Jill Kerby

START SHOPPING AROUND NOW…FOR LIFETIME COMMUNITY RATED HEALTH INSURNANCE

Remember the story of the golden goose?  The cost of health insurance comes to mind every time I think of how easy it is to kill off a good thing – or at least move in that murderous direction.

Only after as many as 250,000 people had dropped their private health cover did the government and health insurance industry finally realise that drastic action had to be taken if the private side of Irish health care was not to further implode, putting even more pressure on our seriously under-achieving and over-spent state health service.

The solution was a long-suggested development:  Lifetime Community Rating - LCR for short – which from May 1, 2015 will replace the faulty Community Rating that has been in place since the 1960s.

Under community rating rules, everyone can purchase any health insurance plan on the market regardless of their age or state of health. (Over 2m people have a plan.)

The downside of CR, however, is that the pyramid on which it is built becomes unstable if there isn’t a large, steady stream of young members joining every year, paying premiums for insurance that they probably won’t use until they are older and become more susceptible to various health conditions. 

If the pool from which new membership shrinks, then the cost to the insurers soars a) as older customers, still paying modest premiums start making bigger and more expensive claims, b) younger existing members drop down to lower value plans or quit their membership altogether or, c) if more people – especially healthy ones - strategically delay buying a plan until they are in their middle age or older. 

The latter people take a big chance that they might develop some illness or condition before their joining date:  depending on your age you could go 5, 7 or 10 years before your policy covers pre-existing conditions.  Still, under the old CR system they might have calculated that 25 years of NOT paying health insurance made up for the risk of getting ill: and anyway, they were still entitled to treatment under the public health system.

“All that changes on May 1”, says specialist health broker Roisin Lyons, the chief executive of Lyons Financial in Dunboyne, Co Meath.

“Solidarity-based health insurance [like CR] is a good thing, but it is outdated now,” said Lyons, due to the economic downturn and our ageing population. “This [lifetime community loading incentive] is a wise move that will incentivise 30 year olds to buy the insurance.”  Missing the deadline, she warned, “means you are stuck for life with a higher premium. I’m not sure everyone realises this.”

So how much more will non-members of a health insurance plan have to pay if they don’t have a LCR plan by April 30?

A 35 year old who does not buy a plan from VHI, Laya, Aviva or GloHealth will only pay a 2% loading on their future premiums, explained Lyons.  If their policy of choice costs €1,000 a year, “it will cost them €1,020 a year because they didn’t sign up before May 1.” 

But if the person is already 40 on May 1 that €1,000 policy rises to €1,120. A 60 year old who misses the deadline will pay €1,500 a year for the exact same policy, reflecting his 25 years of age over the cut off date of 34 to enjoy the original community rating regulation and not the new ‘lifetime’ one. 

The good news after all of that is that the life companies are bringing out lower cost entry levy plan for the 50-60,000 new members they expect will sign up by April 30.  They cost as little as €450-€489 a year (c€99 for children) and provide a semi-private room in a public (but not a private) hospital. You also get 20% tax relief on premiums.

“This is the equivalent of the old VHI Plan A-type priced plan,” explained Lyons. The benefits are very basic and may not be wholly satisfactory since there is no guarantee of even a semi-private bed/ward in any public hospitals. If you eventually can afford to upgrade to a better plan, waiting periods will apply for pre-existing conditions.

Not everyone will be loaded: if you are already 35 and over if doesn’t apply if you only gave up your insurance in the previous 13 weeks and you will get up to 3 years loading credit if your were insured but stopped your cover for periods of unemployment since 1 January 2008. Also, it you lived outside Ireland on 1 May 2015 but subsequently move here, the loading won’t apply if you get health insurance within nine months and continue to be insured.

If you do want to avoid loading, act soon. Health insurance is confusing, full of terms and conditions so always shop around. Check the www.hia.ie site, or use a good, specialist broker that can explain the merits of corporate plans and “excesses” to cut premiums.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.

