R€solutions 2014  Part 1: Common Financial Mistakes …that Warren Buffett Never Makes

 

“I think it fair to say that most of my clients would be much richer today, not because of the clever, financial decisions they made, but because they kept making so many smaller, foolish ones.” 

A well known financial adviser – and rich man himself – shared this simple statement with me nearly 20 years ago. He wasn’t just referring to his high net worth clients who may have made a few extra millions if they had been more diligent about their stock market portfolios, but about the ordinary one who just kept losing more money than they made through a combination of ignorance and greed, impatience inertia.

What better time than the start of a new year to test the great American investment manager Warren Buffett’s number one investment rule – “Don’t lose money’.  Next week, in Part 2, we can then look at ways to make some money in 2014:

-       Failing to have a personal budget: How can you know how much money you have to spend if you don’t know exactly how much you (and your partner/kids) earn, the state of your debt, how much tax you pay and other outgoings.  A proper budget means you can take action to tackle your debt, prioritise your spending and make long-term financial plans.

 

-       Never having any financial goals:  The most successful people set themselves goals not dreams.  The young person who sets out in their working life saying “I never want to be in debt … I’m going to be financially independent someday,” is a lot more likely to have a saving and investment regime in place than the one who says “I haven’t a clue about money, I’m too young to bother about a pension…I wonder how much the bank will lend me?”

 

-       Ignoring the impact of tax:  You do this at your peril. Business owners are favoured by tax law, PAYE workers are seen as nothing more than tax serfs. Yet everyone can, with good tax advice, avoid unnecessary tax. The Irish income marginal tax rate is 52% on ever penny over €32,800 but when VAT, DIRT, capital taxes, excise, levies are taken into account, the state takes the bulk of your earnings and a chunk of your wealth.

 

-       Failing to understand investment risk: This is a mostly a consequence of lack of knowledge, stupidity and greed. There is no such thing as a risk-less investment or “sure thing”. Leaving all your money in a “safe” deposit box ignores the risk of taxation, inflation and confiscation (especially in Europe which is riddled with insolvent banks.) Stocks and shares are both subject to the natural volatility of the market place and the manipulation of markets and money by central bankers.  Age is a factor: the younger you are, the more risk you can time is on your side to help make up any early losses.

 

-       Handing your money to strangers to manage:  A guaranteed way to lose money is to give it to a stranger who says he can manage it better than you can yourself. Finding suitable places for surplus income/savings is not rocket science but it require some research, patience, and diligence.

 

-       Always buying high and selling low: It’s human nature to want to buy the ‘good news’, especially if it’s a financial asset, but you want to be ahead of the crowd in identifying a bargain property, stock or share, commodity. Buying great shares in great companies when the crowd has lot interest (and its money) like after a stock market crash) is also counter-intuitive but highly profitable.

 

-       Never insuring against catastrophic risk: Losing a mobile phone is not a catastrophe. Losing your life is, especially if you have dependents and insufficient life insurance. Too many of us spend more money than is justified insuring small ticket items (even cars) and not enough against untimely deaths or serious illness/disability that can have devastating financial effects.

 

-       Always making assumptions:  “I assumed my interest rate had changed…”; “I assumed my mortgage/pension/health tax deductions were done at the office…”;  “I assumed my no-claims bonus was protected…”; “I assumed that ‘whole of life’ insurance lasted forever…”; “I assumed the bank manager/insurance agent/snake oil salesman knew what they were talking about…”; “I assumed there would always be state healthcare/education/old age pension…”

 

-       Ignoring time…and its effect on money:  The best advice a young person will every ignore is: ‘save your pennies’, ideally in conjunction with a good, default managed fund or pension scheme that they can assign 10%-15% of their pre-tax earnings.  The effect of time on human beings is relentless, but its effect on money is utterly magical.  Compound interest works both ways:  it can quickly bankrupt the holder of an unsustainable debt; but it can also slowly turn a young, steady but modest investor into a millionaire in their lifetime.

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Royal Navy Pension is torpedoed by Irish tax

 

 

MB writes from Dublin: I am in receipt of a small Ministry of Defence pension from the UK as I served in the Royal Navy. My understanding is that I don’t have to pay tax on it here in Ireland where I am resident. I am at present fully employed but retiring in 2014. Is this correct or am I just living in hope?

As a general rule, all income is subject to Irish income tax if you are tax resident here, including your Royal Navy pension that you should be declaring in an annual income tax return. However, if this pension is already taxed at source by the UK authorities, in order to avoid you paying tax twice on the same income, you can claim a tax credit here if the combined tax exceeds your Irish tax liability of either 20% or 41%. The Revenue ROS.ie on-line pay and file tax deadline is November 15.

Meanwhile, you can always request from the UK authorities that your MOD pension is paid gross, not net of tax (if this is the case) so that you only pay income tax once here in Ireland. 

It may be helpful for you to know that from 2014 as a pensioner aged 66 or over, you will also be entitled to earn €18,000 or €36,000 (as part of a married couple) entirely income-tax free, in addition to unlimited income and Dirt-free returns from state savings.

Also as a pensioner you will no longer be liable to the 4% PRSI charge on any income, not even on unlimited amounts of unearned income. (Unfortunately, from next year, non-pensioners will be liable to 4% PRSI on unearned income like rent, deposit interest or dividends that exceeds €3,174 per annum.)

However, until you turn 70, you will be liable for the universal social charge (USC) at a 4% rate if your total individual income (excluding yields from tax-free state savings) is between €10,036 and €16,016, or 7% if it exceeds €16,016. Over age 70, USC reduces to 4% on qualifying individual income up to €60,000.

