Jill Kerby

RABO DIRECT PULLS OUT LEAVING 90,000 SAVERS IN THE LURCH

Something is very, very wrong in the banking system when you deposit €10,000 with a lending institution (a bank, building society, credit union) for 18 months and they repay you – at the most – a 0.65% return. (Five years ago you could get a 3% gross annual return, 10 years ago, as much as 4.5%.)

Once the government takes its pound of flesh, aka DIRT tax of 37%, you are left with net interest of c€41 from that €65. Meanwhile, the bank could be charging someone who borrows your €10,000 up to 10% compound interest.

Well, that ‘Something’ just got worse.

On May 16, RaboDirect, the Dutch A+ rated bank and still considered to be one of the safest banks in Europe, will shut its doors - and vaults – for good to its remaining 90,000 retail customers who collectively have €3 billion under deposit.

The Dutch have been winding down their activities here for the last few years – I used to have a current account with them -  and now Rabo’s depositors are being turned away.  But where will they go?

With such a limited field of deposit takers, anyone with a large sum of cash that they especially need for boosting their income, should be checking all their options, or resign themselves to guaranteed losses once DIRT and inflation is factored in. (Over 65s whose gross income is less than €18,000 a year or €36,000 for a couple are exempt from DIRT.)

If you are happy to make your own arrangements, then the least you should do is consult a good on-line comparison site like www.bonkers.ie which provides up-to-date tables of deposit accounts and breaks down those choices according to the type of account you want – easy access (ie, a demand account), a notice account (in which you must give say, 30 days or 60 days notice for withdrawals) or a term deposit account of, say, one to five years.

You can further narrow the result according to whether you have a lump sum to deposit or are a regular saver. Bonkers even gives you the banks’ credit rating, if that is important to you – and it should be. The only A, let alone A+ rated bank in Ireland has, up to now, been RaboDirect;  all the others are B-rated, ranging from BBB for Ulster Bank, BBB- for KBC Bank and Bank of Ireland, BB+ for AIB and BB- , the lowest rating, for PTSB. 

Credit ratings agencies like Standard & Poor’s, Moody’s and Fitch were all discredited for their role in the 2008 financial meltdown, so even these ratings need to be taken with a pinch of salt. However, in the next banking crisis, depositors will be expected, like bank shareholders, taxpayers and bondholders to contribute to any “bail-in” to save the banks. They remain “too big to fail”, no matter the cost.

The €100,000 bank deposit guarantee still applies, and no one should leave more than that amount on deposit in any institution, but as the Cypriots, and later, Greek depositors discovered, when a catastrophic banking failure occurs, all the conventional practices – like ‘easy access’ to your savings and capital bank guarantees - are only worth what the central bankers say they are worth.

Having the deposit rate facts before you – via up-to-date tables – is important and will help you squeeze every available cent of interest out of your savings. But until the interest rate cycle turns in the eurozone even this effort will be very limited.

Interest rates are finally turning upward in the United States, Canada, Australia and the UK because the cost of living and wage inflation is beginning to tip over the 2% mark – that so-called perfect, Goldilocks figure to which central bankers (easily the most discredited economic forecasters after credit rating agency analysts) are so devoted. Raising interest rates, they claim, will stop these economies from overheating, stalling and falling back into recession.

Really?  Many commentators think rising interest rates are more like to cause another downturn (as debtors find themselves unable to meet higher repayments.)

Instead of trusting these Masters of the Universe (again) to protect your financial interests you need to act in your own interests.

To depend on a single asset – like cash – for long-term financial security is as much of a mistake as putting your faith in the stock market or becoming an amateur property investor or landlord.

If you are worried about your shrinking deposit options, engage an independent financial adviser to help you improve your savings yield, reduce any deposit or bank security risk, explore safe investments with risk levels you can live with.

A good adviser even ensure that you are not paying unnecessary DIRT (or income tax) and that you have claimed all your tax deductions and refunds. And don’t be surprised it they recommend the tax-free Rent-a-Room Scheme as the single, least risky income booster of all.