WILL THE ESRI SEE THE NEXT CRASH COMING?

The retired ESRI economist John Fitzgerald conceded last week at the banking inquiry that the government funded think-tank didn’t see the 2008 banking crash coming, and wasn’t robust enough in its warnings to the Financial Regulator and Central Bank about the risks to the economy from the overheated property sector.

Yet, after looking back at my own computerized archive of articles from 2000, and the hundreds of reports which I received from 2000 from the likes of the ESRI, the Central Bank, retail and investment banks, stockbroking companies and the private financial newsletters I subscribe to, it’s pretty obvious that just about everybody knew that the growing volume of bank lending during the Celtic Tiger period was going to end badly - eventually - for all the parties who had helped to inflate the great Irish property bubble.

I’ve found references in my own articles from as early as 2002 that the Central Bank and ESRI (which was compiling the monthly property price index with PTSB) were concerned about surging prices - even during the mini-recession of 2001-2003 when employment actually fell, public sector hiring was frozen and Charlie McCreevy brought in sharp spending cuts, that eventually lost him his ministerial job here and the transfer to the EU Commission. 

A very well know investment manager, Frank O’Brien published a widely publicised book, The Purposeful Investor at the same time, that the ESRI and central bankers could not have missed. In it he identified how booms and bust cycles happen. They need ‘an unusually profitable opportunity, leveraged debt, greed and euphoria [and] “the naked exploitation of the gullible.”

Six months later, in March 2003, the Central Bank issued a report that warned that property lending was getting out of hand in an economy where other indicators – including rising unemployment and inflation – suggested a slowing economy. Why was that?  Because ECB eurozone interest rates were still too low – set for Germany’s continuing reunification needs, not ours - and facilitating encouraged too much lending and borrowing (of German savings) in Ireland.

By April 2004, the boom was back and the ESRI/PTSB house price index reported that Dublin and regional house prices were up 11.8% and 13.5% respectively. “Mortgage values are growing by one billion euros a month…” and included their warning that “if something doesn’t give, we could end up in the same scenario that happened in the UK in the early 1990’s where a property crash left thousands of people with mortgages that were worth more than their properties.”

My files show that during 2004-05 the ESRI and the Central Bank each published a number of other reports about the extraordinary level of secured and unsecured debt that Irish people were taking on and warned about what would happen if interest rates went up: rising unemployment would negatively impact on the ability of people to pay their huge mortgages. Prices would fall.

Where the Regulator completely fell down was from 2006 by not even thinking to join up the dots between excessive credit lending for property which the ESRI was tracking every month with PTSB, and the health of the banks.  Despite the US sub-prime property bubble finally hitting its pin and beginning to deflating from 2005 bringing down big and small US banks and sub-prime lenders with it – official Ireland stuck to the “soft landing” idea, even keeping up the illusion throughout 2007 and 2008.

The economic analysts at the ESRI even “predicted” a stronger economy in 2009.

I bring this up only because more bubbles have been blown up since Lehman Bros collapsed in October 2008.  Outstanding debt is even greater than it was pre-2008; bond prices and stock market prices have never been higher, the latter pumped up by trillions-worth of money printing (QE) by central banks in the hope it will kick-start floundering. deflating economies. (No amount of kicking looks like it will resurrect the Greek economy.)

I haven’t found too many recent new bubble warnings from the ESRI. Yet I’m reading many more warnings outside of Ireland about how stock markets have achieved historic highs in 2014 – it exceeded 20,000 for the first time in August 2014 - how property bubbles are being blown up again and even art is exceeding all past historic prices: someone paid €265 million for a Paul Gauguin painting.

In March, the ECB will start €1.1 trillion worth of QE. Will it work? Or will it just blow up all the bubbles even further…until they eventually meet their pin?  What will that mean – when that happens – to our property prices, pension values, share prices?  Are we looking at 2008 all over again, only hugely magnified?