 

 

TMcG writes from Blackrock:  I heard recently that the €3,000 CAT-free limit for gifts from a parent to a child could be increased to €6,000 if the gift were to be made by the two parents, i.e. €3,000 from each.  Inquiries made by colleagues has provided conflicting answers.  Perhaps this is something you could clarify?

You don’t say who provided the information your colleagues passed onto you, but they were misinformed. Under capital acquisition tax (CAT) rules anyone – whether a direct relative, a friend or stranger is entitled to give another person up to €3,000 a year, as a gift, tax-free. The gift does not have be reported to the Revenue by either the benefactor or recipient.

As parents, this means that both of you can give each child €3,000 a year in perpetuity, along with every child of your acquaintance if you so wish. This can be a valuable succession planning or inheritance tool as the tax-free gifts of up to €3,000 per annum have no impact on lifetime CAT thresholds; that is, the aggregate value of inheritances or gifts within the three CAT tax-free threshold groups, that is, Group A, parents and children; Group B, linear ancestor/descendents like siblings, nieces or nephews and Group C, strangers.

CEO’B writes from Wexford:  We owe just over €100,000 on our tracker mortgage, which matures in eight years, comprising the ECB rate of 0.5% plus 0.75%. However, we have been saving hard over the last few years and we hope to be in a position soon to clear the mortgage.

Our question is, do you think that due to the fact that our tracker mortgage is costing the bank money, they would agree to reduce the capital sum if we clear it before years’ end? Also, what size discount could we expect and how should we approach them?

 

The question comes up periodically, and the mortgage experts I speak to usually say the same thing. First, is it in your interest to use your precious capital this way? Could you get a better return than 1.25% net (the current cost of your tracker) over the next eight years on the €100,000 by investing it in another, albeit higher asset. 

 

Financial advisors are particularly keen on reminding clients that a low cost, properly invested pension plan that grows tax-free not only attracts marginal 41% tax relief on contributions, (you are paying 41% income tax on every euro you earn over €32,800) but due to the magic combination of time and compound interest on the invested assets, the long term returns from a pension should exceed the mere 1.25% compound interest at stake here.

 

Whether or not your lender agrees to discount your final capital payment is another matter. Yes, trackers are a loss-leader, especially on top of all the payment difficulties so many tracker mortgage clients are experiencing. You, on the other hand, are an ideal client who is already repaying the tracker faster than required.  The advantage to the bank in you repaying the loan sooner is not as great than if you were in serious arrears and suddenly had a lump sum with which to bargain.

 

All you can do is ask and hope, but keep in mind that there is nowhere else you can take your business if the bank turns you down.

 

Even if that happens, keep your eye on the endgame. There is a lot to be said about clearing a huge mortgage early – my husband and i did so 11 years ago and have never regretted it. Not only do you finally own your home outright, saving thousands of euro in future interest payments but you also now have those accelerated monthly payments to spend, save or invest  - even in a worthy, tax efficient pension if you so wish.

 

 

 

 

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REJOICE, REJOICE! IT’S A NEW YEAR AND A RECOVERY - IRISH STYLE!

 

Let us raise our glasses to the Great Irish Recovery, 2014. 

A new year; a new beginning.

I don’t know about you, but I can’t wait. The past six years have been a complete bummer and I’m sick to death of the Great Recession.

Isn’t it just amazing how the whole world now believes that our plucky little nation has turned itself around from basket case debtor to sterling world stage performer after just three years.

So enough of the cynicism and gloom. A quick recap shows that Ireland: The Economy has emerged from the grim, but paternal scrutiny of the EU, ECB and IMF fiscal examiners.

By lending us €64 billion they allowed us to avoid not just the banks (well, most of them from failing being shut down, with losses to depositors and the all important bondholders, but also – we are told - a mass walk-out of foreign companies, mass unemployment, catastrophic debt and price inflation and god forbid, the return of the punt.

Later they even approved an additional €33 billion Anglo Irish promissory note, to be repaid in 18 yeas, which has resulted in a bit of let up on the Budget austerity accelerator.

Without the bailout, the experts insist, no one would have ever lent to us again an we would have become just another third-world economic basket-case like… Iceland!  And worst of all – the ATM machines would… have… closed.

Whew. Talk about a close call.

Instead, for the greater good of Europe’s banks its bondholders, we bit the bullet. A troika of real, flesh and blood men (whom the Merrion Hotel must be very sad indeed to see depart) sacrificed three of the longest years of their working lives to make that Brussels/ Frankfurt/New York business-class flight to Dublin every quarter, come rain or shine.

Without them, 260 economic, financial and fiscal errors of our ways would never have been identified; tens of billions of public over-spending would never have been slashed, the fiscal deficit would not be on courser to reach that magic 3% by the end of 2015 and politicians and higher civil servants would not continue to enjoy salaries and pensions far in excess of the common citizen.

Of course, there remains the small matter of reform of the health service, the legal profession and the fragile health of the retail banks and their burdensome tracker mortgages. (Funny how the ECB inadvertently made this worse by cutting its base rate to 0.25% in November.)

                          *                               *                                  *

Three years ago we were unable to pay our bills, not just as they were presented, the definition of insolvency, but not at all - the definition of bankruptcy. 

The success of the bailout, said the Minister for Finance as the Troika departed means we are ready to go back into the lion’s den of the global money markets and by 2015 start borrowing the many billons we will still need to run the state.

