whether they work in the public or private sector should have the right to choose whether they can afford to make pension contributions. 

But only if they’re clear – like the rest of us are - about what it means if they opt not to. 

I too oppose cuts to the child benefit payment in next month’s Budget. 

Except, unlike all the women’s and child advocacy groups that have come together to lobby the Minister for Finance, I think the entire €2.5 billion boondoggle should be abolished, to be replaced with a means-tested payment to those parents and children living in poverty, on unemployment benefit and very low incomes to ensure none of these children go hungry, naked, without shelter or an education. 

Where the lobbyists and I digress is that I think this country is bust and they don’t. We are in the early days of an economic depression, and only for the financial IV tube that the European Central Bank has rigged up for us, we’d be queuing behind Iceland and Latvia at the IMF court of bankruptcy.

Some day, hopefully only a decade or two from now, when we have a properly functioning economy of hard working, self-reliant, vibrant, export-earning citizens, the state will be in a position to return to the old, fairer system of allowing parents of children to claim some tax credits for the cost of raising each child, who in turn, someday, will be a net contributor of tax to the state. 

Under my proposal the loss of €535 a month for a family with three children will of course be a hard blow if they don’t have a financial cushion of savings and low debt to fall back upon.  It means no more family holidays, no second car (or maybe any car) or other luxuries. Basic things like children’s clothes will have to be passed between siblings, mended or sourced from other family members, friends, from Penny’s or charity shops. Feeding everyone - conveniently – might be a thing of the past (but no one will starve.) It will be very tough if you’ve been living from paycheque and benefit payment to paycheque and benefit payment every month.  You will have to work harder, smarter.

But if €2 billion can be saved, it will be an extra €2 billion that your children won’t still be paying for…when they have children of their own. 

Last week my colleague Brian Carey in his Agenda column wondered why the state, in the form of the Department of Health “is still involved in [the health insurance] market.” He was referring to our exclusive page one story about how the VHI is seeking, for their own benefit, to have the health insurance levy doubled from €160 to €320 for every adult and from €58 to €116 for every child.  They need this money, they say, to offset their loss-leading older members, a legacy of their decades as the monopoly provider of health insurance. 

The only credible reason I’ve ever heard from a former VHI insider, is that the VHI is, and always has been the private little empire of the civil servants who control it from the Department of Health. 

Of course this incompetent government shouldn’t be in the health insurance business: in the UK and the Netherlands where at least 32 and 14 private medical insurance companies operate, not a single one lets a civil servant near them. 

PART 1: THE NATION STARTS ADDRESSING ITS DEBTS

Lately I’ve been receiving quite a few e-mails, letter and telephone calls from readers who want to discuss their number one problem with me – debt. A young couple have both lost their good paying jobs and now have no way to meet their monthly mortgage payments of €2,800 a month and their other debts. What should they do? A father wonders if his son, who bought a buy-to-let holiday home in Florida in 2007 and who has seen his income fall this year and cannot meet his repayments anymore would be pursued by his US lender “if he just walked away from his loan”. A woman is desperately worried about losing the family home – she has three young children and her husband has gone to England to work. The bank is harassing her, she says: “I can’t pay the ESB bill on time, or the credit union, let alone €900 to them.” Aside from serious mortgage debt, they all had another thing in common: none of them had met face to face with the banks, or had visited MABS, the nation’s Money Advice Budgeting Service.

With the Nama debate now done and dusted, attention is finally turning to the wider debt problems here involving ordinary people whose loss of income, bonuses, commissions and their very jobs also explains why there has been a horrific doubling of jail terms to debtors over the past year. One in five households are now unable to make their full rent or mortgage repayments. This is a massive and growing crisis. At their annual conference last week in Dublin, the Law Reform Commission laid out the problem very succinctly – as a nation we have a household debt to disposable income ratio of 176%, meaning that for every €10,000 earned we are spending 17,600, one of the highest ratios in the world. In 1995 that ratio was just 48%. Even in the United States – where sub-prime foreclosures sparked the collapse of the world’s financial system and mortgage debt is systemic – the ratio of debt to income is ‘only’ 138% and only rose by 48% between ’95 and 2008, compared to 276% here.