Most of us would be grateful just to know where to get a decent return on our devalueing euro denominated savings and safe assets for our pension funds. But if the ESRI is to justify its continued existence it might also try and present an informed and impartial view of the big economic picture – geo-political warts and all. 

What nobody ever wants to hear again is, “We never saw it coming”.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.

TAX FREE PENSION PAYMENTS MAY BE DUE TO THOUSANDS OF IRISH

If you could access the savings in your pension fund, would you? What about savings in a UK pension fund that you have left behind and thought you would collect at retirement?

From next April 6, all holders of UK defined contribution pensions who are age 55 and over, will have access to their savings. The first 25% of the pension fund value can be encashed tax-free. The balance can then either be encashed at your marginal tax rate; an annuity for life can be purchased with the balance or the balance can remain invested. From this you can then opt to draw down further income (which will be subject to your marginal tax rate.)

The question for Irish holders of UK defined contribution occupational or personal pensions (say if you were self-employed) is how the proceeds of their early encashed pensions will be treated?  Will the UK Revenue still permit 25% of the fund to remain tax free if it leaves their jurisdiction?  Will the Irish Revenue seek to tax the 25% here?  How will both tax authorities treat any subsequent pension income?

Pension access

One of the recurring questions that I’ve received from readers who are self-employed people, small business owners, but also sometimes just ordinary workers since the 2008 crash has been “how can I withdraw some of the savings in my pension fund?”

Access to the tens of thousands of euro (perhaps even hundreds of thousands) in their Irish pensions, they tell me, could solve some very difficult, short-term problems like an unpaid corporate invoice that is holding up an important sale or expansion; mortgage arrears that needs to be paid off or even the payment of university fees.

For many, who worked for years in the UK, “Pension Freedom Day” on April 6 might be the answer they’ve been waiting for. (Pension access is highly restricted but not impossible here in Ireland, but it is complicated by the kind of pension you have, your age, the state of your health and the rules of your individual pension scheme.)

Financial advisers and pension experts I have spoken to, including a spokesman for the Irish Association of Pension Funds say that no guidance notes have been issued by the Irish Revenue about the upcoming changes in the UK pension system.

They say that the UK development is not referred to  - not surprisingly since it is brand new – in the rules that do apply to tax treatment of foreign pensions and income that is reverted to Ireland.  Despite the dual tax agreement between Ireland and the UK, the experts say it is not entirely clear if the way existing UK pension income reverted here by genuine retirees will also apply to people who encash them earlier than their (former) employers retirement age.

In other words, as one expert told me, “we’re in brand new territory”.

No one knows for sure how many Irish residents are holders of UK-based defined contribution pensions. I’m guessing, based on the high level of immigration since the 1970s, the numbers run in the tens of thousands.  Some might have only belonged (even unknowingly) to a company pension for a few years before they moved on, perhaps to another firm or came home.

UK pension retirement age rules are quite similar in many ways to our own and early retirement is possible (before 60 or 65) where someone has stopped working in their 50s, say, due to redundancy or ill health.

And while the 25% (or 1.5 times final salary) tax-free encashment of a defined contribution pension applies in both jurisdictions, the rules also diverge: unlike the UK we have a maximum lump sum limit of €500,000 of which only the first €200,000 (a lifetime limit) is tax-free. The €300,000 balance is then subject to 20% tax. Total funding for pensions (with tax relief) is also restricted here to €2m and funds worth more than that will be subject at retirement to a once-off tax of 40%.

All of these different rules may have to be taken into consideration for some Irish holders of UK pensions if they do want to either encash all or part of their pension, continue to invest it or buy an annuity with the fund.

If you are such a person – 55 or over, with a UK pension - I’d like to hear from you.  Are you considering joining Pension Freedom Day?  If you do, you will need both impartial investment and tax advice – especially in the absence of clear guidance about the tax treatment of your UK pension money whether you bring in home or leave if there.