You may think, like I did, before I read all about The Recovery, that borrowing yet more debt when you appear to be hugely indebted is… well, not very smart.

Silly me. Our great economists keep reminding us simple folk that debt is an integral part of every modern democratic state. (Well, perhaps not Norway.)

Creditors understand all about deficit spending and they don’t expect to ever be repaid their capital because sovereign debt is perpetually rolled-over, just like your car loans, and creditors don’t mind being paid in debased and devalued fiat currencies endlessly printed by government central banks.

Unfortunately in our case, with no access to the ECB money printer we must repay the interest payments through cutbacks, taxation, confiscation of wealth and future income and savings of our famous “unborn”.

How much debt is there, you wonder?  As of mid-November 2013, the General Government Debt was €205.9 billion, according to the national debt managers, the NTMA. At the end of 2007 it was just €47.2 billion and at the end of 2009, just before the Troika’s arrival, €104.5 billion.

That GDD were also serviced by annual interest payments of just over €7 billion in 2013, which will rise by over a billion a year until about 2016, when the by then €211.6 billion GDD will start to fall quite dramatically.

We can thank austerity and higher taxes to not just make the economy more productive by then, we are told, but wait for it …they say that global and European economies will also finally out of the post-2008 slump.

Go 2016! 

The Recovery should mean the ending of mass unemployment and emigration, the return of solvent banks and lending, decent returns for savers, the end of the mortgage and personal debt catastrophe, lots of new jobs and rising incomes, the lowering of penal taxes, the retreat of the black economy, the rebirth of devastated small towns and communities.

We can look forward to the fixing of antiquated water treatment and supply services, the upgrading of the national electricity grid and renewable energy supplies; the roll-out of superfast broadband needed in every corner of this small island.  Reform of the health service, better services for the disabled and destitute and more investing in education research and development will happen.

Lifting the great burden of debt on ordinary taxpayers – 70% of whom are employed in the SME sector -  will bring the growth that modern economies cannot survive without.

The Recovery might even mean that you might even be able to retire some day. 

Our national purse has been returned to us, the delighted Minister for Finance reported to the Dail.

We reluctantly gave it away three years ago and then it was ransacked and fitted with a device that will permanently monitor what goes into it and how much goes out. 

But no matter: the train called ‘sovereignty’ left the station a long time ago, he reminded us, when we collected our ticket for membership of the euro-club.

                                

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We are now the marvel of the financial world.

The Government has exceeded in its tax collection target for 2013. The Troika signed off knowing that 2014 will be another bumber tax year with full year property tax, a bigger pension levy, 41% Dirt on deposits, 4% PRSI on ‘unearned’ income, higher excise duties on most of the ‘old faithfuls’, a bigger contribution from the sick for their prescriptions and less tax relief for pension fund holders and two million private health insurance members.

On top of this, they’ll get paid first, no mean feat given that there are 300,000 fewer taxpayers today than in 2009.

So who am - or you -  to challenge this amazing scenario?

Didn’t Herr Schaeuble, the most powerful UE finance minister of them all say back in October that ‘Ireland did what Ireland had to do. And now everything is fine’?

 

But…but…

Just in case he’s being a little premature… just in case those marvellous crystal balls the economists on Merrion Street, in Brussels and at the ECB use are slightly off kilter… just in case the 1.87 million of us in work have a few off-months before 2016… you might want to ease up on those plans to buy that new yacht, that mansion in Malaga and diamond tiara.

You are not a euro-state, you know.  There’s no central banker at your elbow guaranteeing that you are exempt from the honest pursuit of bankruptcy if you can never repay your debts. Stick with living within your means for a while longer.

Still, we’re borrowing with the big boys again.

And the NTMA, ESRI, OECD, DoF, ECB, EU, IMF, the Wall Street and City power brokers are believers… and they’re backing us 100%...er, until they don’t.

Hey, this is The Recovery. Whether you like it or not. 

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DANSKE BANK CUSTOMERS NEED TO START SHOPPING FOR NEW CREDIT NOW

 

Shopping around for a new credit card, or an affordable current account isn’t exactly what most people have in mind at this time of year, but if you are a soon to be ex-Danske Bank customer, you may want to get a jump on the other 150,000 customers who will have to do just that in the coming months.

The first set of letters to customers with current accounts, savings accounts and credit cards, are dated December 5, but received in our household on December 11, have informed them that they either have two or three months with which to find an alternative service.

Current and savings accounts have two months from the date of their letter to find a new bank or deposit taker, after which their Danske Bank facility will end.  After that date, no cheques will be accepted or cashed; direct debits and standing orders will not be honoured. Overdrafts will also be withdrawn and any balance credits or savings returned.

In the case of credit card holders, the outstanding balance owed will have to be repaid to Danske within three months from the date the letter was received. As with repaying the overdraft on a current account, this could be very tricky for the person with a large, stubborn credit card balance off which they have only been paying the minimum monthly amount for a number of years, or who has a track record of missing payment dates.

In its letter, under ‘Customers in financial difficulty’ Danske Bank says, “We will continue to work with customers who are in financial difficulty in line with our existing policy and Central Bank of Ireland codes. We are fully committed to support any customer who is experiencing financial hardship.”  It then provides a telephone support line, 1890 866 866 for such customers.

Usually when a bank customer is in financial difficulty and unable to pay a personal loan or credit card balance, their bank suggests a meeting during which their personal finances are scrutinised and options emerge:  credit cards and even overdrafts with high interest rates are typically converted into lower cost, more affordable personal loans. Sometimes, some debt is written off.

