Jill Kerby

LD writes from Dublin: Late last year my mother-in-law discovered that a life assurance policy her husband had taken out in the mid 1980's with Phoenix Life Limited (a UK company) was still valid.   We wrote to the insurance company to see if this policy was still valid – he died in March 2005 - and they confirmed it was and was worth €7,200. However, when they found out he died in 2005 the amount was reduced to €4,800 as the benefit is calculated on the date of death. She finally received the €4,800 which included an ex-gratia payment of €737 due to the delay in settling the claim but they deducted income tax of €184. Is it correct that a death benefit is calculated on the date of death even if the policy was still earning earning interest from March 2005?  Should tax have been deducted, even though my mother-in-law is not a UK resident? Will she have to pay any Irish tax on the payment she has received? 

 

I learned that it was only after receiving correspondence from Phoenix Insurance in England that you discovered this lump sum policy existed and that it had been put into a ‘fully paid up” status not long after it was purchased. According to John Geraghty, of discount broker, www.labrokers.ie, Phoenix Insurance mainly sold with-profits whole of life policies and this policyprobably had a very low death benefit sum assured.  The payments you were quoted are probably the investment values at those two dates, he says, that may also include a small death benefit. The amounts quoted are “puzzling” as is the tax deduction and should be investigated further, says Geraghty. You have no record of who sold your father-in-law this policy, but he believes it was probably sold through the Scottish Provident here, whose address is Styne House, Upper Hatch St, D2. (Tel 01 6382900).  You should contact them for an explanation about the maturity value. “If your reader does not get a satisfactory explanation, she can progress her complaint to the Office of the Financial Ombudsman.”  Finally, as a spouse, your mother-in-law is exempt from any Irish tax liability. 

 

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NG writes from Co Galway:  When I reached the age of 66 in 2003 I invested that portion of my private pension fund not subject to the 25% tax free lump sum – less than €200,000 - into an Approved Retirement Fund (ARF).  I was very attracted to the ARF as I was in receipt of the state pension and was still doing some consultancy work worth about €44,000 a year. I had been told I was in complete control of my ARF. In September 2007 I was advised that my ARF would now be subject to tax and was given some options. I chose to withdraw 1% of its value in the first year, 2% in the second year and 3% this year and future years, all amounts subject to tax. My combined pension and income means I pay higher rate income tax, but I had always intended to start withdrawing from my ARF after I was fully retired and paying a lower tax rate. I now find my ARF being eroded on two fronts – its value is dropping due to the economic climate and from the tax levy. I believe this disadvantage should be highlighted – it certainly is not the product that I invested in. 

 

All withdrawals from an ARF are liable to income tax at your highest rate. But it was the Finance Act 2006 that introduced a tax on ‘imputed distributions’ of 2% on the value of the ARF in 2008 and 3% in 2009 and every year thereafter. That said, if you do make a withdrawal, that amount canbe deducted from 3% imputed tax.  This tax was introduced as a way to encourage the withdrawal of some pension income, which the government claims was always the purpose of the ARF; it was not intended as a way to defer tax in retirement. Your concern about your eroding fund is understandable, but I suggest you review the underlying assets in your ARF and try to find a more secure assetsfor some or all of your money.  Unfortunately, converting your ARF into an annuity and pension income – which you can still do - isn’t much of an alternative, given the poor state of bond yields. 

 

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FB writes from Limerick: I have recently been told that my mortgage with EBS has been transferred to a new company - EBS Mortgage Finance. The cover letter states that 'in the ordinary course of business' the society will set the interest rate and administer the loan. Given that my debt is now effectively owned by someone else, can this new subsidiary set a different rate of interest at some point in the future? I know the letter states ordinary course of business, but what if there is an extra-ordinary event? And can EBS just do this without my permission?

My understanding is that the terms of your contract with the EBS has not been changed as a result of this transfer of business to EBS Mortgage Finance company. Unless you have a fixed rate loan or a tracker mortgage contract, the building society can set a new interest rate at any time.  Lenders usually don’t do this (unless the ECB rate changes) but it is within their right to do so, say, if there was a huge loss of lending or deposit business – the extraordinary event to which you refer. If you are unhappy with this new arrangement, you can always try to take your business to a different lender.

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If Eugene McErlean’s charges against his former employer, AIB, hold up, then it will certainly add more weight to the growing evidence of incompetence, at the very least, on the part of the Financial Regulator. 

