Money Times - 25/02/09

Posted by Jill Kerby on February 25 2009 @ 23:07



There’s a hint of spring in the air, and if the estate agents are to be believed, there is also considerable interest by perspective buyers in the huge inventory of unsold properties that are on the market.

According the Sherry Fitzgerald CEO, Mark Fitzgerald, over 4,000 viewings were recorded by their company on the Valentine’s Day weekend and many first time buyers are simply aching to buy a home, if only they could raise sufficient finance. 

I think we should take what Mr Fitzgerald says with a pinch of salt:  the bursting of the property bubble and the collapse in prices has hurt his business badly, and any glimmer of hope is going to be blown out of proportion. 

But he is right when he says that the property downturn is now entering its third year and that people “can’t put their lives on hold indefinitely”.   What those buyers need however, is to go into any house purchase with their eyes wide open, a firm hold on their wallets, and a total understanding that what they are buying is a home, not an investment, an alternative pension or anyone other than a very expensive consumer item that is going to carry a number of  on-going costs in addition to the monthly mortgage. 

Mr Fitzgerald’s note of optimism last week, was of course, also encouraged by the announcements by the major banks – AIB and Bank of Ireland, Ulster Bank and Halifax of finance packages for first time and trading up buyers. 

The two main banks are offering lower, one year fixed rate interest rates of c3.5%APR for loans up to 95% of the purchase price while the Halifax has one year fixed APR rates of 3.17% and 3.14% until July 2010 and July 2011. Ulster Bank has a slightly different deal on offer of a five year fixed rate of 4.1% if the FTB agrees to buy a house listed amongst the inventory of eight of their property development clients; the bank will guarantee up to a 15% mortgage capital reduction if the house has fallen in value by up to 15% at the end of the five years (as determined by an independent valuer.)  If it has fallen by more than that amount, the loss is yours alone.

Needless to say, none of these deals comes without conditions and the most obvious ones are that you have a sufficient down payment, a secure job and the ability to repay the loan. 

So is it time to get onto the property ladder or not?  

My first instinct is an emphatic “no”:  not only are house prices still falling, but the latest DAFT report showed that rents are falling too – by a whopping 12% last year with 21,000 properties now available to rent, twice the number from the same time last year. This is not the sign of a healthy property market. 

Unemployment is also still soaring under the weight of the on-going global credit crisis, low consumer spending and falling productivity and tax revenue.  The income tax and pensions levy are both going to take yet more spending power out of the economy. 

This deflationary period means that any house you buy is going to keep going down in price until the bottom is reached:  astonishingly, 19 years after Japan’s great property crash, prices there are still 80% less than they were in 1990. 

On the plus side, buyers are firmly in the driving seat and sellers are open to offers and negotiation. If you are interested in a property offered by one of the eight Ulster Bank developers (see Secure Step Mortgage link at www.ulsterbank.com) it might be worth getting that price down at least another 15% (but ideally even more) before taking up the 15% refund insurance offer; call me a cynic, but I expect the developer may have already priced in the refund.

Whatever about the tempting mortgage offers, you should keep the following in mind before buying any property this year, even if you are certain that is the ideal house for your long term needs and the location is perfect: 

A one-year fixed rate may end up resetting at a higher rate in 12 months time, resulting in a higher repayment.  Look into fixed rates as well.

In addition to the monthly mortgage you will have on-going insurance, utility and maintenance bills. Factor in a property tax and local authority rate charge going forward that might be a flat rate (perhaps €1,000) but more likely a percentage of the rateable value of the property. In most countries this is between 0.5% - 1%. 

Price falls could continue:  if you buy now with just 5% down, you could be in negative equity within months of taking on the mortgage.

Don’t count on the lender or mortgage broker to properly stress test the loan. Do it yourself by asking if you could still afford the mortgage if the repayment rose to 5%-6%.

Aim to pay off your mortgage as quickly as possible, especially while interest rates are low.  The more equity you own, the better to command the best mortgage interest rates.

Offer to rent the house for a year or two, with an option to buy. 

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The Sunday Times - Money Questions 22/02/09

Posted by Jill Kerby on February 22 2009 @ 22:21

JGL writes from Co Cork: I shall reach age 60 in August at which time I will be eligible to take a (defined benefit) sterling pension of approx £14,500 per year or a lump sum of up to £66,000 with commensurate reduction in pension down to approx £9,500 per year.  If I wait until age 65 my pension will be just over £1,000 per year more (some elements are paid at 60 without reduction).  The pension is payable by an Anglo-Dutch multinational. Given the current economic climate and the questions surrounding many pension funds, would your advice be to take the money at 60 or wait?   I can survive without the additional income, but we need to make our house more energy efficient and a lump sum to invest in alternative energy sources would be helpful. Also, there is the low sterling exchange to consider. 


This might be one of those ‘a bird in the hand’ moments, says Alan Morton, a director of the Dublin financial advisors, MoneyWise. You should first establish whether your employer’s defined benefit pension fund is currently underfunded or not (he suspects that it very well may be).  A limited pension compensation scheme operates in the UK, but it may not be sufficient to cover your pension entitlement if, in a worst case scenario, this fund was involuntarily wound-up. “No one can be sure what is coming down the line financially anymore,” says Morton. “If your reader was my client, and from the information she has provided you, I would suggest that she take the lump sum and the pension at 60 rather than delay it until age 65. As for the currency exchange risk, the sterling/euro rate may not be in her favour right now, but this may change.”  Timing a currency rate is not always possible, he added and there may be years when her sterling-based pension will be worth more than it is now against the euro.






PG writes from Dublin: Do you know of any brokers that sell Insurance that covers tenants who refuse to pay rent or will not vacate. I was offered this indirectly by a management company.


