Jill Kerby

 “There’s no way I can afford to save €283 a month,” a myriad of callers told Newstalk radio’s morning show last Wednesday after they ran a report about the latest Postbank Savings Index take on the average level of savings.

The next morning Newstalk asked yours truly to provide a profile of the sort of people that are saving, and I duly pointed out that the €283 is the ‘average’: this literally means that half the respondents to the Milward Brown Lansdowne survey at the end of December, early January, are saving up to that amount and the other half in excess of that amount.

On which side of the average you fall depends very much on your age and the amount of debt you are carrying, but overall, 40% of those surveyed reported that they had no debt, and it is this proportion of respondents who clearly are the ones who account for the bulk of the higher amount of savings.

For example, 50% of 18 to 24 year olds have no borrowing; a quarter of 25-34 are debt-free; 27% of 35-49 year olds have no borrowings, 42% of those aged 50-64 and 70% of those age 65 and over. Interestingly, the people who are in the greatest debt, the 25 to 34 year olds and the 35 to 49 year olds are also the ones who are both reporting that they intend to spend less in 2010 (54% and 60% respectively) and will decrease their borrowings (30% and 37%) the most.

The 25-34 years olds (the age group with the largest first time mortgage take-up in recent years) are also among the highest savers at €356 per month, compared to €270 for 35-49 year olds and €277 a month among the 50-64 year olds. Pensioners save an average, for their age cohort, of €258 per month. This survey also found that while 76% of the respondents are saving regularly, that figure is down about 4% fewer than the previous quarter and that average amount of €283 is also down - from €305 a month in Q3 of 2009 and from €344 a month during the same period of 2008.

Nevertheless it is estimated that the amount being saved now represents about 11% of disposable income. Also reflecting the poor economic situation is that 45% of respondents – this percentage is rising from previous survey periods – said they expect they will have to dip into their savings this year. The average for those reducing their debt is 25% (but seen from the above breakdown, is much higher among the 25-49 year old groups) and only 6% will increase their debt in 2010. Fully half of all respondents said they expect to also cut their spending this year with pensioners being least likely to do so at just 13%.

The purpose that most people – c33% - give for this level of savings is mainly to ensure that a ‘rainy day’ or emergency fund is in place to meet those unexpected expenses, or falls in income.

One small but welcome ray of hope for travel operators is that all age groups except the 25 to 34 year olds (16% of all respondents – the highest percentage recorded in 15 months) said that they were saving for a holiday this year.

Meanwhile just 4% on average said they are saving in order to buy a car and only 6% were saving toward the purchase of a house.

The Postbank survey does not include the total amount of personal savings in the economy, but estimates as high as €180 billion have been suggested.

Some economists describe this savings rate as a form of hoarding that is damaging the economy. They’re wrong of course. High savings are a typical reaction to recession that occur as a result of a serious banking crisis that in turn has been caused by excess credit and liquidity which is suddenly withdrawn, as it has been in highly indebted western economies like our own. It’s also a natural reaction when a country is caught in a deflationary vortex (as is the United States and the UK) and people see asset prices falling; better, they reckon, to wait until prices hit bottom before they make their purchase.

What will stop the vicious cycle isn’t consumers willingly buying at the higher price – that clearly is not in their interest – but in the return of confidence in the banking sector and the general economy, something we have clearly not yet achieved. The danger for savers, is that the government, which is increasing the c€77 billion national debt by millions every day – you can watch the figure tick up here: http://www.financedublin.com/debtclock.php will decide to raid our rainy day fund by sharply raising the DIRT tax from its current level of 25%.

Think they won’t? You may want to recall that DIRT was just 20% at the beginning of 2009.

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MMcH writes from North Dublin: I know you have written extensively about the importance of maintaining life insurance even in difficult financial times and I fully agree with this advice. I would however, like to ask your opinion on the following: my husband and myself (both now 50) pay approx €350 per calendar month on a 20 year mortgage of €500K. My husband was "weighted" as he had pre-existing illnesses. We now find this payment punitive and while we both have life assurance cover associated with our jobs, it was pointed out that this was only in place as long as we both were in these particular positions. Is there any way we can reduce the premium without going though the stress of hawking ourselves around to new brokers? Can we reduce our cover as the outstanding amount on the mortgage has been reduced?