 

Mr McErlean, who was group internal auditor in AIB from 1997 until 2002, claimed last week before the Oireachtas Joint Committee on Economic and Regulatory Affairs that the Regulator failed to properly investigate or report the overcharging and share dealing irregularities that he brought to their notice in 2001. 

 

Not that anyone in the Joint Committee seems particularly interested in what Sean Citizen thinks about the shortfalls of the nation’s banks or its regulator, but perhaps they should ask one or two such people to their meetings, people who over the years have had money stolen from their accounts in the form of grossly inflated fees or higher than expected foreign exchange commissions. 

 

Our legislators could even invite the regulator’s own Ombudsman to join in; a person with an impeccable public reputation – and I genuinely mean that – who  could supply them with plenty of cases of ordinary folk who have been devastated by the terrible investment advice they were given by the bank’s life assurers.  Tens of thousands have lost c40% of the value of their managed pension funds over the past year, but to this day are still being charged exorbitant administration and fund management fees that copper-fasten these losses. 

 

It isn’t just on the banking side that the regulator is losing the plot: last week, the regulator’s consumer office published the finding of a ‘mystery shopping’ exercise it did last November, in order to see how well or badly the banks handle the banks’ own personal bank account switching procedure. 

 

Of the 51 different branches of the seven banks visited, just 59% of them – less than six out of ten – were doing it right.  The others didn’t have the switching packs at hand; staff were unable to provide any information; they discouraged the switching based on the information provided or actively discouraged the switch. 

 

Not only does the Regulator not name the offending banks, but it doesn’t even comment on why their mystery shoppers may have received such poor service.  There’s also no suggestion of a scolding, let alone a genuine penalty, like requiring the banks to withdraw the staff concerned and retrain them, or even pay compensation to the inconvenienced customers.  

 

In case the acting Regulator, Ms O’Dea, is still scratching her head in wonder at this survey result, let me enlighten her: the banks sign up for all sorts of voluntary codes, but that doesn’t mean they like them. Maybe four of the 10 branch officials who failed the test were - quelle surprise! - simply following orders to not facilitate customers moving their business to a competitor. 

 

Mr McErlean’s allegations of a cover-up have yet to be proved, but consumers know by now that even when Regulators appears to be doing their job, it doesn’t necessarily mean that anything is going to change for the better. 

 

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It’s ISA season again in the UK – when anyone with some spare cash puts it into their tax-efficient individual saving account that comes in a simple, deposit version or a range of individual shares, bonds and investment funds.  

 

The amount you can save or invest tax-free is reasonable – the ISA is no millionaire’s tax shelter – but over a period of years if you can afford to divert up to £3,600 in cash or £7,200 a year into a riskier investment fund or shares, you can end up with a substantial nest egg, with which to buy a home, fund higher education for your children or put away for retirement. 

 

Sounds familiar doesn’t it?  Remember the SSIA scheme when over 1.2 million of us were happy to save up to €3,000 a year (with the 25% top up by the exchequer) for five years?  Thank goodness for that scheme now – it’s paying off debts and paying groceries for people whose incomes have been cut or lost altogether in the last year. 

 

The only way we – and the rest of the indebted world is going to genuinely recover from the extraordinary spending binge of the past decade is if we own up to our mistakes, pay off or write off our debts and start building and restoring our savings accounts. 

 

What better way to do this than to set up our own version of the ISA, however modest:  it’s enough that the money going into such a fund will be as heavily taxed as it will be after the mini-budget is finished with our finances next month. A little tax-free savings scheme will at least give some promise that ‘this too will pass’, and that there will be a future worth saving for. 

 

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This latest trillion dollars worth of quantitative easing – printing money from thin air, to you and me – as part of President Obama’s campaign to bail out toxic mortgage debt held by insolvent banks and insurers in the United States, is expected to have the eventual effect of causing all sorts of corporate and individual debt to be inflated away. 

 

But, say the plan’s critics, once this money spills over into the wider investment market, it will force consumer prices up too, especially the price of oil as investors and traders pile into this essential commodity which, like gold, is a reservoir of real, intrinsic value (unlike paper money). 

 

Anyway, if that isn’t enough to convince you that oil prices are sure to rise again, how about the news that the Tata Motor Company of India now expects to attract 500,000 orders of their new Nano, the no-frills, but cheap and cheerful little four seater car that was launched last week for just $2,500.