Danske Bank would prefer that you find a new bank to sort out your financial difficulties, but clearly this will not be possible for everyone. Rather than force such customers into new Insolvency Service of Ireland arrangements like a three year Debt Relief Notice (DRN) or a five year Debt Settlement Arrangement (DRA) in which they will become just one of many creditors sharing a very small pot of money (over three or five years), they may very well resort to an informal credit arrangement themselves, which would most likely result in some debt write-off.

Such an informal arrangement is unlikely though if the customer has too many other debts or their circumstances are unlikely to improve. Whether Danske Bank likes it or not, that person may have no choice but to seek protection under the new insolvency legislation.

Another set of letters is also being sent out before the end of the year, a spokesperson said, and these are being sent to people with multiple accounts that include could personal loans, mortgages and other financial services.

All loan terms and conditions will continue to be honoured even after the bank ceases retail trading. Customers will continue to pay their loans as normal to Danske Bank, which will continue to have a business banking presence here. Other banks, like Bank of Scotland Ireland, turned over the administration of these loans to a financial outsourcing agency like Certus, when they stopped trading here, but there is no suggestion, at the moment anyway, that Danske Bank will farm out their loan administration.

A final tranche of letters will also go out to customers “with complex issues”, the spokesperson said.  These will probably involve cases that two readers have contacted me about in recent weeks: they are both holders of sophisticated ‘offset’ or current account mortgages in which their loan balance is offset by any credit in their current or savings accounts. Sliver by sliver, day by day the offsetting effect of this money over the years reduces the total capital that has to be repaid and on which interest would otherwise be charged.

Without a current or savings account, an offset mortgage, which is usually also a tracker loan, is redundant. These Danske Bank customers will be very interested to see what offer will be made to them.

With so many people looking for new banks and new credit facilities, anyone who gets a letter from Danske this month may want to move sooner than later.

The other banks – AIB, Bank of Ireland, Ulster and PTSB are providing switching packs for Danske Bank customers and say they are keen for their business. You will only know this when you ask them to take you…and your overdraft or credit card balance.

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Worthless PTSB shares can be put to good use

DP writes from Dublin: Like your correspondent GB from Co. Tipperary (8/12/2013), I hold a small number of essentially worthless Permanent TSB Group Holdings (formerly Irish Life) shares. I also have a small number of worthless AIB shares. I have no share dealing account and no desire to open one. What is the best way to get rid of these shares and so crystallise the capital loss for declaration on my tax return?

One relatively cheap way to sell your shares is to find a stockbroker with low minimum costs for once-off transactions – Campbell O’Connor, for example, only charge €40 for an execution only transaction on share values up to €12,500 or 1.5% of the value, whichever is the greater. Unless you have a huge shareholding (PTSB trades at 5 cent and AIB, 12 cent) the cost to you is more likely to be €40.  Or you could contact a charity of your choice and ask them if they would be interested in accepting the shares in exchange for paying any transaction charges. Big, long-established ones may be very happy to file your unwanted bank shares away in the hope that some day they will be worth cashing in.

As I explained to the Tipperary reader, PTSB (and AIB) were diluted to the point of worthlessness when the State rescued the banks from certain closure. The best you and anyone else with such shares can expect – unless there is a miraculous recovery in the value of these banks – is to dispose of them and carry forward your losses against future capital gains.

 
RW writes from Galway: I am a full-time adult student on a Back to Education allowance of €188 per week. I have no debt and while this is a liveable income, paying the usual car tax, insurance, oil bills can be a strain. I have three saving accounts with An Post that will be worth a total of €87,000 when they mature.  I tried to get a €5,000 loan with my local bank and credit union in which I would pay the capital interest in one lump in December 2015 but to no avail.  I wonder is it possible to cash in one of my post office accounts early and if so what are the conditions, the firsts matures in two years, the rest the following May.

Early encashment is always possible with state savings products whether they are savings bonds, certificates, or instalment savings and national solidarity bonds, but you will suffer an interest penalty that will vary depending on whether the redemption happens at the anniversary of the date of purchase or not. In the case of the latter it will amount to 0.15% per annum of the redeemed amount (the principal) for the number of days between the most recent anniversary of the purchase and redemption. Redemptions will be made within seven days of An Post receiving (at any post office) your completed redemption form that you can download from the www.anpost.ie website.

 

I’m curious as to why you wanted to borrow €5,000 from a bank or credit union when the cost of such a loan per annum, typically interest of 12%-14%, is so much higher than the puny amount of interest you would receive from An Post, or any other deposit taker at perhaps 2%.  Borrowing money to advance your education and employment prospects isn’t a bad thing in itself, but most students only do so because they don’t have sufficient savings or income.

 

 

 

GB writes from Dublin: Can you please advise on any good value health insurance policies, as you did for me 12 months ago? My Laya policy renewal has arrived and is up 32% from €885 to €1167 for 2014.  I am a single man, have made no claims since I switched last year. Are there any corporate policies that are cheaper?

Since you didn’t supply me with the name of your Laya policy, I suggest you contact a good broker who specialises in health insurance, such as www.healthinsurancesavings.ie . They should be able to supply you with a list of similar, cheaper alternative plans from Laya and the other three providers. And yes, the corporate ones tend to be better value:  our community rating system means everyone is entitled to buy any health plan on the market, even those designed specifically for companies.

All health insurance members can do their own research as well by going onto the Health Insurance Authority website www.hia.ie which provides a comparison search engine.