The TAB Guide to Money Pensions & Tax 2017 is available in good bookshops. See www.tab.ie for ebook edition.

CAN MERGING THE USC WITH PRSI SAVE THE STATE PENSION?

A government working body is considering merging the much-detested USC with the pay related social insurance that workers and employers pay.  Do you know how much USC and PRSI you pay?  You should.

At the heart of this consideration is the urgent need to reform the multi-pillared pension system in this country, each part of which – state pensions, private pensions and public sector pensions, is unsatisfactory and economically unsustainable.

With private pension membership falling every year – it stands at only c40% of adult workers, while it remains at nearly 100% in the civil and public sector – the government claims to be committed to the idea of introducing an auto-enrolment private pension scheme by 2021.

If it is modelled on similar schemes like Nest in the UK, it will involve signing everyone up in companies that don’t already have an occupational pension scheme in place. Opting out will be permitted, but only about 10% of workers ever do so. In the UK workers and employers also continue to pay social insurance contributions and collect the state old age pension.  

Contributions to auto-enrolment schemes – in the UK and other countries where similar ones operate, like Australian (‘the Super’) and New Zealand (‘KiwiSaver’)  - start off very low with a tiny percentage of salary paid in by the workers, employers and state. Savings rates have increased over the years and so far have provided their citizens a decent retirement pot.

Here, plans are still at embryonic stages and no one knows what kind of soft-mandatory pension scheme will emerge or how much it will cost.  Recently however, the Minister for Finance, responding to a suggestion that the new pension might incorporate the existing contributory state pension (now worth  €243.30 a week or €12,636 per annum) said he was committed to keeping the old age pension a separate entity.

We’ll see.

The government does know it has to boost the value of the Social Insurance Fund (SIF), worth just over €9.2 billion a year, out of which more than half is drawn down to pay for the state old age pension. It is on course to have a massive annual funding shortfall of c€21.2 billion by 2066, just as today’s youngest workers will retire.

The latest idea is that the USC, the much detested universal social charge that was introduced on January 1, 2011 (and replaced an emergency income tax levy from January 2009) will be merged with PRSI, increasing the SIF by c€4 billion.

The fund currently pays – just about – for the weekly pensions that retirees collect, as well as unemployment benefits, child benefit, family income support payments, parental leave benefits, disability payments, etc .

USC is not a single rate, but five different rates, 0.5%, 2%, 4.75%, 8% and 11%, paid on escalating bands of income. The 11% rate only applies to income over €100,000 earned only by the self-employed.

No one who earns less than €13,000 a year pays USC. Pensioners over the age of 70 whose aggregate earnings are under €60,000 pay at reduced rates of 2% ad 4% as does any full medical card holder, aged under 70 with income of less than €60,000. (Pensioners do not pay PRSI.)

A worker on a €50,000 income pays about 3.3% USC or €1,662 a year.  Unlike the c4% of €2,000 worth of PRSI contributions that they also pay, USC is only paid by workers and not by employers: they pay PRSI of c10.85% of their employee’s earnings into the Social Insurance Fund.

USC was supposed to be abolished when the economy ‘recovered’, but that was always unlikely. Inevitably, the government has found a new purpose for the tax – to underpin the shaky Social Insurance Fund and especially the surge cost of old age pension claims.

Many pension experts believe that an ideal pension income of 2/3rds of a person’s final salary – whether from one or multiple sources - needs to be an annual salary contribution of at least 20% (or €10,000 a year if you earn €50k.) Can the combination of PRSI, USC and any soft-mandatory private pension contributions meet that benchmark?

This debate is finally – I hope – getting underway. It won’t go away, no matter how badly politicians, employers and workers (who always have other spending priorities) want it to.

Adding another €4 billion of funding will certainly more than meet the state pension cost at today’s values for many years into the future, but not out to 2066, especially not at the rate our population is ageing and living longer.

This PRSI/USC merger is essential, but it won’t be enough to ensure a sustainable state pension.