 

Highly fuel efficient already, that number of family-friendly Nano’s are still going to need a lot of petrol until a viable alternative fuel can be found.  This is all good news for anyone who is adding Exxon, BP and Royal Dutch Shell to their share and pension portfolios or buying oil ETFs – one is even listed on the Irish Stock Exchange. 

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One of the (many) criticisms laid against the majority of government ministers and TDs is that they lack business and finance experience.  Lawyers, teachers and farmers are, shall we say, over-represented in our representative assembly.

 

The latest publication of Dail Members financial interests (and the Seanad) makes for very interesting reading, and pretty much confirms the above. (You can see for yourself what your local TD or minister has declared by way of directorships, shares and property holdings: http://www.oireachtas.ie/viewdoc.asp?DocID=11429).

 

Close scrutiny of the shares and property interests that members disclosed (their spouse’s interests do not have to be divulged) shows that many of them have made the same investing mistakes as the rest of us:  they poured too much money into Irish bank shares and other Irish listed companies (which represent a tiny fraction of European or global markets). And way too many of them bought far more than they should have had, both here and in other countries. 

 

For example, the Taoiseach himself who owns one rental apartment in Leeds and two other rental properties in Dublin 7 and Dublin 8 – which are probably not the best investments he could have made now that prices have crashed and rents are falling. (I live in Dublin 8).

 

The register doesn’t reveal when the properties (or any shares listed by TDs and Senators who have a separate register) were purchased, but with no other declared shares or investments, the Taoiseach, perhaps even when he was Minister for Finance, was clearly over-invested in a single asset – property sicne these are in addition to his family home back in Offaly.  (The Tanaiste and Minister for Finance list no investments whatsoever.)

 

He isn’t the only one who may have overstretched his property interests:  the biggest property magnates include Frank Fahy, the Galway West TD who owns outright or is a partner in many residential, commercial and retail properties in 18 different locations that include Galway and Limerick, Leixlip and Athlone, Dublin and Dubai, Boston and Brussels; he also owns properties in France and Portugal as well as a number of publicly quoted shares, including AIB, Grafton, Eircom, Kingspan, Ryanair and Worldspread.  

 

Alan Shatter, the Dublin TD has 14 different residential and commercial property investments, mainly in Dublin, London and Florida as well as small portfolio of shares. The Dublin North TD, Dr James Reilly is another major property investor with 10 different interests in land, holiday homes, medical facilities, residential lettings, some farm and woodland and an entire commercial building in Lusk with about a dozen different tenants including residential tenants. 

 

The register is notable for the few women TDs with any outside financial interests: poor Mary O’Rourke, the Westmeath TD and former government minister is now stuck with Bank of Ireland shares, as is health minister Mary Harney who laments that her original stake in Bank of Ireland, which she bought with her husband originally “exceeded €13,000…they do not do so now”.

 

Only the Cork TB Deirdre Clune stands out amongst her women colleagues for having three residential properties and sites in Dublin and Cork and for a few share investments which include – patriotically - the Barry’s Tea company.

 

A few of the farmer’s (or farmland owners) like Richard Bruton from Meath, Michael D’Arcy from Wexford, Seymour Crawford of Cavan Monaghan, Frank Feeghan of Sligo/Roscommon, Tom Hayes of Tipperary South and especially Edward O’Keefe of Cork East also happen to have invested – quite sensibly – in various co-op and agri-shares:  farmland and agri-company shares are expected to be among the investment survivors of the global downturn. 

 

As many people already know, the Dail is pretty top heavy with former teachers, and a pattern emerges here too:  they tend to stick with life assurance investment funds from the likes of AIB, Bank of Ireland, Hibernian, Standard Life and Irish Life and Permanent, all of which have suffered substantial falls in value.   

 

Quite frankly, there is very little for a constituent to learn from the investing habits of their public representatives, except perhaps not to put all your eggs in either the Irish property or stock exchange baskets.  

 

However, there are a few who have tried to position themselves with a more balanced and global portfolio: Sean Haughey, the Dublin North Central TD holds global oil and gas shares, European share funds, emerging markets funds (like Asia and China) and investment trusts, big pharmaceutical companies (as well as a tobacco company) and perhaps unfortunately, a number of Irish and foreign bank shares though he starting disposing of a number of his shares in February ’08.