 

PC writes from Dublin: I am in my late 50s and am currently receiving Job Seekers Benefit which will end next May and am currently living off my savings. Am I liable to pay PRSI for as long as I receive this benefit? Does the PRSI stop after I stop receiving it?

You get PRSI credits automatically, that is, you do not have to make the contributions, if you are fully unemployed and getting Jobseeker's Benefit which now lasts nine months if you have made 260 past PRSI contributions, or six months if you have made fewer than 260.  When your Jobseeker’s Benefit runs out your credits should continue if you move onto Jobseeker’s Allowance. PRSI credits continue then, so long as the recipient has made PRSI contributions themselves in either of the last two tax years, or has been credited with PRSI contributions.

 

 

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Somebody please tell Mr Noonan why rents are rising

 

The Minister for Finance Mr Noonan has been out of the loop for many years when it comes to finding an affordable roof to put over his own or his family’s head, otherwise he would not have suggested last week that cheaper, interest-only loans for investors only is somehow going to be a good thing for hard pressed renters in the capital.

Rents in Dublin, according to the latest PTSB/ESRI rent index are up 6.4% year on year to September, while still declining by 0.2% in the rest of the country. For houses, rents averaged €1,157 compared to €1,095 a year ago, and €1,042 for apartments in Q3, compared with €983 a year ago.

There is certainly no evidence to show that special lending terms to investors, even foreign ones that Bank of Ireland say they will lend to, will bring rents down or magically improve supply.

Why would anyone enter a market if they knew that rents were sure to fall?  Surely the banks will encourage new investors to buy their repossessed buy-to-lets with sitting tenants? That hardly increases the supply problem.

Dublin residential prices are being driven up by a limited number of cash buyers seeking yield, young professionals starting families who were not burned in the crash and have big deposits and a supply problem that has only grown larger since the 2007 crash. Now the banks are going to fuel it by offering preferential interest rates and borrowing conditions to investors who will drive Dublin rents even higher.

We’ve seen what happens when property markets are manipulated, mainly through taxation and interest rate manipulation and then when losses and arrears are not dealt with expeditiously. Things get worse.

Rents will stabilise and residential property in Dublin will be affordable (and even profitable again for investors) if and when we ever see the great debt burden clear, employment numbers recover and savers duly rewarded by solvent, independent banks.

Until then, anyone stupid enough to think that now is the time to become an amateur landlord in Dublin, should know that while the rules of the property game keep changing, any “special” deal from the banks is an offer you might want to think twice about accepting

 Danske Bank customers with overdrafts and credit cards will be given two or three months respectively to repay their loan balances before these services are withdrawn in the course of the next six months or s0.

Personal loan and mortgage customers will continue to repay these loans and will be unaffected by the closure of the retail side of the bank. Unfortunately, Danske Bank customers with current account mortgages remain in limbo.

Readers who have contacted me say their loans are linked to the credit balance in their current or savings accounts, “but without a current account, what happens to the mortgage?”  They want Danske Bank, who say they will be contacting all their retail customers “shortly”, to either honour their existing contacts or come up with a mutually acceptable solution.

Danske Bank mortgage holders are not the only ones uncertain about how their mortgages will be treated next year. Thirteen thousand remaining INBS mortgage customers are much worse off.

Refused a chance to bid for their loans, which are being auctioned in lots, to foreign bidders as part of the liquidation of the Irish Bank Resolution Corporation (IBRC), if their mortgages are purchased this way, they will lose all the consumer protection they enjoy under the Irish Financial Services codes of conduct and regulations.

However unfair this is, the only hope for the ex-INBS borrowers is that Nama, the national asset management agency and not some foreign vulture investor will ends up with their unsold loans.

Nama says it will maintain the regulatory status quo for the ex-INBS borrowers, even though they are under no such legal obligation. (It is not a financial institution in the conventional sense, requiring Central Bank supervision or regulation.)

It has been suggested that might even let people bid for their own mortgages, though no one should hold out getting the kind of discount that foreign bidders of will be expecting.

I may not be a fan of property investing, but over 1000 potential buyers queued outside the RDS last week for a chance to bid on nearly 150 mainly commercial and retail properties at the latest Alsop Space auction.

The residential properties didn’t catch as much the attention as did the commercial ones, but some holiday properties were picked up for a song – like the two bed apartment overlooking Kilkee Bay in Co Clare that sold for €32,000 or the modern, white-washed cottage in Achill, Co Mayo that sold for €18,000.

Meanwhile, someone decided that a two bedroom apartment in Bray costing €101,000 with a sitting tenant and an annual yield of 8.32% was good value, while another in Belturbet, Co Cavan perhaps did better by buying an apartment for just €37,000 and an annual yield of nearly 13%.

Alsop’s director of auctions naturally claimed that this record breaking auction – it took in €23.7 million - has “kick-started” the Irish property market.  Well, maybe the lower end of the commercial and retail market.

And while a few residential properties did sell with 6%-8% yields, most good advisers say that is too low a yield to adequately reward any investor after they cover mortgage interest payments, income tax, property tax, maintenance and/or management fees and insurance.

 

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THE ESB STRIKE THREAT IS AVERTED…BUT THE CAUSE REMAINS A MYSTERY

 

“Do you think they’ll strike on Sunday?” my neighbour asked, as we stood outside our homes last week, our dogs getting tangled in each others’ leads.

 “I don’t have a crystal ball,” I replied. “It could go to the brink. Maybe a deal can be made, but just in case, you might want to get some extra batteries and candles in.  Oh, and maybe don’t overload your freezer with too much Christmas baking and food.”