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I asked financial advisor John Geraghty of www.labrokers.ie for his opinion about your case. Without knowing more about the type of loan you have and the medical reason for the loading of the premiums, he was unable to determine whether your policy is ‘good’ value or not. Nevertheless there are ways to try and reduce the cost he says though it depends on the cooperation of both the lender and insurer. First, you could, as you suggest yourself, ask to switch to a policy that reduces the cover in line with the depreciating balance of capital you owe. Not all insurers are in a position to do this as it depends on the terms of the underwriting of the policy, he says. Another option is to seek cheaper cover from another provider, “but given that your readers are probably a couple of years older now and the health condition they refer to may still exist, they may not be able to secure a lower quote.” If your husband’s health is better, however, the loading penalty might be lifted and this savings may cancel out any higher age-related premium, he says. Next, since you are now both 50, you can ask your mortgage lender if they would be willing to waive the requirement for the life cover. But, says Geraghty, only expect them to do this if they are satisfied that the surviving partner’s income is sufficient to comfortably meet the loan repayments and/or the sale value of the property would cover the outstanding balance owed to the lender. Finally, you don’t say if you have any other life insurance policies of similar duration to the remaining term of your mortgage, other than your death in service benefits (which cannot be assigned against a mortgaged debt). If you do, the lender might allow these to be assigned to the loan, therefore allowing you to reduce the balancing cover (and cost) of the existing policy. Again, this depends on the existing policy being amended and not having to be re-issued. If that happens, says Geraghty, your ages and health circumstances would probably result in a higher premium that might cancel out the benefits of having access to the other policy. Given how there are so many permutations to consider, you really should engage a good broker to help you cut your costs. 

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BA writes from Dublin: Post Office savings certificates and bonds are advertised as tax-free savings and I receive an annual certificate of interest on every cert and bond. Does that mean that in my annual tax return, where it states under the heading ‘Irish Deposit Interest, Gross Interest Received’ (from which DIRT was deducted), that one must state how much they have earned each year from the Post Office? If that is the case then these are not tax-free as one will have to pay income tax at the higher rate if their pension/ salary plus extras plus interest on certificates and bonds bring your income over the lower tax rate as these earnings are all added together and you are now taxed on this total.

 

You are worrying for no reason. The deposit interest you receive from your Post Office savings, which is limited to a sum of €120,000 for an individual and €240,000 for a married couple - is entirely tax-free. You do not have to include the existence of your certificates or bonds or any interest earned from them in your annual tax return to the Revenue Commissioners. 

 

SW writes from Dublin: I hold a small self-administered pension scheme which is administered by a pensioner trustee. Along with your comment on the Sunday Times (17th January) I am opposed to paying the sky-rocket brokerage fees charged for my infrequent buying and selling of shares under the pension scheme. Would you know if it would be possible to set up an on-line, execution-only stock broking account for a small self- administered pension scheme?

 

According to pension expert Judy O’Rourke of Global Pension Options in Dublin, there should be nothing to stop you and your trustee from setting up a lower-cost execution-only brokerage account in order to reduce your share transaction costs. “But your reader needs to know that under self-administered pension scheme regulations he cannot act separately from his trustee in purchasing shares or any other assets.” This is something you will need to discuss with your trustee.

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The Sunday Times

MoneyComment  Feb 7

By Jill Kerby

 

 

Last weekend the Minister for Communications, Energy and Natural Resources Eamon Ryan told The Sunday Times that the government planned to appoint a panel of external experts to provide proposals to deal with the huge problem of residential mortgage debt and defaults.

 

I wish I could believe that there is such a thing as ‘a panel of external experts’ in this country, especially regarding mortgages and property.  The ones in the banks who claimed expertise, turned out to be morons.

 

Anyway, the minister says this expert panel will consider every option, such as stretching mortgages over longer terms to reduce monthly repayments; debt-for-equity swops where lenders would take ownership stakes in borrowers’ homes; and even purchase or rental arrangements similar to the joint ownership schemes that are now operated by local authorities.

 

The lobby for legal aid quickly joined in too to say that new insolvency rules will also have to be introduced to allow those mortgage holders for whom none of the above will be suitable, to be able to hand back their keys without facing financial ruin.