 

Meanwhile, Michael Noonan, the Limerick TD is clearly a huge fan of low cost ETFs – exchange traded funds – and Dr Rory O’Hanlon of Cavan/Monaghan has one of the most global share portfolios of all – it even includes Chinese real estate interests. 

 

And should you happen to meet his colleague, Minister Willie O’Dea on a Limerick street, do ask him how his African gold and diamond shares are doing these days:  pretty well, I’d say. 

 

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Is this the start of a genuine stock market rally or just another false dawn?  Is it a chance to buy world leading shares that are now at bargain basement prices or a signal that you might be able to recover some of the losses of the past year? 

 

 

Pension fund holders in particular, who may be about to lose some of the tax incentives associated with their pension when the mini-budget is announced next month, are especially keen for some answers: their retirement is at stake. 

 

 

Yet trying to time the stock market correctly is such a mugs game and even the world’s most successful investor, Warren Buffett, admits that he was ‘premature’ in thinking that stock prices had bottomed out last November when he went on a multi-billion dollar buying spree. 

 

 

His bearish critics still respectfully suggest that Buffett has underestimated how bad corporate earnings are going to be over the next few quarters and that this rally could end up crushing the investors it lures in, just like those who piled into the markets during the great rally of early1932 were crushed. Only when shares dropped to 90% of their original 1929 peaks in July 1932 was it worth buying again – if you had any money left. 

 

 

I’m told every pension advisor in the country is losing sleep over John Maynard Keynes’ famous saying – “The market can remain irrational longer than you can remain solvent”.

 

 

What do you tell Mr X, who turns 55 this year – and had every intention of prudently following a plan to start shifting his pension into safer assets -  but missed the boat by a year?  Do you advise him to cash out of what is left of his equity funds now, crystallizing all his losses or do you try and help him time this rally?  Is now the time to tell him to start buying those select number of genuinely blue chip shares that have never been priced so low? Is time on his side?

 

 

These are tough calls that the April budget changes could make even harder.

 

 

But my sympathy really goes to the tens of thousands of private pension fund holders who bought their contracts directly from the pension provider (or their employer did) and aside from an annual performance statement, have never heard from them again. 

 

 

In an ideal world, life and pensions companies would be earning their on-going fees and commissions by contacting fund-holders in the 50s and offering to help them work out a new investment strategy. 

 

 

Since there is absolutely no sign of this, and no sign that the Financial Regulator is doing anything about it  -  I think orphaned pension fund holders should be demanding, en-masse, that the ongoing, but unearned fees that they are still being charged be scrapped, or the very least, be refunded. 

 

 

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Still don’t have an emergency fund stuffed with three to six months worth of net income?

 

I’ve already recommended that you extend the term of your mortgage and make interest-only repayments in order to bank the extra cash – an idea that the Financial Regulator subsequently endorsed. 

 

In America, where savings are a fraction of what they are here and where foreclosures or arrears now affect one in every nine mortgage holders, people are turning to a different source to build their emergency fund: their Visa or Mastercards. Thousands of working Americans who are living from paycheque to paycheque are now drawing down the maximum approved credit line off existing and new credit cards and banking this money.  

 

 

The spread between the card interest rate – typically 11% or 12% compared to the 1%- 2% deposit rate – is huge, but the card-holder doesn’t care, reports the Wall Street Journal website, Marketwatch.  So long as they can juggle the minimum monthly re-payment, a la Peter-paying-Paul, the fund can keep building.  Even if the worst happens – bankruptcy – the unsecured credit card debt is usually discharged. 

 

 

This is surely a credit line of last resort (especially if legal action can’t be taken for at least 12 months if you fall into mortgage arrears with AIB and Bank of Ireland. 

 

 

But desperate times provoke desperate measures, especially when a long-standing family home is at stake.

 

 

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I’m all in favour of house prices falling back to their natural pre-bubble levels – and as soon as possible.  I have a young friend, newly married who has a downpayment burning a hole in his pocket and is positively salivating over showhouses that he and his wife keep visiting on weekends.  His parents (and me) keep telling them to wait – prices will keep falling – but they’re pretty fed up with this message. 

 

The crux of the matter is that the housing market isn’t going to bottom out until house prices revert to about three times earnings – maybe four times in the most desirable locations. But that isn’t going to happen until sellers have thrown in the towel and reduced what are still unrealistic price tags, in spite of the 30%-40% falls that have been recorded since the property bubble burst in late 2006.  And not until the foolish low cost mortgage offers imposed on the likes of AIB and Bank of Ireland by the government in exchange for the €7 billion bail-out are withdrawn by the banks:  artificially cheap mortgage credit is what blew the bubble all out of proportion and it’s still going to keep house prices artificially high. 