Anyone interested in exploring just how precarious the state pension and Social Insurance Fund is – especially if you haven’t started a private pension yet - can download an excellent review done by KPMG for the Department of Social Protection that was published last September. http://www.welfare.ie/en/downloads/actrev311215.pdf 

The 2018 TAB Guide to Money Pensions & Tax is on sale in all good bookshops and on-line. See www.tab.ie for ebook edition.

PART TWO: MORE CAPITAL, MORE INCOME NEEDED TO GET ON THAT LADDER.

In this column last week I highlighted a number of the factors that are working against first time home ownership - from the mortgage debt legacy and tighter bank lending for both developers and buyers, to the negative impact of politically motivated tax and planning policies, and general incompetence at all levels of government

We seem to be particularly bad in Ireland at devising sensible, workable policy and administrative solutions to social problems like the shortage of affordable housing. But first time buyers in other places are also finding it hard to afford their own home, not just because of the lingering impact on the great financial crisis on the availability of mortgage loans, but because of the wider impact of globalisation on their working experience and their future incomes.

Very simply, the job security, affordable housing, pensionable employment and huge stock market returns that today’s 65-70 year olds have benefitted from is not the reality for today’s younger workers. This generation is also now competing on a global front for jobs at rates of pay that are slowly but surely converging with what the equivalent worker is earning in developing economies.

Unfortunately, we have a big jump on these countries when if comes to debt accumulation. We’re all hopelessly addicted to cheap credit in the West, the growth of which outruns productivity or surplus savings. Ten years after the great financial crisis, the steady flow of credit and debt is all that keeps the entire system from unravelling.

If you don’t think so, consider last week’s global stock market ‘correction’. The US Fed’s decision to finally raising its base interest rate resulted in both the price of stocks and treasury bonds to drop dramatically (and bond yields to soar). What it means is that debt becomes more expensive to service (including mortgages) and credit (which has been flowing into the stock markets for several years) tightens up.

Is it any wonder that the post-2000 generation, with their historic levels of student debt (especially in the US and UK), insecure employment contracts and snail-like wage increases are floundering financially?

The real solution of course is the end to the vast wages and earnings gulf between the asset holders -  especially the giant multinationals and financial institutions at the top of the earnings chain – and the vast majority below.

So what can be done for our struggling millennials? More overtime? A second job? A couple of years working in tax-free Abu Dhabi or Dubai?  Should we be encouraging even more immigration to richer countries with more amenable wages, living conditions and state subsidies (Anyone for Canada? Norway?)

Family dig-outs – the Taoiseach’s other solution - still happen in middle Ireland, but financial advisers warn about the risk of using pension lump sums or retirement incomes to help out their children.

“Someone in their 60s or 70s needs to think very carefully about messing with their lump sums, or with their ARFs [approved retirement, post-pension investment funds from which income growth and capital can be taken.] “ARF draw-downs are taxable and you may need this money far more than your kids some day.”

Selling other assets – shares, investment funds, land or a second property - will release cash, but may also trigger unwelcome capital gains tax or gift/inheritance liabilities. Parents or grandparents who can afford to gift or even lend cash earning nil to low deposit interest “would be far better to do this than to draw down higher yielding and taxable investments or ARFs,” said the adviser.

“There are other ways a parent can raise money to help their child or children get on the property ladder. If their children are gone – the parent could rent out spare rooms and earn up to €14,000 tax free a year which they could then gift to their offspring. It might be a better solution than having the adult child move back in so they can save on rent.”

Finally, the question has to be asked: is the nuclear family model outmoded in this post- modern world? Should we be revisiting a collective family arrangement that allows uncertain, casual and contracted incomes stretch further, even beyond one or two generations?

The last financial crisis fuelled the idea of building financial ‘arks’ by the older generation of asset owners of pension funds, paid off properties, stock portfolios and bank cash.

A variation on the ‘family office’ trusts that wealthy families operate, the Ark can be a more modest operations in which grandparents, parents, siblings and even godparents can combine surplus income or cash which can then be lent to the next generation of to help finance education fees, house down-payments and even business through a seed capital for businesses.

And in a financial crisis, the Ark might even keep more than just the struggling house hunter afloat.

The 2018 TAB Guide to Money Pensions & Tax is on sale in all good bookshops and on-line. See www.tab.ie for ebook edition.