Meanwhile the UK government is expected to launch a website shortly to help defined contribution pension holders decide for themselves the pros and cons of accessing their pension funds early. See https://www.gov.uk/pensionwise 

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.

DOWNPAYMENTS ARE NOT RISK-FREE…FOR PARENTS

How far can parents or families go to help their adult children financially?

The answer is, not as far as they would have had to go had the Central Bank not relented on its 20% down-payment proposal for all new property buyers.

Under the new borrowing regulation, if a (grand)son/daughter, for example, wants to buy a house worth more than €220,000 – the maximum value at which a 10% down-payment will be permitted – then you may still be tempted (or beseeched) to give them a financial helping hand:  the new ruling requires a 20% down-payment on any purchase balance over €220,000.

For example, if the property is valued at €300,000, the buyer will be required to put down €22,000 (€220,000 x 10%) plus €16,000 (€80,000 x 20%) for a total down payment of €38,000.

Parents or grandparents in a position to give down-payment assistance should consider the banking and legal limitations to their act of generosity and their own personal financial limitations.

LENDERS

First, lending banks are unlikely to object to the down payment being gifted so long as the borrower can comfortably repay the loan (now at income-to value of 3.5 times.) The banks want to see a steady track record of regular savings and/or payment of rent equal or exceeding the proposed mortgage payment and will demand at least a year’s worth of bank statements; outstanding personal loans and multiple credit cards will work against the borrower. On-line gambling accounts are a definite no-no.

A poor credit bureau record (see ICB.ie) will also ruin any chance of a mortgage, no matter how the down payment is secured.

GIFT LAW

The current tax-free gift and inheritance threshold between a parent and child is €225,000 over the child’s lifetime. (It was €521,000 in 2008) If the child has not already used up that threshold, a €38,000 down payment gift will be entirely tax-free. A grandparent however, is restricted to giving a tax-free gift of no more than €30,150 (unless the child’s parents are already deceased). And balance over the thresholds is subject to 33% capital acquisition tax.

If the parent/grandparent doesn’t have the resources to give a large lump sum, but still wants to help their young relative, they can always gift an annual tax-free sum of €3,000 that falls outside the CAT net altogether.

This €3,000 a year can be given to anyone, regardless of their relationship. A (grand)child and their partner, whether married or not, could be given €3,000 each. This will certainly speed up the accumulation of a large down payment.  (Even at a saving rate of €500 a month, or €6,000 a year, it will take approximately six years and four months to save a €38,000. Tax-free gifts of another €6,000 a year will cut the saving period in half (assuming you can still find a similar property at the same price three years later.)

YOUR CIRCUMSTANCES

Irish parents and grandparents, in my experience, have been extremely generous in their financial assistance, and sometimes to their own detriment where mortgage guarantees have been concerned.  Depleted savings and pension funds (that still haven’t been restored) have been the other consequence of helping adult children onto inflated boom time property ladders.

Before you assist in securing a mortgage for your relative (and this could include existing owners who want to trade up but don’t have at least 20% equity in their home) you need to review your own finances and ask the following questions:

-       What is the value of my/our pension fund(s)? What projected income will it produce at retirement age?

-       If I am a member of a defined benefit (DB) pension, is it fully funded?  If not what are the chances that my/our retirement income will be cut?

-       If I am still employed and this cash gift comes from savings, will I still have sufficient cash left to meet at least 3-6 months worth of our monthly expenditure, if needed?

-       Can I make a similar value gift to my other children?

Relying on families to get a young person on the property ladder is a reality and wealthier families will still be able to short-circuit the new regulations since the banks can exceed the 80% limit and the 3.5 time income limit for 15% and 20% respectively of all its lending in any given year.

But it doesn’t come without risks for both parties: when the new baby comes along, when a wage is cut, or illness strikes, it may not be as easy to repay the mortgage as it was to put together the downpayment.

What these new regulations really show is that we need new savings products with higher deposit yields and lower tax.  An Irish ISA would fit the bill perfectly.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.