 

In the UK, their Financial Services Agency (FCA) is about to bring in a rule that prevents the banks from lending more than three times income to new borrowers, which might be exactly what we need here too…though I am loathe to endorse any more meddling with the property market by our own government that has done so much harm to it over the past decade.

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AOS writes from Dublin:  What advantages are there to selling/buying property between family without using an auctioneer? I know the auctioneer’s fee is one – what else?

Since family members are already aware of the selling points – and perhaps the fault of the property – the saved fee and VAT are the only advantages I can think of. Now this has nothing to do with the use of an auctioneer’s services, but an advantage of transferring property between family is that you can presumably share the services of a single solicitor to keep the costs down and as well, if a site (worth less than €500,000 and no larger than one acre) is transferred between a parent and child and it is to be used to build a principal private residence for the child, no stamp duty is payable, which represents a savings of many thousands. Stamp duty is also only chargeable at half the usual rate on property transfers between other blood relatives. 

 

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KO’C writes from Limerick: I purchased an apartment in Bulgaria in 2008. However, I was wondering if I could now "cash in" some of my pension fund and pay off the apartment mortgage and then subsequently add the apartment to the pension fund?

 

That’s an interesting idea, but I’m afraid it’s not possible to cash in any of your pension unless you have reached the designated retirement age of 60 or 65 (depending on the type of pension contract you hold) or earlier, if you are forced to retire on medical grounds.  Personal retirement savings account (PRSA) holders can access their pension fund from age 50, but after taking the first 25% as a tax free lump sum, you would have to pay higher rate tax on the balance.  What you should have done from the start was set up a pension mortgage:  the purchase of the apartment would have been part-funded by your pension fund (complete with tax relief on the contributions), but the apartment would have had to be sold upon retirement – you would not have been entitled to own or use the apartment for your own use at any time. 

 

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JS writes from Dublin: Having read your recent article on Irish Nationwide, I am concerned about deposits there. I have €200,000 on deposit. Do you think Ireland Inc. is sufficiently robust to reimburse all depositors under the guarantee scheme if a bank or building society fails or would it be more prudent to withdraw funds, incur penalties and find an A rated bank?

 

I think you are quite right to be security conscious – even with the 100% government guarantee of your deposit.  Ireland Inc is not out of the woods yet regarding the nation’s overall financial position, let alone that of the banks who without the government’s intervention may very well have been deemed insolvent. As other Irish Nationwide depositors have accepted by now, the society is not going to be bought out or privatised – some say it is more likely to be nationalised.  If you are looking for absolute safety for your money you might want to even split it up - into two different institutions, perhaps?  Don’t forget when you are choosing a new deposit institution that RaboDirect is the only triple A-rated bank based in Ireland. Their deposits are covered under the Dutch bank insurance scheme guarantee of €100,000. Meanwhile, if you don’t actually need this money to live on (I’m assuming that your income, pensions, savings, low debt – whatever – mean your finances are in good shape) you might consider buying some precious metals – gold or silver, as the ultimate store of value and a hedge against inflation and economic or geopolitical uncertainty, all possibilities going forward.  Check out the merits of holding a little physical gold in your portfolio at www.gold.ie, the Irish-based gold bullion dealers who have a good information section on their web-site.  

 

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JO’B writes from Clonmel:  I had a managed pension policy and it matured in July 2007. I assumed my pension fund was safe after it matured but when the pension company did not contact me, I contacted them two months later to find out what was happening with my policy. They told me it has lost money the previous months.  I thought in the run up to maturing that the pension company safeguarded all pensions.  What is the law regarding this situation? 

 

Private pension funds come in various forms, but if this is a typical retirement annuity contract for a self-employed person or for someone whose company had no occupational scheme dating back at least 10 years ago, then it may have been entirely your responsibility to monitor the asset mix and performance of the fund as you approached retirement.  “About 80% of pension providers contact a near-retiree about six to eight weeks before retirement informing them that their maturity retirement date is coming up and asking them for instructions.  But not all of them do,” says Gerard Geraghty of Geraghty & Co financial advisors in Westport.  “There is no obligation the part of the pension company to ‘safeguard’ the fund either, but in the last decade or so all the pension providers offer pensions with a default investment strategy that you can tick, that will, every five years automatically shift some of your fund into safer assets like cash or bonds.  It doesn’t sound as if you reader had such a policy.”  One of the reasons I keep recommending that readers get good, fee-based financial advice before they buy expensive money products is so that this kind of feature will be pointed out, and the pension advisor you engage will keep you abreast of issues like proper asset allocation as you get closer to retirement. 