There is a growing list of suggestions about how to mitigate our private sector debt crisis – as opposed to how to actually solve it once and for all. My preference is already on record, here and in other columns: it gets paid off, or written off and you live with the consequences, however brutal. At least you know that you can move on and start again. (This is not the popular or political view.) At last week’s Conference, the question of insolvency and bankruptcy reform was finally raised, however, and it would appear that government will at least be urged to set up a workable and affordable bankruptcy system here so that businesses and individuals who are now insolvent can set in motion a bankruptcy process. (The Individual Voluntary Agreements in the UK may be the form that this ends up taking, though it does not always include mortgage debt.) Not everyone with a massive mortgage bill, negative equity and credit card debts is insolvent, not if they can show that they might have the ability to keep repaying their bills (even after a short period of unemployment.)

The government and banks already know that because of the size of the debt problem here, far more lenient debt recovery schedules will have to be worked out for the majority of debtors. There are also suggestions that a Nama-style agency be set up that will see the state or the banks do an equity-for-debt swop with householders in serious negative equity. Their ‘equity’ can then be recovered, they say, when property prices recover. Other ideas include the banks being forced to take equity in the property with a rental/purchase repayment in place of the mortgage or that they even write off some of the outstanding capital. Needless to say, the cost of any of these suggestions will be in the billions and only add to the national debt. Unfortunately, none of the above is suitable for people who were grossly over-borrowed from the start and now, as result of unemployment, have no immediate, or perhaps even medium term prospect of producing an income stream to pay even a fraction of their bills. For them, the most realistic option is an insolvency/bankruptcy arrangement.

Until any of these ideas become legislation, there are a few ways to keep the creditor from the door and perhaps to even keep your home. Next week, the column will be devoted to debt rescheduling: how the bank moratorium works; the plus and minuses of seeking help from MABS and/or a private debt “councillor”; how families can help each other and ways to make your house help pay for itself and the consequences of personal insolvency and bankruptcy. These are worrying times, but the debt holes that so many have fallen into are not insurmountable. We all need to step back and, with some help, take a more objective view. Sharing the problem – especially with creditors – is also a way of lightening your personal load.

MoneyTimes is sponsored by Postbank

BK writes from Co Kerry:

I am 51 and have worked in the HSE for the past 15 years and pay into the HSE pension fund. Prior to this I worked for eight years in the private sector where my pension contributions were invested and left in the Irish Life’s Consensus Fund. As well as my HSE contributions, for the past five years I have also been investing in an AVC with Irish Life. Is it possible to transfer both these Irish Life pension funds into my HSE pension now and use them to buy back years of service? I am aware that buying back service is very expensive. Irish Life said it was not possible, but I read somewhere that since the Pension Act it was possible.

According to the Pensions Board it is possible to secure transfer values of your occupational pension fund from your previous, private sector employer and your existing AVC and to then use this value towards the purchase of years of service in your HSE pension. But you must check first with the HSE pension administrator about the rules that pertain to purchasing years of service. This can be a very complicated area, but one that pension consultants, in my experience, is worth considering when compared to the cost of funding AVCs. If the transfer value you are quoted appears much lower than you were expecting, it could be because the one you are working off is not very current, or it could be due to the way the value has been calculated by the scheme actuary. You might also want to consult an independent pension advisor if you have any doubts. If you haven’t already done so, I suggest you open a file, and keep all correspondence and documents in good order so that all parties are fully up-to-date with exactly what terms and conditions apply to both your pension funds and the purchase of the extra service years.

FG writes from Dublin:

I was very surprised to read your recent reply in regarding a medical card for a UK pensioner. My understanding is that receipt of a UK state pension automatically entitles a pensioner living in the Irish state to an Irish medical card regardless of his/her total income as long as it includes no Irish pension and the pensioner is not working in the Irish state. This is due to EU regulations that prevent an individual person in one EU state being worse off when moving to another EU state.  Please research the issue fully and confirm the above.

I have confirmed with the HSE that all medical cards issued by them are means-tested, regardless of the origin of the applicant. However, if you are declined a card, said the spokesman, you may still be granted a card at the discretion of the HSE, depending on your particular circumstances. Since the beginning of this year there has been a big change in the system of allocating medical cards but another reader who also contacted me thinking that means testing did not apply in his case supplied me with a very out-of-date document he received from his Citizen’s Information Centre dated September 2000. If you have any further doubts about your own case, contact the HSE at Callsave 1850 24 1850
or directly at your local health office.

YM writes from Dublin:

I am unemployed living on savings, would I have a tax free allowance that I could claim against DIRT payments as that is my only income?

The only people who are not subject to deposit income retention tax are those who are permanently incapacitated and the over 65s whose income falls below the tax exempt income threshold, which is currently €20,000 for a single person and €40,000. Despite your low income you will still be subject to DIRT and while this is no consolation, even children – who are too young to work – will find that any growth in their savings is subject to the 25% tax.