I passed on your query to Sean O’Connell of The Insurance Shop in Fairview, Dublin who told me that he is aware that insurance, from UK underwriters, is available via property management companies to landlords who wish to cover rent arrears if a tenant disappears.  You might want to weigh the cost against the risk before you buy such a contract, he said. He suggests you contact the Irish Property Owner’s Association (www.ipoa.ie) for their views about the availability of this insurance.  Evicting a tenant is a “slow and costly business” in this country, say O’Connell, and to his knowledge there is no insurance policy to pay those legal costs, but the IPOA does offer assistance to members who are involved in disputes and eviction proceedings that come before the Private Registration Tenancies Board.





MP writes from Dublin: Our VHI renewal notice (Plan D) states "The total cost of your cover for the period from 01/01/2009 to 31/12/2009 is €3,600.”  This is a 30.132% increase on 2008 premium of €2,766.42 euro. My husband and I are aged 79 and 67 respectively. I spoke with VHI to ascertain if the additional tax relief announced by the Minister for Health had been deducted.  It had and the explanation of the modus was that our gross premium is €5,950 less the combined tax relief for the two of us of €1,450, less 20% tax relief of €900. I maintain we are entitled to 20% tax relief on the entire premium which would bring our net premium down to €3,310.  I would be grateful for your opinion on this matter. 


The new tax reliefs for health insurance haven't come into force yet, says Dermot Goode, a Dublin-based financial advisor who specialises in the health insurance sector, but under the new levy regulation “The new tax credits must come off the premium first and then the 20% relief is deducted. In fact, the new gross cost of VHI Plan D for 2 adults (with the group discount) is €4,500 for renewals after January 1, 2009. The net cost is €3,600 when you deduct the 20% tax relief. If this member's calculations were correct, she'd be paying approximately €300 less than the market for 2 adults which can't be the case. I believe many people are confusing a normal price increase to cover the cost of medical inflation with the new tax credits.” He suggests that you consider switching to similar plans with either Quinn-Healthcare or Hibernian Aviva Health, both of which are cheaper than VHI Plan D. “Switching is straightforward with all insurers and assuming you've satisfied all your normal waiting periods, you should be on cover immediately.” 


1 comment(s)

The Sunday Times - Money Comment 22/02/09

Posted by Jill Kerby on February 22 2009 @ 22:19


The two main banks have wasted no time in producing a new mortgage lending package for first time buyers, (FTBs) but then a pre-condition of AIB and Bank of Ireland getting the €7 billion taxpayer bailout, was that they would provide 30% more lending to small businesses and individuals. 


At just 2.45% (3.5% APR) from Bank of Ireland and 2.49% from AIB, the one year fixed rates announced last week look as tempting as those offered at the peak of the property bubble.  Ulster Bank is joining in too, further sweetening their pot with a 4.2% five year fixed rate and a promise to refund up to 15% of the purchase price of inventory listed by eight of their property developer clients if the market price falls by 15% (or more) after five years – which, unfortunately, is entirely possible. 


Whatever about the banks, the property industry desperately want everyone to believe that first-time buyers are just aching to get back into the housing market, if only they could find a sympathetic lender.  


AIB’s jargon-laden statement that “dynamics are beginning to change in the Irish housing market and while problems still remain, over time, the reduced level of housing output and improved affordability conditions will help stabilise the market” would be laughable, if it wasn’t so serious. 


The bankers and their new bosses in the Department of Finance need to look out the window at the reality of the housing market: property prices are still falling, and now rents are too, a clear sign that we are caught in a deflationary price spiral. First time buyers, like everyone else, are worried sick about the possibility of losing their jobs and livelihoods. 


Unless someone has a recession-proof job, plenty of savings and every intention to remain in their new house indefinitely, with it’s risk of negative equity, they are far better off saving their money and renting for the foreseeable future. Renting also gives them the flexibility to follow the jobs market, wherever it takes them. 


The banks hardly have to be reminded that it was artificially low interest rates that got so many recent buyers into deep financial trouble.  Their track record, and that of the mortgage brokers who they paid so handsomely to sell their mortgages, is not good when it comes to giving informed, objective advice, especially about the risk of higher interest rates or long repayment terms.  


At the very least the advertisements or these loans should carry great big warnings about the risk of negative equity, potentially higher interest rates and the possibility of the introduction of property taxes and rates (on top of existing mandatory mortgage protection and buildings insurance.)  


But the most worrying thing of all is that any memory of how lending should be done – prudently, responsibly – with a clear eye on the profit that can be made and the risk that the borrower will be unable to pay – has been discarded in favour of a political mandate that makes no fiscal sense at all. 


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‘Banks that have been saved from bankruptcy by the intervention of the State and by the generosity of the taxpayer should not be rewarded for failure,” wrote an editorial writer in one of the national newspapers last week. 


He, or perhaps it was she, was referring to the controversy about paying staff bonuses, but let’s not kid ourselves:  the €7 billion bail-out of the Irish banks from taxpayers money held in the National Pension Reserve Fund is nothing but a reward for their failure. 


It’s happening everywhere that governments and central banks are propping up bankrupt companies and industries:  the additional €22 billion that General Motors and Chrysler are now demanding, on top of the $37 billion they (and Ford) have already received just shows how deep their insolvency runs. 


So here’s a thought.  Before every one of us becomes insolvent, why don’t we demand that the government hand back the remaining ten (or fewer) billions left in the National Pension Reserve Fund.  We should also be allowed access to the money we’ve built up in our private pensions so that they can pay off pressing debts like mortgages and car loans, save our family businesses, build up cash reserves in the event that we suffer a loss of earnings or redundancy, or to pay for the cost of emigration, if it comes to that. 