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Health insurance cuts for children

Vhi Healthcare reduces 2009 premium for Children on Plan B and Plan B Options 

200,000 children and their families to benefit.

 

4th March 2009:  Vhi Healthcare today announced the introduction of reduced premiums for children under the age of eighteen on its most popular plans, Plan B and Plan B Options. The company has reduced the 2009 premiums for children on these plans to €200 - a reduction of at least €100 per child with effect from 1st April 2009.  

 

Commenting on today’s announcement Mr. Jimmy Tolan, CEO, Vhi Healthcare said 

“We have been listening to the issues and concerns that are being raised by parents in conversations with staff in our contact centre. The reality is that families in Ireland are feeling the impacts of the deteriorating global economic environment and are experiencing changed financial circumstances. Despite this, many parents consider it very important to have the highest quality health insurance cover in place for their families.”

 

“To support these parents we have introduced reduced premiums for children. Almost 200,000 children and their parents will benefit from this measure and we hope that this will go some way to help alleviate the pressures on families. The reduced premiums for children on Plan B and Plan B Options will be funded through expected savings of €20m achieved through a range of cost containment initiatives right across the organisation including negotiations with providers of medical services.”

 

Vhi Healthcare will write to all members who are renewing their policies in April to advise them of this new rate.  The company will also write to all members who renewed with us in January to March ’09 to advise them of the reduction in their policies (from 1st April).  Members renewing at a later stage of the year will be advised of the revised pricing as their renewal falls due.

 

Vhi Healthcare is Ireland’s only not for profit specialist health insurer with over fifty years experience.  In 2009, Vhi Healthcare expects that over 90% of its customers premium income will be spent in ensuring that’s its customer’s medical needs are met.

 

 

Foreclosures in US and here 

House Repossession Remains at Very Low Level, says IBF 

 

Data published today by the Irish Banking Federation (IBF) confirms that house repossession remains at a very low level here.  The total number of houses repossessed by all mainstream mortgage lenders in 2008 was 96.  At 0.01%, this represents a fraction of the total number of mortgages issued.  

The level of repossession of residential properties in Ireland is very low by international standards.  For example, for every 10,000 mortgages issued, 1 results in repossession here compared to 35 in the UK – demonstrating a significantly different approach to arrears management between the two markets.

Furthermore, the recent introduction on a statutory basis of the Code of Practice on Mortgage Arrears (which builds on the original IBF voluntary code), and its extension to cover all mortgage lenders, will provide an added measure of reassurance to mortgage borrowers at this time.  Under the Code:

〈        Lenders must adopt flexible procedures for handling mortgage arrears and assist the borrower as far as possible – whereby consideration can be given on a case-by-case basis to deferral of payments, extending term of mortgage, changing type of mortgage, or capitalising arrears and interest

〈        Lenders must wait at least 6 months (12 months for the two recapitalised banks) from the time of arrears first arising before applying to the court to commence legal action for repossession.

 

“While the number of repossession applications to the courts has increased, this number bears little or no relation to the actual number of properties repossessed”, according to IBF’s Chief Executive, Pat Farrell.  “Increased activity in this area is reflective of the general economic slowdown and we can expect this to continue to be the case.  However, the importance and value of early communication by borrowers with their lenders cannot be emphasised enough.  Where repayment difficulties arise for some borrowers because of changed economic or social circumstances, the borrower should talk to his/her lender at the earliest opportunity”, he stated. 

 

 

But not in the USA`: Mortgage delinquencies took their biggest quarterly jump on record in the fourth quarter of 2008, hitting a record 7.88% of loans outstanding, the Mortgage Bankers Association said Thursday. The delinquency rate, which includes loans that are at least one payment past due but not yet in foreclosure, was up from 6.99% in the third quarter and from 5.82% a year earlier. The rate of new foreclosures was up slightly to 1.08%, putting 3.30% of mortgages somewhere in the foreclosure process. The combined percent of loans past due and in foreclosure jumped to a seasonally adjusted 11.18%, the highest since the MBA began keeping records in 1972.