 

All of these proposals, said Ryan, are in addition to the repossession moratorium already in place with the main banks and the mortgage interest supplement (MIS) currently being paid to struggling mortgage holders. 

 

I reread the Minister’s comments several times, but couldn’t find any reference to the most important consideration of all: how much will all this cost, and who pays? 

 

If, by some miracle, the billions of euro that will undoubtedly be required are found, what about the moral hazard – the danger that homeowners who are just about coping with their negative equity mortgages might decide it’s also in their interests to walk away from their debt?

 

The Economic and Social Research Institute now estimates that a third, or up to 196,000 of all households are in negative equity- owing more than their homes are worth. 

 

The Financial Regulator says that at the end of last September 26,271 mortgages were in arrears for more than three months, with 17,767 mortgages in default for more than six months.  If the mortgage interest supplement was cut off tomorrow, the arrears figures could theoretically double.  Given than the figures are six months old, they probably have done so anyway.

 

At the end of last year, according to an Oireachtas report by Deputies Thomas Byrne and Olwyn Enright, 15,100 people were in receipt of an average €367 monthly mortgage interest supplement and another 1,000 applicants were being turned down every month.  (At the end of 2007, just 4,111 mortgage holders were getting this supplement.) 

 

The annual cost of this bail-out is already over €66.5 million. So who will pick up the even larger tab?

 

The last time I looked, the Irish banks were still on life support. Loading them up with yet more arrears doesn’t sound like a very likely solution. 

 

As for the state carrying the can, the national debt, you may not have noticed, is already €76.976 billion as I write and rising by the hour. Check it out at: http://www.financedublin.com/debtclock.php

 

 

The Minister might want his panel to look at the experience in America before endorsing the idea that borrowers could exchange their unaffordable mortgages for a rental contract under which they lease some or all of their home from their lender.

 

In some places where this state or federal backed ‘solution’ has been tried, many first time buyers in particular have come to regret signing up. The monthly outgoings might be lower, and the threat of eviction removed, but they are now repayments might be more affordable and they aren’t in danger of being evicted, even more tightly locked into starter homes that they never intended to live in for more than a few years. 

 

 

As the resentment increases,  lenders will find more sets of keys pushed through their letter boxes.

 

 

It’s possible that the Minister and his panel of mortgage experts will come up with a set of proposals by the summer…but affordable, workable ones are another matter altogether.

 

 

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The Irish League of Credit Unions told a Joint Oireachtas Committee on Economic Regulatory Affairs last week that it was unhappy with “the over-zealous and intense” approach that the Registrar of Credit Union Brendan Loguehas taken in his regulation and supervision of them.

 

 

It’s nice to know that at least someone in the Financial Regulator’s office has been doing their job properly. 

 

 

Too bad the ILCU doesn’t see it that way.  It’s convinced that credit unions are being subjected unfairly to onerous regulation when the banks and building societies have got away with ‘soft-touch’ regulation.

 

Credit unions had no part in bringing the country to the brink of financial ruin, but in the few years that Brendan Logue has been in charge of regulation, he has uncovered all sorts of debt and solvency problems, poor investment practices and compliance and administrative shortcomings in several credit unions.

 

Logue will retire shortly and I hope his successor takes the ILCU’s criticism for what it is, and keeps doing was Logue has been doing.  It’s clearly working.

 

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These are worrying times for investors, holders of pension funds, pensioners dependent on fixed incomes and for anyone else with some money that they want to preserve, let alone see grow in value, however modestly.

Over the last fortnight or so, the question on the minds of many of the commentators that I read every day, is whether the stock market rally, which began in March and has resulted in up to 70% recovery of the value that was lost when markets crashed in late 2008, is coming to an end. (Not all markets have recovered at the same pace.)

There isn’t a consensus, even among those non-mainstream media and private newsletter writers that I subscribe to, but enough of them who accurately called the original collapse, are now suggesting that stock markets seem poised for another fall, perhaps to a point even lower than was hit last March.

No one knows the future; the best analysts and advisors admit that. But their reasons for believing that the market recovery is not sustainable seem more compelling than the empty forecasting that is now going on by bank and stockbroker economists and analysts, all of whom are paid to encourage customers to spend and invest in the stock markets or in investment funds they recommend. Their prime role is to help make their employers rich, not you.