The alternative is to watch it be squandered by a government that simply doesn’t seem to know any better. 


*                      *                       * 


This sad tale, which I am assured is true, should make you feel much better – as it does me - about owning an old banger of a car. 


A well known businessman who had leased a $265,000, 2008 CL 65 AMG Mercedes Coupe  - a very flash car – last year was distressed to discover only a few months later that it was now only worth a derisory $160,000.  Under some financial pressure, he had thought about handing it back, but scoffed, “Forget it, it’s got to be worth more than that.” 


Recently, the coupe is involved in a relatively ‘minor’ accident.  Now he really wants to get rid of it.  The main dealer presents him with a repair bill for €25,000 and offers him a trade-in price on the lease…of just €80,000. 

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Money Times - 18/02/09

Posted by Jill Kerby on February 18 2009 @ 23:06



Cash in king, whether you’re a bank, a business or just an ordinary PAYE worker:  the challenge for all of us is not to run out of that cash as the economic downturn deepens. 

For anyone who has unfortunately lost their job, their cash-preserving options are fewer than for someone who is still in employment, but it is even more imperative that they maximise every penny possible.

The following is my top 10 list of practical ways to quickly maximise your personal finance budget; you may not be able to access all of these savings, but you should be able to reduce our outgoings and improve our cashflow via some of them. 

1) If you have a mortgage, and you are already struggling to pay it, you can reduce it by requesting your lender to switch you onto interest only payments, and/or by extending the repayment term to a maximum period of, say, 35 or 40 years.  

Several hundred euro a month should be freed up by this action and you can then use this money – after it’s been deposited safely in a good demand account - to help offset your redundancy or build up as an emergency fund. Everyone should have three to six months worth of net income in an emergency account.  

The new mandatory code of practice regarding home repossessions means that if you do end up unable to pay your mortgage, the bank cannot begin foreclosure procedures until you are at least 12 months in arrears.  Just make sure you don’t keep your mortgage and your savings fund with the same bank – they can deduct the full mortgage payment from the savings if you do.  


2) Do you have enough space in your house to take in a lodger under the Rent a Room scheme? You can now earn up to €10,000 a year tax-free – though not by renting to your adult children. Register with the revenue to qualify for the scheme. 

3) If you have credit card debts, try to reduce the total sum as quickly as possible by switching to a 0% or very low interest repayment card with the likes of the Halifax, Bank of Ireland and Ulster Bank for six, six, and five months respectively after which you switch to their much higher variable interest rates.  Postbank has just brought out its first credit card at a 1.9% rate for six months. Don’t keep spending. 

4) With the economy imploding, it’s time to get real:  car loans can be as crippling as a mortgage if you can’t afford them. Ask for a new interest only or longer repayment schedule.  You can try and sell the vehicle, but most car loans are unsecured – the vehicle will be repossessed if you fall into arrears but once the card is recovered you can’t be chased for any price shortfall.  (Your credit record will take a hammering.) If you can’t or won’t sell the car at least consider putting it up on blocks so that you don’t have to pay the thousands of euro it typically costs to tax, insure, fuel, NCT, park and maintain it every year. 

5) Forget the foreign holiday this year and use this money – typically €3,000 or more for a two week family trip when all expenses are counted – and use this money to build up your emergency fund. Check out the growing selection of local budget offers at home instead. 

6)  Try to sell your unnecessary “stuff” on e-Bay or other on-line sites, through boot sales and auction rooms.  It all adds up.

7) If you must, borrow from your family. Keep proper records and make sure repayment arrangements (where they apply) are clear to everyone.  You can always offer them collateral:  your house, car or other assets (and hope they never collect.) If interest is charged it will probably be less than the bank would charge you and (hopefully) it won’t be compounded.  

8)  Pension fund contributions can be either reduced or postpone entirely – just check that you are not penalised. You will lose some tax relief, but you should still try and bank this money instead. 

9) Cut the rest of your discretionary spending to the bone, like expensive gym or golf club memberships, beauty treatments, eating out and alcohol.  If you bring your own lunch instead of paying a fiver every day, physically bank that amount into a big glass jar. Ditto for expensive cups of coffee (buy a thermos), newspapers and magazines you can bring home from the office or read free on-line.   I am assuming you have already cut your huge grocery bill with visits to the discount grocers.

10)  This is a controversial suggestion, but if you have older teenaged children or other young adults still living at home and earning who are not being charged anything for the bed and board I suggest you insist upon a minimum 20% contribution.  Their budgets will be squeezed too, but their contribution could – in a worst case – help keep a roof over everyone’s head. 

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The Sunday Times - Money Questions 15/02/09

Posted by Jill Kerby on February 15 2009 @ 22:24

MM writes from Galway:  A few months ago I read your comment about fixed mortgage rates and the cost of getting out of a fixed rate. We have a loan of €400,000 from the Bank of Ireland that was drawn down in May 2008 at a fixed rate of 5.25% for three years until June 26th, 2011. Now we would like to change to a variable rate and I was quoted €23,697 as a fine. Is this correct?


Bank of Ireland told me that they do not charge a penalty to break fixed contracts.  That sum you were quoted is the "funding sum", based on the outstanding balance of the mortgage, the interest accrued and any cost directly incurred by the bank as a result of breaking out of the contract.   I can understand why you want to break this contract now that the Bank’s variable rate is just 3.6% APR and it has just launched a new five year fixed rate APR of just 4.1% and just 3.5% for two years. However, the €23,697 penalty you have been quoted is the equivalent of a about a year’s worth of interest on your loan, which would certainly take some time to absorb, even on a lower rate payment.  The repayment difference between a 3.6% rate and 5.25% one on a €400,000 loan over 30 years is at least €400 a month, but even at that lower interest rate it would take several years to absorb that interest penalty, especially if you intend to fund it by consolidating it onto the existing mortgage or further extending the term of the loan.  There are no guarantees that the variable rate won’t go higher either. 