MNM writes from Dublin:

I'd be most grateful if you could answer the following question, based on the following information: two people own three properties in joint names. Property one is the principal residence of person A. Property two is the principal residence of person B. Property three is used as a holiday home by both people, and NPPR tax has been paid on that holiday property. Is there a liability for NPPR tax on property one or two, with regard to the person not using it as a principal residence?

The Non Principal Private Residence charge of €200 applies to property that you own that is not your “sole or main” residence. You and your friend, person B, each partly own three properties – but the two that are each considered your ‘sole’ residences are exempt and you are only obliged to pay the €200 on the holiday property that you jointly own. It’s a good thing that you paid your tax on the holiday property; the Act provides that if a charge is not paid within a month after the last date for payment, a late payment fee will apply for every month or part of month that the €200 charge remains unpaid. For 2009, this means that the late payment fee will apply to all payments made after 31 October 2009.

The Environment minister Eamon Ryan says the state has six months to come up with a credible scheme to prevent a bigger wave of house repossessions. 

Organisations that work with debtors, like MABS and FLAC, the free legal aid centre, would say that deadline is far too generous.  

Right now, the first of the 160,000 people who lost their jobs between October and May (about 20,000 a month) are already shifting onto means-tested jobseeker’s allowance. 

The €820 a month they’ve been receiving on job-seekers benefit could melt away once a spouse or partner’s income, and any other financial resources are taken into account, pushing many into arrears for the first time.   And who knows – aside from the Minister for Finance - for how much longer the state will continue to pay mortgage interest supplement at that bill creeps up towards €60 million? 

Eamon Ryan has suggested that the cabinet is already considering a scheme that will force the banks to take an equity stake – some suggest as much as 50% worth – in the property of some indebted homeowners which could then be described as an ‘asset’ to be recouped when property prices recover to 2007 levels.   

The genius who came up with this solution must be the same one who has projected that Nama will make a profit for the state within the next 10 years. 

Which is why we should be hoping that before any more cocktail-napkin-back-of-the-envelope policies are rushed through, the cabinet takes the proper time to study the Law Reform Commission’s wider recommendations on the reform of the treatment here of personal debt.  

At their annual conference last week the big debt picture was presented – and it isn’t pretty.  It is estimated that there is €395 billion in all private sector personal debt, about €110 billion worth being mortgage debt (according to recent Central Bank statistics) and another, €2 billion in credit card debt.  All other personal, commercial and business debt makes up the balance. 

Meanwhile, our average household debt to income ratio is now a massive 176%, says the Commission, a 276% rise between 1995 and 2008.   In other words, for every €10,000 being earned, €17,600 goes out.  In their own September financial capability study, the Financial Regulator found that 9% of those surveyed are in serious debt arrears – the kind that can result in losing your home - and another 8% had missed some payments. 

This problem isn’t just about the terrible negative equity problem of a generation of first time buyers, or the mounting arrears of unemployed homeowners.  It’s much, much bigger than that. This is the kind of debt that sometimes only a proper bankruptcy system can deal with, something the President of the Law Commission Mrs Justice  Catherine McGuinness said we desperately need in this country. 

I’m really sorry to keep harping on about how bankruptcy needs to be one of the options that the government should be considering, but someone has to.

Pension consultants I know seem resigned to the idea that pension contribution tax relief will be reduced in the December budget, perhaps to a flat 30%-35%, down from the 47% worth of tax and PRSI relief that applies now. 

There’s no question that higher taxpayers have enjoyed the bulk of the €2 billion plus in pension tax relief awarded every year; certainly there was no advantage to saving for a pension if you were out of the tax net or paying only a small amount of tax at 20% or 26% including PRSI. 

That will certainly change if the tax bands are widened, and draws back in many of the nearly 50% of earners paying little or no income tax right now.  That is, of course, if they can still afford to make contributions after the Budget dust settles. 

The same might apply to higher rate taxpayers.  Already, 19% of pension contributors have cut back on their pension payments according to a Friends First survey, and modest earners in the €36,000 to €50,000 pay bracket, who  are paying between 53% and 56% in tax, levies and PRSI on the top slice of their earnings and these people will most certainly think twice about tying up earnings for up to 40 years for a 30% tax break, if the retirement income they receive ends up subject to up to a much higher top rate tax. 

If a single tax relief rate is introduced, it should come with at least two new incentives – the right to access to the cash in your pension fund, and abolishment of mandatory purchase of an annuity for members of occupational pension schemes. 