As we know now, the strike threat was averted last Sunday evening but the ‘settlement’ is even more mysterious (as I write) than the apparent cause of the dispute: the two sides agreed that the ESB scheme, is indeed, a ‘defined benefit’ or DB one, and should the issue of deficits arise again, the parties will meet to try and sort them out.

And for this the workers were about to pull the plug, the week before Christmas

My neighbour certainly didn’t know what caused that threat. But neither are pension industry experts I’ve spoken to, especially since management avoided making any comment in the lead-up. But what it is NOT about, they insist, is the €1.6 billion deficit the unions kept mentioning.

That funding hole is based on the last, 2009 actuarial report (a requirement of all defined benefit schemes.) but it has most likely been filled by a combination of the terms under the 2010 restructuring deal in which the company agreed to a payment of €590 million (stretched over several years), reduced future benefits for pensioners and three years of substantial investment growth, reckoned at 18% per annum.

The parties now say that their scheme is a conventional defined benefit one in which workers get an income that reflects their salary and number of year’s service, but the dispute involved the assertion by the company that it was also a defined contribution one in which the income workers get in retirement is based on contributions made and investment growth.

Unlike other more modern DB schemes, the ESB one is certainly unusual – created back in the 1940s, funded like a DB one, and paying out DB style salary/service related retirement incomes. But its founding document  also includes a clause, say industry experts, that allows the company to limit the overall amount it pays in, most recently to fill a huge deficit. (Other DB schemes that get into that kind of trouble must close their schemes.)

The ESB appeared to suggest it might opt– possibly from 2018 – to not fill any more deficit holes and then presumably (no on knows for sure because they won’t say) pay out pensions on a DC basis without having to adhere to the strict salary/service promises of the past. Was this agreed between the parties back in 2010? The unions say no.

What was always clear was that there was no immediate threat to anyone’s DB salary and service income or benefits and that it might not even happen after 2018 if the scheme stayed out of deficit.

Important as the ESB workers are, in reality, they are no different than any other members of DB type schemes. Global stock markets are volatile. Central bankers have messed around so much with the price of money in recent decades that interest and bond rates are too low to guarantee long duration salary/service income promises. And critically, retirees everywhere are just living longer.

The choices for these schemes are stark: close them off to all new workers; base retirement incomes on lifetime income averages, not a final salary. Stop indexing the pension every year to worker pay rises; make existing workers and company contribute more.

But what would almost surely sort out all DB deficits and future funding problems is if everyone retired later.  Very simply, today’s worker, if he lives to 85 needs to save for 50 years and retire when he is 75 if he is to assured a comfortable pension.

The same applies to the DB state pension. Pensioners who live 20 years to age 86 will get (assuming the amount stays the same) €12,000 a year from the old age pension, or €240,000 worth of benefits. They would have only paid in a fraction of that amount over their working life in personal PRSI contributions (especially if they were self-employed).

Meanwhile, the unfunded liability for public service and civil service DB pensions is now about €120 billion. 

With typical retirement pensions of about €45,000 per annum for ESB workers (2/3rd of average pay/allowance/pension of €78,900 but less the pension contributions) a total fund of €900,000 is already needed lifetime say industry experts. 

Next Sunday’s ESB strike have been averted.  But for how long?

I shared a theory with a number of pension experts who I’ve know since my years editing Irish Pensions magazine that the ESB workers may have wanted their DB scheme nationalised in order to guarantee that all the existing members’ 2/3rds of income/service pensions. The threatened strike was their bargaining tool.

That isn’t how it was avoided.  But it doesn’t address the flaws that underpin their pension DB scheme either…or anyone else’s.

 

 

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How will Danske offset impact on mortgages?

RA writes from Dublin: I am a Danske Bank customer with an ‘offset’ or current account mortgage. I am wondering what is going to happen if they close my current account as the positive cash balance in my account at any time is credited or ‘offset’ on a daily basis against my mortgage balance. If they close my other accounts then there will be no money to offset from my mortgage debt, and it will be much worse situation for me.

I see this as breaking my mortgage contract. I contacted the bank but they said they didn't have any information yet as to how they would handle this, and that I have to wait for their correspondence. Also I was not able to find any information related to similar cases where banks have left Ireland.

There is a presumption that Danske Bank borrowers will continue to make their payments to Danske Bank or its agent (as happened when Bank of Ireland Scotland withdrew) after the company quits the retail banking side of their business next year.  As your mortgage is linked to a current account – which will no longer be available to you at some point next year - this will need a different repayment solution.

There have been precedents: after First Active announced it was to close down in the summer of 2009, the outcome was a merger with Ulster Bank. Current account mortgage accounts were transferred with all their existing terms and conditions honoured.  There has been no suggestion of any kind of transfer to or purchase of Danske Bank mortgage loans like yours by another Irish bank.

You can only wait to see what solution the bank proposes and then decide whether it is acceptable to you or not. Meanwhile, you may want a lawyer to review your existing contract.

 

 

GB writes from Co Tipperary:  What is the current and future status of Irish Life shares? I accumulated in excess of 3,000 over many years, as a retirement nest egg. Now that they have been taken over by Great West Life Co, will anything formal happen to them? Is there any winding up or dissolving process that takes place? Or do we get to enjoy their languishing on the stock exchange for all eternity. I note that some publications no longer mention them in share price listings, while other persist.