PJ writes from Dublin: Six years ago when my mother-in-law sold her house she set up a trust fund of €30,000 each for our two boys in her own and my wife’s name. All taxes were paid. The fund was Bank of Ireland Life Smart Portfolio and Balanced Managed fund S9. Its value is now €53,000 in total and dropping. We were advised to leave it as it would be a bad time to get out.  If the Bank of Ireland was nationalised what would happen to the investment?  If the money was taken out and just put into their Credit Union accounts what questions would be asked by the credit union and are we liable for more tax?  What would you advise to do with the money as we don’t want the boys to have direct access to the money until some kind of maturity has set in.  It is very difficult to get independent advice so any help would be appreciated as we have one elderly woman very worried.

If this investment fund is closed now, the losses will be crystallised.  You don’t say how old the children are or for what use the fund was created – college education perhaps?  The question your mother-in-law and wife need to ask themselves is whether the investment will recover sufficiently by the time the money becomes available.  I’m also not sure from your letter what kind of a trust has been set up, but shifting the money from Bank of Ireland to another institution shouldn’t make too much difference if it is a legal issue that prevents access to the matured fund at say, age 21 or 25 or whenever.  Consult your solicitor about the legal contract.  It sounds to me that everyone’s main concern is that there are no more losses. Bank of Ireland Investment Managers should allow you a free switch into a more secure deposit or asset fund in which the capital is guaranteed. Or you can do as you mention, and shift the remaining money into the boys’ credit union accounts or another deposit institution. Since you have lost money, there will be no exit tax of 26% to pay if you close the fund, but your mother-in-law and wife will have to produce the proper identification to comply with money-laundering regulations if they open a new account.




LD from Dublin: I am 50 years old and joined the public service in 2003. I currently pay around 6.5% of my gross salary into the public service pension scheme. I also have a PRSA which I started around the same time to supplement the public service pension and into which I contribute the maximum amount allowable for tax relief. With the new pension levy, I estimate that I will have to pay an extra 8.8% of my salary into the public service salary, making a total of 15.3% of my gross salary going to my public service pension. To make sure that all contributions are tax efficient, I am considering reducing my PRSA contributions to 14.7% of my salary to maintain the total pension contribution allowance of 30% of my salary. Does this make sense?


If what I have been told by a senior official in the Revenue is correct when the pensions levy legislation is published it is expected to allow public and civil servants to continue to claim the maximum tax relief available on any Additional Voluntary Contributions (AVCs) or PRSA contributions they are currently making up to and including the allowable amounts which are income and age related. IN your case, because you are now 50, you will continue to be able to claim tax relief on the 6.5% mandatory pension contribution, and the 23.5% into your PRSA which brought you up to your 30% contribution limit, PLUS tax relief on the new 8.8% contribution you must now make into your public service pension.  Whether or not you still want to or can afford to divert a total of 38.8% of your gross income into pension funding is another matter, though the actual cost to you will be reduced by your higher rate of tax. But keep in mind that this new 8.8% levyis not actually buying you any extra pension income; it is really nothing more than a gross pay cut, albeit one that attracts tax relief.  It is the PRSA that is buying you a genuine pension top-up.

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The Sunday Times - Money Comment 15/02/09

Posted by Jill Kerby on February 15 2009 @ 22:23

Will the mandatory moratorium on foreclosure actions that is being imposed on the banks by the government be enough to family homes from being repossessed over the long term? 


Probably not; this depression is showing every sign of lasting longer than a year. But then, the €7 billion bailout of AIB and Bank of Ireland, the latest $2.5 trillion that the US Treasury is going to use to further capitalise troubled US banks and other industries, and the $840 billion President Obama intends to spend “to save or create four million jobs” isn’t going to be enough either. 


This is because this money has to be borrowed or created out of thin air.  It’s money that will only add to the crucifying amount of debt already in the system, debt that has caused banks all over the world (and a few countries) to implode, property bubbles to explode, and tens of millions of people to lose their jobs, businesses and homes. 


The mainstream media are also finally beginning to realise that all these plans to save Ireland and the world have been cobbled together on the back of envelopes by panic stricken politicians and regulators, who clearly have no idea that the depression will only end, and a recovery happen, when the existing debt is paid off or written off, not postponed.


You must now do what you have to do to protect your family and wider community from the ‘catastrophe’, as President Obama has described what will happen, not if, but when, the first depression of the 21st century really takes hold. 


If you’ve lost your job, claim every benefit to which you are still entitled. (Check out the ‘social welfare’ and ‘employment’ links on the www.citizensinformation.ie website. 


Once the new mortgage foreclosure agreement is signed and sealed, tell your mortgage lender, if you have one, that you can only pay a token monthly payment. You can’t be evicted until 12 months of arrears have passed. You will need every penny of your unemployment benefit to feed your family, to pay your hear and light bills and to find new work. 


As for those who are still employed (and the vast majority of us still are, thank goodness) but who don’t already have a hefty cash emergency fund in place and are struggling with a large mortgage, crèche fees, car and credit card loans, you should also speak to your lender. 


Tell them you want to extend the term of your loan to 35 or 40 years, and/or switch it to an interest-only payment schedule.  (So many loan contracts already make provision for this kind of flexibility.) The monthly savings should then go into an emergency savings fund that you can access if your income is reduced or lost. 