The only thing worse than reduced tax relief for such people, is then to be stuck with a fixed pension for life that reflects lousy annuity rates and that then reverts back to the annuity/insurance company when you die, to the disadvantage of your beneficiaries. 

I’m a big fan of Sarah Beeny, the Channel 4 presenter of Property Snakes and Ladders and before that, Property Ladder.  Unlike so many of the fawning presenters of the ubiquitous property shows during the boom, she continually warned the stream of amateur developers that they were inevitably underestimating the cost of and amount of work involved in turning their old property wrecks into show-houses. 

She inevitably pointed out to the participants who did make huge capital gains that they benefitted far more from the bubble market than from their genius as developers or decorators, and she endlessly warned them about over-extending their borrowings, especially if they were going to pursue ‘careers’ as developers. 

Now that the bubble has burst, few of the latest participants on the renamed Snakes and Ladders have been able to sell their glammed up properties; most are renting (at a loss) or living themselves in their developments in the forlorn hope the market will recover so they can at least break even some day.  

Beeny has now spotted a niche in this depressed market and has filled it with a website for UK sellers called Tepilo.com .  

Anyone here in Ireland who finds themselves unable to even rent their empty buy-to-let should check it out for Beeny’s practical and realistic selling and pricing tips.  Especially now that Daft.ie has reported that there are over 20,000 rental properties on their site, and average rents, at €770 per month have returned to 2000 prices. 

SAVINGS KEEP SOARING IN UNCERTAIN TIMES 

We’ve gone from being a nation of super-spenders, to being on of super-savers, and all in the course of a single year. The economy may be in freefall, with record unemployment and a collapse in the tax base, but over 80% of Irish adults are now regularly saving on a regular or lump sum basis, according to the latest Postbank Quarterly Savings Index survey.  

The average monthly amount we are putting away has fallen from €344 to €304 in the past year, a reduction of 12% but the numbers of savers has risen by 7% since this time last year, says Postbank’s Head of Marketing John Donegan.  Based on national averages, the savings rate has increased to 11% and this is expected to rise to c13% in 2010, according to the ESRI, the highest rates since 1978. 

“We are seeing an increasing number of people saving smaller amounts. We are also seeing that the gap between men and women saving has been reduced dramatically, with men likely to save larger amounts. The switch from spending to saving more is a product of the economic circumstances, as we build up a buffer during times of uncertainty.”

As if anticipating the impact that the December budget will have on the nation’s capacity to spend and save, Postbank say the figures also show that for the first time since the Index began in 2008, “over half of savers believe that they will have to dip into their savings in the coming months. Looking ahead to the next three months, more and more of us will be relying on savings to help with current expenditures.”  

The gap between the higher numbers of women than men has also dramatically narrowed, say Donegan and more women now say they are likely to dip into their savings over the coming months, 9% rise this quarter to 56%.  Other commentators have suggested that this may be partly due to the fact that male unemployment has been particularly high over the past year, especially in the construction and manufacturing sectors and more women are now reporting that they are the main breadwinner in the home.

The most common reason – still – for saving, say respondents, is the need for a financial safety net or emergency fund, and 47% of people say that security is the key factor in choosing where they save…only half that number said the interest rate they received or easy access to funds was more important; a quarter of those surveyed said they still “have no confidence in the security of their savings” a reflection of the deep concern about the viability of the Irish banking system. 

Finally, one result of this survey that will be deeply worrying to the nation’s retailers is the number of people who told Postbank that they will be drastically cutting their Christmas spending. 

More than half of the respondents said that they would be spending under €500 this season. Only a relatively small group, 13%, were planning on spending more than €1000. Other consumer surveys in 2007 and 2008 estimated that the average Christmas spending was over €1,300. 

This sharp reduction in the amount people expect to spend on their Christmas celebration reflects how much we are paying down our debts. The September credit and debt figures from the Cental Bank showed that private sector credit declined by €4.4 billion overall. And while credit card spending went up fractionally in September (the ‘back to school’ effect), overall credit card spending is down 14.8% on September 2008.

This debt repayment phenomena isn’t just happening here:  in the United States, for example, where unemployment is now officially 10.2% (and closer to 18% if Department of Labour criteria used before 2001 was still in force), Americans wrote down a whopping $14.8 billion of personal debt in September and about $156 billion so far this year – all money that is not finding it’s way into the consumer economy.  