Your shares would have been accumulated either as part of the share issue to Irish Life and/or Irish Permanent customers when the companies were privatised or because you purchased the shares yourself over the years.

The share price in IPGH collapsed during 2008. In the summer of 2011, the Irish government became the single largest shareholder in Irish Life and Permanent Group Holdings plc when it had to inject over €4 billion into the company.  Overnight it became the single biggest shareholder of the 135,000 shareholders, with 99.2% ownership. The remaining 134,999, including you, ended up with massively diluted share - just 0.8% of the company value.

The sale of Irish Life by Permanent TSB Group Holdings to Great-West Life of Canada in 2012 ended any connection between the original plc and the business of Irish Life. You are now a shareholder in a company called Permanent TSB Group Holding plc. Your shares are now so diluted that it is inconceivable that they would ever be worth much, even if the company market value was restored to its February 2007 peak of €6.2 billion. This is because instead of there only being 275 million shares in circulation valued at €22.80 each, today there are 36.5 billion shares circulating, with a value of just a few cent each.

While the company is still listed, I’m afraid your ‘nest egg’ effectively disappeared when the share price collapsed five yeas ago and was then forever diluted by the state takeover in 2011.

 

PM writes from Cork: As it is not safe to have more than €100,000 in any single bank, is it safe to have more than one Post Office Savings product – that is more than €100,000 in savings bonds, certificates, prize bonds?

The Irish deposit guarantee scheme insures the first €100,000 worth of deposit savings in banks, building societies, credit unions, ordinary post office deposit accounts. State savings products, such as the ones you have mentioned are 100% state guaranteed and do not come under the deposit guarantee scheme.

That said, there are some limits to the amount you may save or invest in tax free, 100% guaranteed state savings products. Savings certificates and savings bonds limit individual holdings to €120,000 (€240,000 held jointly by a couple) and you may only up to €1,000 a month into Instalment Savings accounts. There is no limit to value of Prize Bond holdings.

The four year and 10 year National Solidarity Bonds have individual investment savings €250,000, or €500,000 from two joint applicants and €750,000 from three  joint applicants.

Correction/Clarification:  Two sharp-eyed readers have pointed out that in my answer to Mr PD from Dublin, regarding inheritance, I failed to clarify that since December 5, 1991, a child can only inherit up to the tax-free threshold amount between a parent and child (at that time) over their entire lifetime. Before that date, the child could inherit up to the threshold from one parent and if the parent died after 1991, still inherit the post-1991 threshold amount from the other parent. My answer incorrectly suggested that this would be possible where both parents were deceased after 1991.

 

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Taxpayer face high price for settling ESB pension row

 

Will they, or won’t they strike?  In exactly seven days the ESB worker’s strike threat bluff will be called we’ll either be sitting in the dark…or not.

But whether the power stays on or goes off, it isn’t going to change the nature of the ESB’s complex defined benefit pension scheme:  just like every other DB scheme in this country it cannot provide a 100% risk free income to all its current and future qualifying pensioners, unless the Irish taxpayer is compelled to back-stop the risk.

Defined benefit pension models, here and in every other (mostly English speaking) country where they exist are in deficit or have failed mainly because their members are living too long.

Modern era salary and service related or state pensions were created when workers only lived a few years post-retirement and annual remuneration was comparatively much lower.

Today, these schemes, which carry the risk of longevity, market performance volatility and high fees and charges that reward armies of administrators, fund managers, trustees and regulators, just can’t carry the load. 

The real scandal is that the likes of the ESB, Aer Lingus, AIB, Waterford Crystal (whose scheme failed) and so many others were ever permitted – the the regulators - to accumulate such huge deficits.

As the ESB unions rightly argue, it isn’t the company executives, administrators, or regulators who will suffer if their scheme status quo is not maintained and they are forced to accept the defined contribution model (like every other DB scheme eventually).

Nevertheless, the company is adamant that after 2018 if will not bail out the scheme again should it fall back into deficit, which it is not at the moment. The deal the unions helped negotiate back in 2010 which involved a €590 cash injection and lower pension benefits, plus three years of excellent fund performance means that no pensioner’s present or future is at risk until then when the scheme will have to stand on its own merits.

Last year a typical ESB workers’ earnings were in the region of €78,900 (including pension contributions) and their two thirds pensions, about €45,000, say industry sources.

Given that fewer than half of all private sector workers in defined contribution schemes will be lucky to get an occupational and state pension of €15,000-€17,000 a year, it beggars belief that the ESB unions are considering a nation-wide walk out.

But it would be an even greater travesty if the rest of us end up guaranteeing those €45,000 pensions if they are nationalised as the quid pro quo for the ESB workers not pulling the plug next week.

Why is Twitter Inc worth nearly $24 billion? This company has no earnings. Some analysts are finding it hard to find $50 million of quantifiable value.

As companies like Twitter and others see their share values soar, ‘mom and pop investors’ as they are known in the United States appear to be shifting money out of negative yielding deposits and into stocks and shares.

Listening to Irish people talk about investing is like being on a permanent feedback loop.  Our attachment is more to property as our investment poison of choice, especially as we see prices rising.  The higher the better, as the mini-price bubble in Dublin is showing.

Instead of ignoring the background noise produced by estate agents or brokers about how well their markets are doing, the mom and pop investor, forgets how badly it turned out the last time, and instead return to flock-of-sheep mode and follows the one out in front, bleating the loudest about how it’s time to follow the money back into the market.