This isn’t a suggestion the banks or government will welcome.  But the law of unintended consequences means this moratorium will probably be abused by the reckless and the feckless who will find a way to use it to avoid paying their mortgage.   


You want to secure some flexibility for your family budget before the code is tightened or more likely, abolished because it has become unworkable. 


*                              *                              *


A big downside of apartment or gated-estate ownership in this country has been the poor service delivered by many of the management companies that were set up by the original developers to do ongoing repairs, cut the grass, change the light bulbs and service the boilers. For many unsuspecting owners, the charges have been disproportionate to the service, which was sometimes non-existent. 


The National Consumer Agency took up the ‘multi-unit’ owners’ cause by setting up a consumer property section on their website and developing a code of practice for the Irish Home Builders Association and the property owners (see http://www.consumerproperty.ie/downloads/downloads.htmlfor copies of the various codes.)   


This has been an enormous help to both existing and new condo owners, but some are discovering a new problem:  what do you do when fellow owners lose their jobs, move away, or hand back the keys to their flats or townhouses to the banks because they see no point in continuing to pay off a loan that is worth less than the property? 


As the NCA website notes, “Once you sign up to a management company agreement, remember that it is legally binding. It sets out your rights in terms of what the company will do for you, but it also places an obligation on you to pay for the services it provides.”  And one of those obligations may very well be a contractual obligation – that you never bothered to read – that requires the remaining owners to share the costs (sometimes with the management company) that are no longer being met by a fellow owner. 



Defaulting owners may have to be pursued through the courts, but in the meantime, a friend who owns an apartment in a very smart building in the Dublin suburb of Rathminestold me that she has already received a notice from her management company to say that their annual fee will have to rise in the next quarter for this very reason, or services will be reduced.  


“’Take it or leave it’, we were told,” she said. “I don’t fancy cutting the grass or putting out the rubbish every week, so I guess I’ll have to pay up.”


You might want to take a closer look at the small print in your contract, especially if you see the owner of apartment 2C down the hall moving out…before a For Sale sign even goes up. 


*                   *                  *


Last year, my old rocker of a spouse agonised over whether it was worth paying€135 to see Tom Waits in a leaky circus tent in the Phoenix Park.  He eventually succumbed on the basis that Tom is ‘a legend’ who might never play in Ireland again.


Now he’s doing the same again about spending between €96.25 (to stand) and up to €131.25 to see Ry Cooder – another elderly ‘legend’ in the Olympia next June – and that’s before Ticketmaster gouges him for its €3.35 service charge. 


This time, he’s decided enough is enough. “Have concert promoters not grasped that the economy is on the ropes, people are keeping their money in their pockets and the prospect of paying a minimum €100 for a two hour gig is just  not on?”


Fifty-something music fans may not have huge mortgages and creche fees to pay, but they’ve watched their pension funds tank this year.  


Concert promoters and their artists, just like the rest of us, need to ‘get real’. 

1 comment(s)

Money Times - 11/02/09

Posted by Jill Kerby on February 11 2009 @ 23:13

ANALYSIS: The impact of tax relief means that those on higher incomes in the public service will, in percentage terms, suffer a smaller hit to their incomes than their lower-paid colleagues, writes Dominic Coyle

WHEN PUBLIC service workers open their pay slips next month, they will notice a drop in their take-home pay as the pension levy announced this week by the Government kicks in.

The actual impact will depend on their current pay. They will also benefit from tax relief on the sum deducted towards their pensions.

Taoiseach Brian Cowen said the levy would take 3 per cent from the first €15,000 earned in a year.

Above that level, 6 per cent will be deducted on earnings between €15,001 and €20,000. On anything higher, 10 per cent will be taken.

The levy will take into account total earnings, not just salary. In that, it will operate in the same way as the income levy introduced by the Minister for Finance in the last budget.

That means overtime payments, which do not count when calculating pension entitlement, will be included when applying the levy.

However, the impact on take-home pay will be reduced because workers will receive tax relief on the amount deducted in the pension levy. Income tax, PRSI and the health levy will only be assessed on the amount of pay left after the levy has been deducted.

That will hit the Government coffers which are likely to receive closer to €900 million as a result of the levy.

For those earning above the marginal tax threshold – €36,000 for single people and €45,400 for married workers bringing in the only family income – tax relief means they will no longer be taxed at 41 per cent on the portion of their income taken in the Government pension levy.

The Department of Finance says average earnings in the public service amount to €50,000. At that point, the levy will amount to €3,750, or 7.5 per cent of earnings.

But that will be offset by the tax relief. Precisely how much tax will be paid depends on whether people are single or married with just one income.

People first recruited to the public service after 1995 already pay limited pension contributions and that will also affect their final take-home pay.

A single person who joined the public service after 1995 and is earning €50,000 will see his or her annual take-home pay drop only €1,998, rather than the €3,750 indicated by the levy – effectively a 4 per cent fall in take-home pay, not the 7.5 per cent headline rate.

The worst-off workers at that salary point would be a married public servants in a household with just one income – again recruited since 1995. They will see a net fall of annual take-home income of €2,331, but even that is 4.7 per cent of their pay.

The impact of tax relief means that those on higher incomes in the public service will, in percentage terms, suffer a smaller hit to their incomes than their lower-paid colleagues.

An assistant principal employed since 1995 and earning €69,659 will face a levy of €5,712. At first sight, that amounts to an 8.2 per cent cut in pay. However, when the impact of tax relief is taken into account, the real hit to earnings is just €3,239, or 4.6 per cent of take-home pay.

At the other end of the scale, a married clerical officer on €25,338, who has worked in the puiblic sector since before 1995 and is the sole earner in their household will face a pension levy of over €1,413, or 5.3 per cent.