 

Interesting pension idea – nationalise DB pension funds

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TO writes from Dublin:  My husband is well over 80 and qualifies for the medical card on income grounds. As I am now over 70 he was told that I also qualify.  The form I must fill in requires not only details of our savings, but evidence and there is no way my husband will write down the numbers of our An Post savings certificates or our post office book. Surely asking for details and evidence of our savings is breaching the bounds of decency? 

Last October’s budget changed the rules by which the medical card is now issued, but the fact that your husband is still receiving the card, and was not required to produce any further statement of income, suggests that the HSE is satisfied that he continued to qualify for the free medical card after the October changes. (In fact the majority of over 70s continued to receive the card.)  The request for income details from you, not that you are over 70, sounds to me like a formality, unless, of course you have separate income to your husband that would push you both over the qualifying income limit of €1,400 per week for a married couple. The HSE has said it will take a sympathetic view of pensioners with existing cards and question marks over their continuing qualification.  Why don’t you contact your local Citizen’s Information Centre and discuss your concerns with them?  They should be able to allay your fears about having to fill out this form. 

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RW writes from Youghal: Having worked for almost 50 years in the UK I have received a pension plus our old age pension of about Stg£46,000 per annum. This I receive gross as I am now tax resident in Ireland.  My query is, at what currency conversion rate does the UK Inland Revenue use to convert my pension to euros? I requested that it be paid in euros, but my pension is vastly reduced as a result of the current conversion rate. 

 

You should contact the UK Pension Service International Pension Centre, Tyneview Park, Benton, Newcastle upon Tyne, England, NE98 1BA to request the conversion exchange rate the UK currently uses when it converts sterling state pensions into euro.  I would have thought the rate is determined by the exchange rate on the particular day of the month that your pension is transferred to your Irish account. The International Pension Centre also provides a telephone service at : 0044 191 218 7777 or you can e-mail them at tvp-ipc-customer-care@thepensionservice.gsi.gov.uk.  Be sure to include your pension file number and other pertinent details in any written correspondance with the centre. is 

 

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AK writes from Dublin: Is there any possibility of changing the rules governing the access to AVC money before reaching the age of 65?  My AVC balance has decreased by approximately €14,000 during the last year, I am now 63 and in need of this money now before it has been completely diminished.

 

The rules of your pension scheme determine when you can access your AVC, and yours clearly do not permit access before age 65, even though you are retired.  You should contact the fund trustees/administrator to see if you can switch your existing AVC assets to an asset fund that will ensure that your remaining capital is secure until age 65.  You should not you’re your money in what appears to have been a high equity-exposed AVC fund – something else you can raise with your trustees, who should have been more pro-active in helping AVC holders at your company to protect their retirement savings at they got closer to retirement. 

 

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PL writes from Dublin:  I am thinking about buying some gold, probably through the Perth Mint certificates that you have written about. However, I want to know what would happen to the value of my gold cert holdings if hyperinflation takes off and the US dollar goes up in value but then collapses, as David McWilliams recently predicted.  If I wanted to cash in my certs would I get the dollars or the gold?  Is there a way to nominate payment in euros or another currency instead?

According to Mark O’Byrne of Gold and Silver Investments, the Dublin bullion dealers, the Perth Mint certificate programme “is very liquid and you can sell your certificate at any time and the client will have their funds wired to them in whichever currency they wish to be paid in.  We deal, quote and have bank accounts in all the major currencies including the Swiss franc. So you can get whichever fiat currency you want to be paid in. Secondly, and most importantly you can also take delivery of your gold or silver at any time by simply converting to allocated gold, paying the fabrication fee for the coins or bars and instructing to ship to an address of your choosing – for safekeeping in one’s home (with home insurance obviously) or to be kept in safety deposit boxes or depositories in Europe.”  O’Byrne adds that if there is hyperinflation in the US “and that does seem quite possible”, it is likely that there would be hyperinflation in the UK and in all debtor nations with exposures to Wall Street and the City of London. “Hopefully the euro would not be as effected due to the German hawks who are aware of the risk of hyperinflation due to their experience at the end of the Weimar Republic in the 1920’s” but all paper currencies are “still likely to fall vis a vis gold”.