In a devastating newsletter to his clients just after last months Twitter flotation, John Gilbert, chief investment officer of investment company GR-NEAM, whose biggest shareholder is Warren Buffett, wrote that “it should be obvious to everybody by now that [the Twitter] stock market largesse is made in Washington” care of the Federal Reserve whose loose monetary policies “induce investors to behave foolishly. He includes Asian emerging economies among them.

Twitter, Gilbert wrote,” is the lottery winner of the moment” but “following such a crowd is an excellent hedge against ever being financially independent.”

 

My Christmas gift buying list is getting smaller every year as the children dear to me turn into adults, and now qualify for home baking instead of toys.

Meanwhile, my husband and I have acknowledged, as have many friends and family, that there really isn’t anything that either of us need or even want anymore, such is the combination of luck and privilege we share as citizens of a country, no matter how economically battered, in the comparatively prosperous western world.

After recent revelations here about how donations are being spent to featherbed the wages and pensions of certain charities’ executives, you might want to pick your charity with extra care this Christmas.

Once upon a time charities were run by philanthropists and volunteers who didn’t get remunerated. The welfare state then took over and ‘charity’ became a social entitlement. Big charities seem to have adopted a similar model, convincing us that the good works they eventually do with our money couldn’t happen unless their chief executives and professional, full time staff are well paid and pensioned.

I already object to a penny of my taxes, via state development aid going either directly or indirectly to pay for the Paris shopping trips of the wives of kleptocratic African dictators or to fill their Swiss bank accounts.

So that’s why our family prefer to keep our voluntary donations local and project based. This Christmas we will give to the likes of the Capuchin Day Centre in Dublin, the RNLI and Mountain Rescue, and Dogs Trust.

Whatever we give them of course…won’t be enough.

 

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GET INTO THE CHRISTMAS SPIRIT…BUT NOT THE OVERSPENDING

 

There has been a rule in this house for quite a few years: Christmas doesn’t usually begin until the second week in December and the tree most certainly does not go up before the third weekend of the month.

So far, so good.

Limiting Christmas to a few weeks keeps it special and meaningful. While I am a confirmed fan of Christmas, I stopped being a fan of the excessive spending that can happen long before the Celtic Christmas Tiger arrived in the early 2000s and witnesses too many people who, when their credit card bill arrived in January, regretted the foolish, extravagant buying the previous month.

Regular readers of this column know that the best way to control spending and enjoy the celebration is to not lose control right from the start. No matter how early your Christmas begins – and I know plenty of people who buy things throughout the year that they put away for Christmas in order to spread out the expense – a proper budget and a plan is the key.

With no little ones waiting for Santa’s arrival in our house anymore, gift-giving focuses on practical stuff and a special treat.  With The Child going on a cheap ski holiday with his college in January, he’ll be getting new gloves and goggles (Lidl provided the new ski jacket for his birthday in November), and the elves will make sure that his dad’s skis, which The Child has inherited, will be sharpened and waxed and ready for the slopes.

I’m going to make his favourite fudge and will put a little stack of DVDs in his stocking (and maybe some nice aftershave!)

Everyone else on my shopping list this year is going to get baked goods, the sweet, old family recipes that I only make once a year but that everyone loves. I will also recycle my large book collection by giving everyone a book that I will choose with care to suit their interests or hobbies.  

There are all sorts of other ways to keep a Christmas spending budget down, and Kris Kindle is a long time favourite: everyone gets to pull a name out of hat and there is an agreed spending limit. Whether this works out at €10 or €100 you do your best to buy something the person will like and that suits them. Some families do a Kris Kindle ‘services’ draw that involves no money:  everyone offers to ‘do something’ for or with the person whose name they draw. 

For example, if you pick out Granny, that might mean offering to do some gardening, or to chauffer her to church or the shops. If you pull out your sister’s name, and she has small children, babysitting duties can be arranged, or you can offer to bake all the birthday cakes for the next year. (Good luck with the teens, though I know someone who took the 18 year old whose name he picked, out for several hours of driving practise in the run up to the boy getting his full licence.)

If you are planning to hit the high street this month, here are my top tips for keeping your purchases within budget and not succumbing to last minute buying panic”

-       Make a budget.  How much can you afford to spend for the tree and decorations and wrapping paper, Christmas dinner and other meals, alcohol, snacks, entertainment, gifts, travel costs.

-       Make shopping lists. Mark down everyone you wish to gift. Consider their likes and dislikes (not yours) and jot down some ideas beside each name.

-       Use the internet to check out prices/availability, especially of toys.

-       Consider a ‘theme’ of gifts – books, DVDs, CDs, subscriptions (a family gift of an annual Netflix subscription?)  Indoor and outdoor plants, fancy chocolates, jams, chutneys and other lovely jars of foodstuff are always welcome, and you can always make some of these yourself.  I’ve given lovely candles, soap, picture frames, and I’ve recycled tree ornaments and pieces of jewellery and many books that I no longer use, wear or read. A dear friend now gives away pieces of furniture, paintings, china and silver at Christmas to her grandchildren for their “bottom drawers” or to help furnish their first homes.

-       Be organised.  Get into town early. Park near the shops and make sure you have plenty of change for the meter. Bring a snack, small water bottle.

-       Choose a single payment method – cash, debit card or credit card, not all three.

-       Don’t bring spouses or children along with you unless they agree to be human pack horses, bringing bags and packages back to the car, or home.

-       Don’t overdress and wear comfy shoes. Use handbags with an anti-pickpocket strap across your body.

-       Don’t shop on an empty stomach or when tired. You’ll only end up overspending.

 

 

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