Even after allowing for tax relief, this worker will still face a 5.1 per cent, or €1,361, fall in annual income.

The largest group of public service workers earns between €40,000 and €60,000 according to figures supplied by the Department of Finance.

The Government will have to introduce legislation to permit the introduction of the levy. It expects to have this in place to allow the tax authorities implement the levy from March 1st.

While the figures first presented by the Government indicate that public service workers could be facing an effective pay cut of over 9 per cent, it appears now that, for most, the figure will be closer to 4 or 5 per cent of their take-home pay.








Talks between the social partners broke up without success at 4am today when the unions could not agree to the proposals for substantial payments from public employees towards their pensions. 

The pension-related payment will form the main part of the cost-cutting package. Mr Cowen said that it would save €1.4 billion on the public pay service bill. The levy will be graduated with those public employees on higher earnings paying a higher percentage of their income. He also said that the payment would apply to local authority employees. 

Later in the Dáil he gave more details of the package. Those earning €40,000 per annum would pay €2,750 or 6.9 per cent; those on €50,000 would pay 3,750 or 7.5 per cent; and those on 100,000 would pay 8,750 or 8.8 per cent. At the highest scale of pay in the public service, those earning €300,000 will pay €28,780 or 9.6 per cent. However, the contributions will be calculated on gross income and not on taxable income. 

The new payments system will be viewed as the most controversial and are expected to meet resistance from unions and from public service employees. Ictu general secretary David Begg said this morning that they would lead to a "revolution" from lower paid workers.


He said the largest concentration of public servants was in the lower and middle income bands and for the Government to generate significant revenue from the pension levy this was where the emphasis had been placed.

He said the Government's proposal was to raise €1.35 billion from the levy which would have been applied according to a complex formula ranging in scope from 3.8 to 9.6 per cent.

However he said the levy proposals would have proved to have been very onerous for those in the low and middle income groups and would have represented “more than the traffic could bear”.

"This would cause such a shock to the system that we would not have been able to sustain it and we would have had the worst of both worlds where we would put out some proposal to our own people who might simply rebel against it and would not really be able to assimilate why it was happening."

“It was a judgment call - we could not do it just today. It was just not possible," he said.

Mr Begg said the process to agree a national economic recovery plan with the Government and other social partners had “run out of road”.



The new pensions levy will be calculated on gross pay and will range from a 3 per cent contribution for workers earning €15,000 up to 9.6 per cent for staff earning €300,000.


PUBLIC SECTOR workers will, in effect, get tax relief on their pension levy contributions. As a result, the impact of the levy on middle- and higher-income public servants will be considerably lighter than initially indicated.

The average public sector worker, earning €50,000 a year, will see a 4 per cent cut in their take-home pay, despite paying 7.5 per cent in the pension levy. Speaking in the Dáil yesterday, Minister for Finance Brian Lenihan said: “Public servants paying the new pension contribution will be treated for tax purposes in the same way as those making pension contributions in the private sector.

“Contributions will be deducted from gross pay by employers before income tax, PRSI and health levies are calculated and, as such, pension contributions will be effectively relieved of tax at the marginal rate.”

Mr Cowen announced the levy on Tuesday as part of a package of measures designed to cut €2 billion from Government spending this year after talks with the social partners broke down over the refusal by the Irish Congress of Trade Unions to accept the proposed levy.

He said the pension levy was projected to cut Government spending by €1.4 billion in a full year. However, the money lost in income tax and other deductions will significantly offset this. While no precise figure is available, Government sources said the exchequer was likely to benefit by about €900 million in a full year. This year, the figure is likely to be closer to €750 million, as the levy is not due to take effect until March 1st.

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The Sunday Times - Money Comment 08/02/09

Posted by Jill Kerby on February 08 2009 @ 22:31

The public and civil servants who have flooded the airwaves this week objecting to the pension levy seem to have missed the point that the money that will be deducted from their incomes from next month isn’t gone forever. It, ostensibly, is to be used to ensure that the pension they signed up for when the joined their department or school or hospital will actually be there to collect in 15 or 20 or 30 years time. 


The pay-as-you-go funding system - for pensions and to meet the cost of even a country’s treasury bonds when they fall due – is the biggest pyramid scheme around.  The only way the pension pyramid keeps from collapsing is because governments, unlike conventional pyramid scheme organisers don’t just have to rely on the members; they can force even people who don’t get any of the money to pay up, and their children and grandchildren too in the case of those much needed, but not so easy to pay back bonds. 


The problem is that when hard times hit, like now, and a lot of the tax money dries up and the foreigners are not so keen to lend anymore, governments have to come up with other ways to keep the pay-as-you-go system in place.   


The c7.5% average pension levy that 350,000 public and civil servants will be paying isn’t really to pay for their pensions – it’s to meet the cost, this coming year, of a portion of everyone’s salary, to keep the lights burning all night in Dail Eireann, to ensure that some roads are cleared and gritted…you get the picture. Only the National Pension Reserve Fund was specifically set up to actually meet some of the cost of pensions from 2025, and now it too is being raided to keep the paying-as-we-go. 


It could have been worse last Tuesday.  If the government had listened to some of the social partners P60s would have seen more than just that universal 1% income levy deducted in 2009 and about 20,000 public and civil servants would be collecting their P45s as well. 


And as for those nurses, teachers and filing clerks who say it’s so unfair and that they had nothing to do with the economic collapse, take comfort in the fact that you are not alone: none of the 36,500 souls who joined the dole queues last month (except maybe the Anglo Irish executives who lost their jobs) areto blame either.  


The people who should be forfeiting their big, fat pensions right now are the ones sitting in Government buildings who never saw the pyramid scheme for the fraud it was and still have their hands in your pockets, rifling around for your wallet and any loose change. 