For example, how by anyone’s estimation could the 0.1% growth in the UK economy for the final quarter of 2009 be seen as the end of the 18 month UK recession? The UK’s economic debt and deficit is even worse than that of the USA and their banking sector, much of which is still on life support from the UK treasury was recently downgrading by the rating agency S&P (albeit a discredited organisation themselves.)

It is evidence like this – plus still rising unemployment figures, continuing commercial and residential foreclosures, stagnant growth earnings, low to non-existent borrowing and lending by business and consumers, the reluctance of banks to lend anyway – that is fuelling the deep pessimism of so many independent commentators whose only job is to help their customers make money through their advice.

One of their biggest on-going worries is that so many central banks and governments still fail to recognise that adding to their budget deficits and borrowing more and more money (from the Chinese and others) is only pushing indebted countries like the US, UK, Japan and weak European countries like us, Greece, Portugal, Spain, most of the Balkans and Baltic countries, further into a debt crisis. In other words trying to cure a debt crisis caused by central banks and governments by creating more debt is sheer folly.

If you believe that governments are doing the right thing in taking on more and more debt (which we and future generations will have to pay) to support insolvent banks and other industries and individuals who borrowed and spent more money than they could afford to repay, then you must also believe that the massive, nearly unprecedented stock market rally of the past nine months or so is the genuine article and there is nothing to worry about.

If like the anti-government and central bank critics you think this rally has mainly been stimulated by government ‘stimulus’ and the natural inclination for stock market traders to always buy shares after a huge fall in the full knowledge that even dead cats bounce, especially if they have a set of government springs on their poor little dead heels, you should be reviewing your portfolio and deciding whether you are happy to stay in such a volatile market. Keep in mind that most western stock markets have produced no gains since 2000 and when adjusted for inflation, produced losses. Ditto for typical, Irish managed pension funds.

The message the experts have been repeating ever since I started writing about personal finance still holds true: buy shares cheap, sell them high. The variation on that theme is that investors will prosper if they buy the shares of companies that are well-run, don’t carry much debt and post steady dividends. These are the company shares that the likes of value investor Warren Buffett only purchases.

There are companies that fit the above description that are not the huge names that Buffett holds but you need to search carefully to find them. There are some high value investment funds and even low-cost ETFs that you can also buy that fit that description. Many top advisors say you shouldn’t ever worry about what directions markets are going if these are the shares and funds you currently hold.

Unfortunately few people have pursued such a sensible, low-cost, low risk strategy. Most people have their money deposited and/or invested their money in shares (like Irish banks) they clearly know nothing about and in funds they can’t even name.

It is those people who could lose out very badly again if this bear market rally is as artificially contrived as so many independent commentators are now suggesting.

Forewarned is forearmed. At the very least, you should have a proper exit strategy in place if the markets do experience a sharp fall again; fortunes were lost in 2008-2009 because investors and speculators simply couldn’t believe that what went up so high could fall so low.

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HOW MUCH DO WE LOVE OUR MONEY?  TOO MUCH? – February 2010

February is the month in which we are directed to consider our romantic relationships, ideally with the purchase of expensive, odourless roses, tasteless chocolates, scratchy lace underwear and overpriced candle-lit dinners (though perhaps not in that order of preference). 

Valentine’s Day itself is of course, about retail, not romantic relationships.  The amount of money you spend on your paramour if you live in a Hallmark-infested country is commensurate with how deeply, they say, you are committed to the ‘lurve’ of your life.

Luckily, once you’ve been married as long as I have been, it is no longer a marital tragedy (and certainly not grounds for divorce) if you both forget that it’s Valentine’s Day:  it is your teenaged or adult children’s turn to try to avoid exploding that little grenade d’amour.

But since it is February, and the nation is still perilously close to bankruptcy (as are so many of its citizens, especially younger ones), perhaps we should ponder on the subject of love and money a little longer.

How much do we love our children …and our money?  Do we love the former enough to part with the latter, perhaps forever? Is our baby boomer fear of old age and a poverty-stricken retirement so great that we will sacrifice our indebted children to a lifetime – theirs -  of personal and national debt repayment with only a modest hope of an inheritance from us in their 50s or 60s?  That is, if we haven’t blown it all on whatever goes for nursing home care in 30 years time?