For Irish savers, the creation of Nama is supposed to mean that the Irish banks will have money again to lend to business and personal borrowers. Bank commentators however believe that this might also mean that as demand picks up, it will mean higher commercial and personal loan rates. This could spell the end of very low variable rate mortgage deals and 3% plus premium interest rates.  Anyone who is currently on a variable rate mortgage under 3%-3.5% might want to consider a similar fixed rate from the likes of AIB and Bank of Ireland for at least the next two years, bearing in mind, of course, that you might be penalized if you break this contract over that period.

Savers, meanwhile, who have more money on deposit that they need for income purposes or for another use in the immediate future, might want to lock in now at the higher fixed rates.  You won’t suffer any capital penalty if you change your mind and want to close the account earlier.  

Because the government’s 100% deposit guarantee in the Irish institutions ends next September 2010 you might also want to choose an institution that you have confidence in by then, even without the blanket guarantee. 

DC writes from Dublin:

My wife and I are looking at getting a mortgage for a house we have finally found. We are first time buyers with the deposit accumulated. We both bank with AIB who have are offered a fixed and variable mortgage. The fixed rate is 2.8% for two years and the variable is now 2.4%. I know Europe is now out of recession and the ECB will be increasing rates over the next year. Would the rate of the variable increase rapidly over the next year or would it be a slow process? AIB would like us to take a fixed rate mortgage. We would like to know what your thoughts are on the benefits of both types of mortgage.

That two year fixed rate is very low indeed. And while economic recovery is going to be tenuous and not at all consistent, either in its strength or in the number of countries involved, there is plenty of consensus that the ECB rate isn't going to go any lower than 1%.You need to keep in mind too that the Irish lenders are not constrained by the ECB rate when it comes to setting their own mortgage lending rates. The only thing that is stopping the likes of AIB and Bank of Ireland, for example,from raising their mortgage rates is the Government's share of their businesses: in return for the billions in bailout money the two received, they gave a mortgage lending commitment, and for the moment, that seems to include no increase in the interest rate.  If you do accept this 2.8% fixed rate, you must also accept that the variable rate could be higher in two years time. Stress-test your ability to pay over the longer term by raising the 2.8% interest to at least 4.8%.  Could you still afford to pay your mortgage?  Even if you can, will you still be happy to pay a higher rate if the value of your property was to fall into negative equity? You don’t say how much your down payment will be, but if it is just 8% to 10% of the purchase price, negative equity is a real possibility.  I wish you good luck in your new home, but the most important thing is to accept that this is your home, not an “investment” or a future pension.  If you have serious doubts about your ability to comfortably repay this debt every month, keep renting.

WO’S writes from South Dublin:

I worked in an academic institution for 33 years.  During this period I also purchased seven years pension contributions before retiring in 2004. Prior to joining the institution I worked in industry for 13 years in the UK thus entitling me to a UK  social welfare pension. I’ve been granted a credit of one year by the D I T  due to the system which it applies because of  how I achieved my qualification prior to joining it . However , I’ve been notified that because of my UK  Social Welfare Pension I  will forfeit this extra year of entitlement. The information was not available to me prior to retiring. I would be most grateful on any clarification of  the validity of the reduction of one year of pension. 

This is an unusual case and not one that I have ever come across.  I have heard about circumstances in which the integration of an occupational and state pension has resulted in disputes over the size of the final pension, but in each case these have been Irish pensions in both instances (and not a UK or EU state pension benefit.)  I contacted the Pensions Board on your behalf and was told that based on the details you supplied me, it would appear that they are the agency to investigate your complaint. “If this doesn’t turn out to be so we will ensure that he is directed to thecorrect one,” - perhaps the Pensions Ombudsman. You should send a letter expaining as clearly as possible the time-line of events and include any documentation you may have to support your complaint.  I’ve passed onto you the name of the Pensions Board official who will receive your correspondance. 

HB writes from Dublin:

I’m writing with a question concerning the management fees on managed funds.  I have three modest funds and a very small personal pension plan.  The funds have taken a big hit this year and recently I calculated the actual amount of the management charges and was quite shocked.  I’m aware that there has to be some charge as I expect that professionals will do a better job than I could do myself.   I’m currently unemployed and living on unemployment benefit so to see an annual amount of €2,500 leaving my funds – regardless of performance - is very worrying.  If the funds were to remain at their current value, fees of 1.5% or 1.75% would eat up a large chunk of money over 10 – 20 years.  I’m happy enough with my financial advisor, as far as I can tell they are doing whatever they can in difficult times.  My portfolio was changed in 2006 therefore there would still be early encashment charges if I switched to a different scheme now. I’m wonder if you would have any suggestion how I might reduce these fees?