*                            *                          *


On the day that my neighbourhood hairdresser told me she was no longer taking credit card payments, I got my annual TV license renewal form from An Post.  They’re not taking credit card direct debit payments.  The merchant charge is just too high, they both say - a sign of the times. 


Credit card transactions are falling as consumers reign in their spending, and some retailers find they have no choice but to abandon their swipe machines as their profits fall, but the merchant’s charge, which can be as high as 5% of the transaction, doesn’t. 


It’s no great loss.  The easy, expensive credit offered by the card companies and banks during the boom is now just another millstone that thousands of people are dragging behind them now, especially if they’ve lost their jobs. 


The criteria for qualifying for a credit card has tightened, say the banks, but clearly not enough: the 18 year old college-going daughter of a friend of mine, who is lucky enough to have kept her part-time summer job at Dunnes Stores,was offered one last week.  


*                              *                             *


“It isn’t going to be the ‘working poor’, or even long term social welfare recipients who will take the worst beating by this depression. That honour is going to go to the middle and higher earners, whether they work in the public or private sector,” said a small business owner I know, who had to let eight employees go in the past six months.  


First, itwas the income levy and the second home property tax.  Now it’s a pension levy for the public sector and a smattering of other small, disjointed cuts to benefits like the incongruous Early Childhood Supplement and the Africa aid programme. 


The next time – perhaps when An Bord Snip finally reports – the expectation is that the cutback game will be stepped up with bigger ticket items targeted, like a property tax on first homes, the taxing of universal benefits like child benefit, the re-introduction of third level fees, and worst of all, a rise in income tax rates, the most efficient way, in my view, to deepen and strengthen the downturn.   


I don’t know about you, but if there is bad financial news out there, at this stage I’d prefer to hear it all at once, rather than have it drip-fed. 


However misconceived, I want to know sooner, rather than later, how much money the government plans to leave in my pocket. The worst disservice this government is doing to the ordinary person and their family is not to share with them the nittygritty of where and how billions must be cut, saved or borrowed if we are to avoid national bankruptcy.  

On a personal level it will certainly make it easier to cope with the minor and major plans that everyone has: to keep saving for a kitchen extension …or have another baby?  To re-train for that dream job, or just hold onto the security of this one? To take the family to the cousin’s wedding in America next summer or just rent a caravan in Brittas Bay? 


It’s times like this we should envy the Swiss.  There, nothing of major importance happens unless the people are consulted directly. They electorate are not kept in the dark by their representatives. Their opinions count, and mostly, the people do the right thing in own and their neighbours’ interests. 

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The Sunday Times - Money Questions 08/02/09

Posted by Jill Kerby on February 08 2009 @ 22:25

GD writes from Navan: Could you please advise on how to go about buying gold, who to approach what banks, what quantities etc. I would really appreciate your assistance.


Gold pays no dividends or annual yield, but nor does it disappear. It’s job – for the last 5000 years has been to simply endure as a store of value during times of inflation, war and general economic uncertainty.  It is why the price of an ounce has risen from c$250 an ounce in 1999 to nearly $900 an ounce today.  (It was $801.50 two weeks ago on January 15th.) Some commentators, including the Irish gold bullions dealers, Gold and Silver Investments in Dublin predict the price will rise to over $1,200 an ounce this year as the risk of inflation returns due to the huge supply of debt and credit by central banks since last autumn. You can buy it in a number of different forms – gold coins and bullion which carry a c10% premium on top of the spot price due to the high demand for physical gold and as gold certificates from the Perth Mint of Australia, (which I own) which represent the value of a quantity of physical gold that you have purchased and which is kept in the Perth Mint vaults. You can also buy gold in the form of an ETF – an exchange traded fund, that trades like a share on a stock exchange or you can opt to buy gold mining stocks that have underperformed the spot price for the past year. If you buy physical gold there are delivery and insurance charges and you will need somewhere safe to store it (at an annual charge). ETFs are a relatively inexpensive way to buy the shares, but there is counterparty risk to consider (ie the trading firm) and you will have to pay a broker sales commission and a(low) annual fee of probably less than 0.5%.  Gold certificates carry a sales commission of between 2%-4%, but there is no annual charge or storage charge and they involve no counterparty risk.  See www.gold.iefor information about gold in its different forms.   




AN writes from Dublin: I sold on an investment I had in Dubai approximately 16 months ago for and approximately $70,000. I put the proceeds into an Ulster Bank dollar account. I am concerned about the current state of the dollar and the possibility that it may collapse. I did ask the bank for advice on this some weeks back and it was suggested to leave it as is and that as the dollar would be safe. Could you suggest a safe policy?

The dollar has recovered a little of its strength against both sterling and the euro from this time last year, mainly because nervous investors are turning to US treasury bonds in particular as a safe haven from the turmoil in the markets.  Yet, these bonds are paying miniscule returns and there is growing concern that foreigners – especially the Chinese – will not keep lending the Americans the huge sums they need to even keep paying the interest on the huge debts. Many predict that the level of monetary and debt expansion that is underway will lead to inflation – and ultimately in the devaluation of the US dollar. How soon will this happen?  No one knows for sure, so your dollars are indeed safe at the moment, though the US currency has certainly fallen against an asset like gold. It now takes about $900to buy an ounce of gold; 16 months ago, you would have needed only about $700.  Perhaps you should consider spreading your risk a bit wider, by diversifying your money into other, safer, assets that might include government and blue chip corporate bonds and deposit accounts other than just the US currency. 