We, the baby boomer generation that runs this country, thought we were so clever back in the boom years.  Once we rectified the terrible mismanagement of the economy in the 1970’s and ‘80s by controlling government spending; lowering corporate and then personal tax rates; boosting exports and the software industry, we geniuses then turned our attention to making personal fortunes by…borrowing and spending.

What a plan!  And boy, did it work. 

We reverted to the one thing, secretly, that we loved more than anything: land and the bricks and mortar that can be planted on it.  We not only reverted to type – we turned ourselves into latter-day Gerald and Scarlett O’Hara – only ‘Tara’s acres turned into Tara’s 475 square studio apartment somewhere in the IFSC or on the back road of Mullingar.

We could be the landlords now, not some English landlord, encouraged by governments and banks that conveniently, but artificially, set the price of credit so low that not only did the modest earning civil servant buy into the idea, but they even encouraged their young to follow suit.

The outcome has been …well, catastrophic. Replace Gone With the Wind’s liberated slaves and civil war with 2007’s liberated interest rates and a decimated global banking industry and you’re nearly left with a very similar montage of personal debt and national bankruptcy.

Except that our generation of 24-35 year olds are anything but liberated:  they are now debt slaves dragging heavy chains of mortgage and credit card debt that will prevent them from seeking better work opportunities abroad, and from which they may never be free.

So how much do we really love our children and our country?  Enough for those of us with genuine assets, like property, savings and pension funds – however diminished by the property and stock market crashes - to sacrifice some or all of it to liberate our children and our state from the unrelenting burden of debt we now own?

Think about it.

Our 4.4 million citizens, of whom fewer than 1.9 million are gainfully employed, now carry a national debt burden of €73 billion that is the equivalent of nearly €16,600 per person.  This doesn’t include total private sector debt* of €375 billion, of which €111 billion is residential mortgage debt, €3 billion is on credit cards and €138 billion is accounted for by term and revolving loans.  It doesn’t include the €54 billion Nama debt monster.  (*Source: Central Bank Monthly statistics.)

You can do the maths yourselves.  Except for older citizens, prudent middle agers who didn’t get caught up in the property bubble and young earners with no capacity yet to borrow, the rest of the population, like the country, is now caught in a debt sinkhole that has no apparent bottom.

This could be the year of Nama Mark II, the new debt agency that is set up to try and liberate the cohort of indebted earners (and unemployed earners) in an effort to secure the country’s long-term future (and the baby-boomer’s retirement.)

Unfortunately, this time it probably isn’t going to be as simple as raising another €20 or €30 billion off foreign debt markets to pay for a debt-for-equity swop that involves the banks and/or government. That extra debt write-off could push the dodgiest of the insolvent lenders over the edge, not to mention the country itself.

And even if such a new refinancing deal could be arranged, in itself it does nothing to liberate the mortgage holder from the miserable starter home or apartment on the wrong side of the M50 or in a midland’s bog estate. These are the sorts of places where half the houses are vacant and the others are beginning to look like a dog’s breakfast because they’re all in negative equity and the trapped owners are already resentful of the fact they are stuck…and stuck facing a possibly new rental/purchase contract with the bank manager as co-owner and co-signee.

The mortgage and negative equity crisis here is merely a private reflection of the wider credit nightmare the country finds itself in:  there simply isn’t enough income around to meet both the interest repayments on our debts or to write down the capital as the asset depreciates. 

Since the likelihood of the government raiding the tens of billions of wealth of those who have it – the mortgage-free, cash and asset rich pensioners and middle agers – and forcing them via penal taxation to buy the toxic property loans of the young is zero; and announcing national bankruptcy in order to write off the rapidly accelerating national debt is zero, where does that leave the young debtors?

Well, nowhere. Not unless one of the following happens: 

1) There is an immediate economic recovery and a new property bubble forms to allow them to start making their mortgage payments and to sell their properties at par or profit.

2) Hyper-inflation happens sooner than later and all that mortgage debt is inflated away.  (This is a terrible short-term solution that would only favour those who still have a job when the dust settles.)

or

3) Those who truly love their young take the initiative and transfer their equity for their children’s debt and hope that that good deed is reciprocated in old age. 

 I think the last option holds the most merit.  You might give it some thought this Valentine’s Day.

 

 

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