Most pension funds allow for a couple of free switches between funds every year and this might be a way to reduce annual costs:  cash and other fixed interest funds usually carry lower annual management fees, but you want to make sure that this is a suitable asset for your needs.  (It may not be possible to switch out of a property fund as easily.) Before you do anything, speak to your advisor – or better still, to a new, fee-based one if yours is not - to review your existing asset mix and your schedule of charges.  Hopefully this person can make some suggestions to improve both. It seems scandalous to me that fund managers and their sales agents don’t take some of the pain, in the form of lower annual management fees or commission rebates, when they consistently lose their client’s money through poor asset allocation and advice, as has happened with typical Irish managed pension funds for the past decade.  It’s certainly a subject to which the new Financial Regulator should give some attention when he takes office next January. 

Progressive taxation - Move to Belize

The fact that 10 lenders have now agreed to a six month moratorium on pursuing mortgage arrears through the courts will undoubtedly be welcome news for those thousands of people who are receiving threatening letters from their lenders over their inability to meet their monthly mortgage repayments. 

The new arrangement doesn’t include the sub-prime lenders who not members of the Irish Bankers Federation and who have pursued a disproportionate number of repossession orders in the courts, but I’m not sure that’s such a bad thing. 

Subprime mortgage holders who are in arrears need to face reality: a large number of these higher cost loans, taken out on overpriced properties during the property bubble, were always unlikely to be repaid if their financial circumstances deteriorated or interest rates went up. 

Losing their house or apartment could be a blessing in disguise, especially if an agreement can be reached that involves a realistic repayment of any shortfall between the outstanding capital/arrears and any sale price the lender achieves.  One such distressed owner said on radio last week “that anything would be better than what we’re going through right now”, referring to the drawn out, legal process in which he and his partner were now trapped. 

The problem is so much bigger than the few numbers actually being taken to court suggest. 

Last summer, the Daft.ie economist Ronan Lyons calculated that 720,000 of the 1.7 million properties that make up the national housing stock would not achieve their last sale price. He predicted that 340,000 homeowners, a large number of them first time buyers, would be in negative equity by next year and because of high unemployment, 60,000 would be in arrears and therefore much closer to defaulting on their loans. 

This latest IBF lifeline is not going to be enough.  It will allow a growing number of desperate mortgage holders to tread water, but what the weakest of them need, is a genuine rescue boat.  

Fine Gael’s idea of a Nama-style equity-for-debt bailout may very well end up being adopted, but it doesn’t strike me as very realistic, no matter how “fair” it sounds now that the reckless builders and bankers have been saved from bankruptcy.  

By my own reckoning, the cost of a 20% equity-for-debt swop for 100,000 first time buyers with average mortgages of €250,000, who are now in serious negative equity of 35% - the amount so many estate agents and economists agree that property has fallen by since 2007 - would be at least €5 billion, plus debt servicing and administration charges. 

And that’s just the problem of some first-time buyers. What about the existing home-owners in danger of losing their homes through unemployment who borrowed heavily against their existing homes to buy second or buy-to-let properties, to invest in their businesses or even expensive lifestyles?

Should the taxpayer pick up the cost of their bad judgment, however encouraged they were to borrow by the reckless bankers?  What would the effect of this be on mortgage holders who were paying their loans, but were disgruntled by the more favourable treatment being given to their feckless neighbours? 

The Americans have set up all sorts of mortgage assistance schemes, even though home loans there are already ‘non-recourse’, meaning that the owners can walk away from an capital shortfall if they property is sold at a loss. 

Reports suggest that they are not all working to plan: owners who were eager to keep their home at any cost, and sign up for a part rent/part capital refinance deal often regret their decision if the property price keeps falling, or they see other nicer houses are now cheaper than their own. In those circumstances, they stop making repairs or renovations and there are many cases where they still end up walking away, crystallising an even greater loss. 

Since the banks don’t have the capacity to write off the scale of our bad mortgage debts – and the state ruled out bankruptcy, the natural solution a year ago when it started down the Nama road, what can be done?

All suggestions welcome.  They’ve got to be better than what our so-called leaders and captain’s of industry have come up with so far.

Private Health Insurance - Review your Policy

Private health insurance holder would be wise to review their policies soon: on January 1st two of the three providers, the VHI and Quinn Healthcare, are expected to raise their premiums by 15%-20%. Hibernian raised their premiums by 12% last month.