PART ONE:  GETTING ON THAT LADDER HAS NEVER SEEMED SO HARD

The Taoiseach has been accused of revealing his middle class bias over his recent remarks about how getting a financial dig-out from one’s parents has always been a factor for many first-time buyers in the securing of a mortgage. 

He didn’t need one himself, he later said, but the fact that he secured an extravagant 100%, 40 year mortgage at the peak of the property boom reinforces just how stratified lending is, and continues to be here.

Back then pretty much anyone with a beating pulse could borrow substantial sums for over-valued property. But 40 year, no-downpayment loans on desperately over-priced apartments and houses were largely reserved for the professional rentier class, those with an apparently safe claim on steady, taxpayer-backed incomes and careers in areas like medicine, the law, accountancy (the State is a most welcome and steady customer for consultancy contracts) and in the higher civil and public service.  A well-paid high tech professional working for a foreign multi-national might also have been unfortunate to have snagged such a mortgage.

As a few of us pointed out at the time, these were dynamite-laden contracts, sure to blow up some day, even if they were variable rate trackers, like Leo’s. 

The ECB base rate, we noted ad nauseum back then, wasn’t going to remain at 3% for the next 40 years. It didn’t. It went up briefly to 3.25% in October 2008 and then dropped all the way to 0% by October 2016, where it remains today. 

Ten years down, 30 to go. But who would dare bet that the ECB rate (and Leo’s variable tracker repayment) won’t go up and down a few times over the next three decades? The US and Canadian base rates have both recently gone up by 0.25% to 1.5% and 1.25% respectively. Commentators say it is due to improved economic indicators like employment and wage growth, something the ECB says is finally happening in Europe.

Where US interest rates go, so do ECB ones…eventually. 

Forty year, 100% tracker loans no longer exist, yet the banks have some wriggle room beyond the strict 10% down, 3.5 times salary limits the Central Bank has set, but only for those borrowers with high paid, secured jobs, who probably also have access to parental cash gifts.

I have no idea when the borrowing environment is going to ease up for everyone else who is looking to get onto the affordable property ladder, or if the stream of new builds that the government is promising over the next few years will help ease price inflation for prospective owners and tenant-savers.

The reality is that so many factors are causing the housing shortage and price inflation. These are only a few: 

-       The mortgage debt legacy from 2008 and restricted lending;

-       The resilience of the land banks;

-       Government building costs and planning regulations;

-       Local authority bureaucracy and incompetency;

-       Massive imbalance of demand in Dublin and other cities;

-       Insufficient job security and income growth among this generation of prospective buyers.  

Endless politically motivated government intervention isn’t helping either, like the latest scheme to provide a limited number of 30 year fixed rate, 2.25% interest loans to 1,000 lower earners who have already been turned down by at least two lenders. As one market commentator put it, “this is just another way for people who should be renting, to get themselves into serious long-term debt by buying over-priced property.”

Is housing overpriced? Are prices in a bubble that’s just waiting for its pin? 

Probably not outside Dublin and other major cities. But rural Ireland is not where the jobs are or where younger people want to live.  And houses and apartments continue to be snapped up in the capital, even at what appear to be exorbitant prices.

The reality – unfortunately – is that there are no quick solutions here and in other high demand places – nearly all capital cities and other high growth urban locations around Europe, the US and Canada, Australia and New Zealand, where young people are being priced out of home ownership. Here the situation appears so much worse because of total collapse of the building market for over five years after the crash.

The Taoiseach, rather insensitively suggested temporary, tax free employment in the tax-free Gulf States as a way for an ambitious young couple to raise the €30-€40,000 needed to buy a city starter home. Or that they move back in with their parents for three or four years and save the rent they’ve avoided paying.

Good luck with that, murmur mums and dads around the country.

Next week: We look at other capital raising options and solutions. And we revisit an idea that should be every family’s priority:  How to build a Financial Ark.

The 2018 TAB Guide to Money Pensions & Tax is on sale in all good bookshops and on-line. See www.tab.ie for ebook edition.