MS writes from Dublin: Having looked with interest at the Sunday Times property price survey last weekend, I can see that my current offer is within range of the overall fall in prices for the area in Dublin I'm looking in - about 29% off the peak asking price compared to 25% in the survey. The imponderable question is, am I mad to go ahead with a purchase given the continued uncertainty? Could we see a freefall in property prices (a la the banks)? Meanwhile I'll be committed for the next 20 years.  Is it possible to strip out the effects of the worst speculative phase and estimate what a two-bed apartment of 100 sq metres should really be going for? On the "go for it" side, I need somewhere to live, the area is a agood location for me and this apartment meets all my criteria and already has close to a 30% fall in price locked in.  


You tick all the right boxes for a shrewd property buyer:  the apartment is suitable for your needs, the location is good, theprice is already down 30% and at least seems more competitive.  What you don’t know, and neither doI, is how much longer the property market is going to contract. My guess is that it still has some way to go, and that’s because not only was the bubble much bigger than just 30%, and lending is still very tight, but other factors are probably going to push down prices further going forward such as the possibility of the reform of tax relief on mortgage interest, stamp duty and the gradual introduction of property tax and rates.  Most asset prices eventually return to their ‘mean’ and that’s what’s happening now. The best formula I’ve come across for judging whether a property is worth its price is to multiply the rental yield – the equivalent of a share’s earnings on the stock market by a factor of between 12 and14. If your prospective apartment commanded a top monthly rent of say, €1,500, or €18,000 a year, when multiplied by the average factor of 13, it’s market value is closer to about €234,000.  Too many amateur – and professional – property buyer/speculators ignored the yield and only paid attention to what they believed would be perpetual capital gain.  If you can afford to service the mortgage at today’s market price and have no intention (or need) to sell this apartment for the next decade, then buy it now. Personally, I’d offer to rent it for a few years.

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Money Times - 04/02/09

Posted by Jill Kerby on February 04 2009 @ 22:58



There are plenty of good reasons to be saving money these days.  A contingency fund with three to six months net pay in it can meet unexpected expenses like a busted central heating boiler, car repairs, school fees or even a family holiday that can’t be paid for out of the monthly pay cheque or by the credit card.  Many people who have been put on short time or have lost their jobs are discovering just how handy it is to meet their immediate household expenses. 


Unfortunately, it looks like another reason to save could be introduced  - the re-introduction of a universal property tax – and could supercede all the others. 


By the time you read this, the government’s €2 billion spending cuts and tax add-ons will have been announced.  If the list includes a tax or levy on second homes it isn’t expected to be a particularly large sum (€200 has been suggested) and it isn’t expected to raise more than about €52 million a year, a drop in the ocean of our annual expenditure.


Instead, the introduction of a tax on all principal residences is what Central Bank assistant director Tom O’Connell, believes is needed to plug the huge revenue shortfall the country is facing. Last week he said that a €1,000 charge would raise €1.7 billion every year.  (This year’s tax gap alone is €2 billion.)


A universal property tax is unlikely to be introduced immediately – the impact would be huge, politically devisive and would require major property tax reform, especially on existing stamp duty rates and the current capital gains tax exemption on principal private residences.


A flat property levy of €1,000 is unlikely since it would not differentiate between the elderly person living in a tiny cottage and the multi-millionaire in their mansion or the realistic annual yield (ie how much rent the property could realistically raise).  It also smacks of the hugely unpopular poll tax that finally helped to bring down Margaret Thatcher’s government in the early 1990s. 


Instead, the government is likely – probably on the urging of the Commission on Taxation, which is preparing a major report by the Autumn - to consider a more conventional property tax formula, such as those already in place in other jurisdictions.  


These places most commonly set their rates based on a percentage of the market value (as determined by the local authority) perhaps with tax relief applying for households owned by low earning pensioners, the disabled or families with children.)  A typical percentage of market value is somewhere between 1% and 2%.  The rate usually varies depending on location, population and the cost of services to the local authority or municipality. 


At 1% per €1,000 market valuation, a typical property worth c€260,000 (according to the Permanent TSB/ESRI property index) would result in an annual charge of €2,600.  Anyone whose home is still valued in the region of €1,000,000 might face a bill of €10,000 a year. 


Such a drastic change of tax policy here will be a huge political issue and will inevitably be resisted. Given how much unwinding will be necessary of the current way taxes apply to property, changes will most likely have to be introduced gradually if only because any universal property tax would further depress house prices …and, it must be said, taxable valuations too.


If this tax is introduced, would you be able to afford it, whether it is deducted directly at income source or, more typically in other jurisdictions as an annual or bi-annual payment?  (Some allow monthly payments, but with an added premium costs.) 


If you are a homeowner, and don’t already have a good regular savings account, you should seriously consider opening one – forewarned is forearmed. 


The best regular savings accounts are currently available from AIB and the EBS Building Society, ostensibly for parents saving for their children’s future, but there is nothing to stop anyone from opening the account. (Each parent can open up to an account in the case of AIB Parent Saver product.)


The AIB  ‘Parent Saver’ pays interest of 8.25%, 6% of which is the premium over the ECB rate until May 20th on maximum monthly savings of €200.  After that date, the bank will pay the ECB rate (currently 1.75%) plus 4% until May 20. 2010.  As a variable rate account, you should expect the rate to be adjusted again after that date. 


The EBS ‘Family Savings’ account pays fixed annual interest of 5.1% for the first year on regular, monthly sums of between €100 and €1,000 after which the rate will be reset. Anglo Irish Bank and Bank of Ireland both have substantial regular savings rates of 7.3% fixed for one year in the case of Anglo Irish on sums of up to €1,000 a month while Bank of Ireland is offering a variable rate, currently 7%, on sums of up to €500 a month to a maximum of €5,000. 


Each bank varies the number of withdrawals it allows so check the terms and conditions.





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