Dermot Goode, a fee-based advisor who specialises in private health insurance (www.healthinsurancesavings.ie) told me last week that more and more of his clients are finding it tough to justify the high cost of their existing plans, despite their concern about not having private cover.  

“If they do switch and are VHI or Quinn Healthcare members, they should do so now and lock into current, lower premiums for the next 12 months.” 

Goode says he’s worried about how the December budget is going to treat private health insurance premiums which still carry standard rate tax relief of 20%.  If the Minister reduces or abolishes the tax relief, or increases the €160 per adult and €53 per child levy introduced a year ago, he foresees even greater numbers of cancellations – some suggest as many as €10,000 a month are dropping their membership - and a big headache for the public health service. 

‘ENERGISE’ YOUR MONEY AND INVESTMENTS 

If you saw the final episode of economist David McWilliams’ most recent television series, Addicted to Money, you know that while he was making the series he experienced a Damascene moment:  he realised that not only was the late, great, global economic boom the consequence of the availability of a century and a half of cheap energy – oil – but that everyone’s assumptions about the future are predicated on how soon we can replace this increasingly costly resource. 

Peak oil, as McWilliams and many others have explained, isn’t just about the fact that the most easily accessible stocks of ‘sweet light crude’ have been seriously depleted, but that the heavier, darker, dirtier sources the ones we must now pay so much more to harvest from the earth’s crust (in the case of the vast oil sands of western Canada, where there is more oil than in Saudi Arabia) or its deepest fissures. 

For example, there is ample scientific evidence to suggest that great reservoirs of oil are still trapped miles under the oceans like Brazil’s vast offshore Tupi field it discovered in 2007. The problem is that the five to eight billion barrels of oil are under 7,060 feet of water, another 10,000 feet of sand and rocks and a further 6,600 feet of salt or nearly four and a half miles below the surface of the Atlantic Ocean.

Geologists know there is enough crude oil under the Arctic waters and probably on the Antarctic continent to meet the planet’s nearly endless energy expectations, but that it is, for now, the technology is simply not available to pump it out.

So what’s the alternative?  David McWilliams interviewed scientific and economic experts who mainly warned that time is running out if we want to both maintain our comfortable lifestyles and national economic growth and cope with the ecological damage already done to the planet from the burning of fossil fuel.  

We need to make radical changes right now they say about our level of consumption of fossil fuel, or else the ability to keep heating our homes and factories, to put food on our tables, to keep transport moving and goods shipped, will not only be unaffordable, but unattainable.

In his latest book, financial advisor, activist, author and broadcaster Eddie Hobbs has also been converted to the peak oil argument and ‘Energise’ is his take on how Peak Oil has happened, and its consequences. 

He warns that as a nation, and as individuals, we must act before oil prices reach $200 a barrel by addressing our own consumption.  That price tag is inevitable, he writes, as the massive inflating of the money supply by governments and central banks to bail out the world banking system spills over into wider asset markets – especially the oil markets.  

He argues that we must not only address the depletion of this precious resource, but also that we might be able to profit from it, by including energy and related sector shares in our pension and investment portfolios.

“The destruction of tax revenues, which is crippling the public finances, is not the greatest challenge to Ireland’s economic wellbeing since independence,” Hobbs writes in his Introduction.  

“Energy dependence on imported fossil fuels is by far the most serious issue Ireland faces. Even if we hit the long-term target of 40% green energy, we will still depend 60% on imports. Sitting on the western edge of the European energy grid, and with practically no energy sources of her own, Ireland is one of the most exposed economies in the world to turbulence in oil and gas pricing.”

This highly readable book – he describes it as a conversation with his readers - is a culmination of his personal research over the past few years into both the huge problems and the huge investment opportunities that the Peak Oil era provides.  

Hobbs identifies and analyses the pros and cons of dozens of global companies, funds, indices and ETFs (and even a few Irish ones like….) that focus on nuclear, hydro, natural gas and coal, electricity, wind and wave power providers as well as other sectors like transport, refinery, mining and commodities that are essential components of energy producing industries or those that are intricately linked to them, like the car industry.

“You can act now,” writes Hobbs. You can divest yourself of assets that will be hit hard by prolonged energy-led inflation and switch to assets that are positioned to create wealth during what will be the longest and largest commodity bull market in modern history.”

‘Energise’ is available from all good bookshops and all profits go to the Jack & Jill Children’s Foundation.  It is one of the best and jargon-free reports about this subject for ordinary people who are not sophisticated investors. If you are interested in investing, you must do your own research or take independent, fee-based professional advice first about the shares or funds he highlights.  This is not a static market.

YM writes from Dublin:

I am an unemployed lady in my fifties and am living on savings.  I have not been in PAYE employment for about seven years.  I believe I have paid enough contributions over the years for a 75% contributory pension, someone has told me I could sign on for more credits towards a pension. (If there is any money left in the country to pay anyone a pension!) Is this correct and how would I go about it?

You should contact the pension section of the Department of Social and Family Affairs at Social Welfare Services, College Road, Sligo, Tel: (071) 915 7100 or Locall: 1890 500 000 or by e-mail at http://www.welfare.ie/ to establish exactly how many PRSI contributions you have made and the size of your state pension at age 66. They can then advise whether you should make some voluntary contributions or not towards securing a maximum state benefit. Since you will reach your pension age after April 6 2012, you will need to 520 paid contributions (10 years paid contributions) and not more than 260 of the 520 contributions may be voluntary contributions. 

KK writes from Carlow:

I will be 65 and retiring in September 2010 and I have a pension with New Ireland worth approximately €8,000 invested in a safe fund. Would you please advise me if it would be worth my while investing the maximum amount in AVC's for 2009-2010 and if so what percentage of my pension and AVC's can I take as a lump sum on my retirement. I earn approximately €40,000 per annum.  

I’m not entirely clear if the €8,000 you quote is the investment value of your pension fund with New Ireland or the size of the actual pension you expect. Either way, your pension fund/income is quite small. Had you qualified for a full, 40 year service pension at retirement, with sufficient funding by both you and your employer and satisfactory investment returns if yours is a defined contribution scheme, you could have ended up with a pension €26,666 per annum or two thirds your final €40,000 salary. As it is, says Dublin investment advisor Liam Ferguson of Ferguson and Associates, you personally can still make AVC contributions in 2009 and 2010 worth 40% of your total net realisable income which would boost the value of your tax free lump sum, which can amount to no more than one and a half times the value of your final income, or your final pension income.  This percentage contribution must include any normal contributions you already make into your pension fund.  Your employer could, if he wanted, fully fund your pension, but this is an option usually only reserved for very senior employees or executives who have a funding shortfall.  If you are a married person and sole earner, you are unlikely to pay any tax on the higher income that is produced by topping up your AVC, says Ferguson, as your total income, “even including a state pension, is unlikely to exceed the tax free, €40,000 per annum income threshold for married couples. The Commission on Taxation has recommended that a higher than standard rate tax relief replace the current tax relief rates for pension contributions and if this is introduced in the Budget, it will give your final pension value another boost, says Ferguson. Just make sure your fund is protected against any investment risk between now and then.  

MP writes from Kildare:

My husband, who is 80, spent all of his working life in England and has a UK company and state pension, but not an Irish state pension.  He has lived in Ireland since 1987 and received an Irish medical card at age 65 and earlier this year was informed by the Department of Social Welfare that he was entitled to hold his medical card. Am I correct in believing that my husband's UK state pension gives him automatic entitlement to an Irish medical card under EU rules?  At age 60 I became eligible for a small UK state pension on the strength of my husband's contributions (I am now 68).  I am not in receipt of an Irish social welfare pension.  When I retired from teaching in January 2004 I was advised I was eligible for an Irish medical card under EU rules. I applied for and received a medical card in February 2004. I have had two review dates since then. My next review date will be in February 2010.  Again, am I correct in believing that my UK state pension gives me automatic entitlement to an Irish medical card?

First, it is the Department of Health and the HSE that determines who is eligible for a means tested medical card, not the Department of Family and Social Affairs. The fact that you have UK state pensions is not relevant. Irish medical cards are available to the holders of UK pensions, but they are means tested. Your husband clearly has passed his means test. If you are concerned about whether your qualification for a card is still valid, I suggest you contact your local health board or get onto the HSE in Co Kildare at the following number: 045 876001.

HFQ writes from Dublin:

We hold a "qualifying account" with I. Nationwide. Can any benefit accrue from a possible demutualisation in the future?

I doubt it.  My husband once had a similar qualifying account, which he opened a number of years ago in the hope of a carpet-bagger’s windfall, but the chances of Irish Nationwide ever being demutualised are, I suggest, slim to zero.  This bankrupt institution is either going to be subsumed into some other creation of the Department of Finance as a ‘third force’ in banking here, or it will remain on life-support from the taxpayer as a zombie bank or be simply wound up.  Your ‘qualifying’ account is now redundant, and you might want to fashion an exit plan for your cash from it, at some point.