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LIFE COVER IS ONE INSURANCE YOU DON’T WANT TO LOSE

 

The imposing of the pension levy on 370,000 public and civil servants has already resulted in one unintended consequence: life and pensions brokers from one end of the country to the other are being told to cancel Additional Voluntary Contributions (AVCs) that up to half of all these state workers have been making, some for many years, to top up pensions that would otherwise be short maximum service years.  

The ‘law of unintended consequences’ looks as if it might be broken again for another financial product that many people who are losing their income or their jobs are cancelling:  their term life insurance. This is especially unfortunate, because while the AVC can always be re-instated when the economy picks up again, getting rid of life insurance as a cost saving measure could end up causing a catastrophe for your dependents. 

Some people believe carrying mortgage protection insurance and some death-in-service benefit that they have at work is sufficient.  But these days the loss of job also means the loss of the work-based insurance; mortgage protection might cover the outstanding loan in the event of your death, but your dependents may be unable to sell the property for what they believed was even the mortgage value.  It could spell financial disaster – at least in the short term.

The Financial Regular has just published its latest comparison price survey on life insurance (see www.itsyourmoney.ie) which is very timely and helpful for anyone who feels perhaps that it’s an expendable cost.

The survey includes three term life insurance profiles and three mortgage protection insurance profiles and shows the cost of the insurance for male and female separate and joint smokers and non-smokers and for dual coverage for both smokers and non-smokers.  (Joint cover pays out only on the first death; dual cover pays out after both deaths and the latter is better value but only slightly more expensive.)

The Regulator reminds us that the cheapest quotation may not be the best, but straightforward term insurance – is a pretty simple product though in the form of mortgage protection, the cheaper version is inevitably the one in which the cost of the premiums – and cover – reduces in tandem with capital repayments. In other words, the value of the insurance falls in line with the amount of the loan you pay off and the amount outstanding. 

What might also surprise buyers is that term mortgage protection insurance is cheaper - by about 20% -  that ordinary term cover and that smokers can expect to pay anywhere from 30% to 50% more for the same level of insurance.  The lower mortgage protection cover is partly due to the fact that there tends to be greater retention of this insurance because it is compulsory. 

So which company offers the best price for the 30 year olds seeking €320,000 life cover over a 30 year period?  For male non-smokers, the cheapest policy (by just 29 cent a month) is Danica Life at €28.16 followed by Bank of Ireland/New Ireland at €28.47. Danica Life also comes out top at €21.74 per month for women; and male and female smokers can expect to pay Danica just €48.72 and €33.20 per month respectively.  Not all of the 10 companies surveyed offer joint policies, but again, Danica Life comes out on top for these, while Bank of Ireland Life is the cheapest for dual policies which amount to €42.72 and €76.61 per month respectively for non-smokers and smokers. 

Life insurance gets more expensive the older you buy it, as the third profile in the Regulator’s survey shows:  for just €120,000 cover over 10 years this time, a 49 year old male non-smoker will pay Danica about the same amount they charge the 30 year old male non smoker who wants €320,000 worth of cover over 30 years. 

Danica Life, incidentally, is the life assurance arm of the Danish mutual bank, Danske Bank, which is the parent company of National Irish Bank and is one of the more secure European banks, not a small consideration in these uncertain banking times. 

The importance of holding onto your life insurance can’t be stressed enough, even if you do lose your job.  Term cover is not hugely expensive compared to other financial products, but if the policy has been in place a few years and you cancel it, you will have to pay more when a new policy is started. This is because you will be assessed not just at an older age than when you first took out the cover, but also perhaps you health may have deteriorated.  

Keep in mind that any serious illness you suffer, once you cancel the policy, can also impact on the cost of future insurance if you want to buy some again – this is because you many now have a ‘pre-existing medical condition’ which, like your age will be used to calculate the new premium.   

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PN writes from Dublin: Unwisely my husband and I took out mortgages on our home in the last few years amounting to a total of €900,000 to make some investments for our retirement. We run a small business, and are unsure if, despite our best efforts, it will survive. We have reduced our salaries by half.  Our home has been for sale for the last eight months and the plan is that when it is sold we will pay off the loans and rent. Meanwhile we are checking out any ways we can save money. I am sure your answers to the following questions will be very helpful for others in the same situation. 1) We cannot afford the mortgage protection policies on the loans. What could the bank do if we stopped paying them? The bank is unlikely to have any more luck than we have had at selling our home.  2) Now that interest rates have come down, are these insurance policies overly expensive?

 

Your longer letter explains that the mortgage protection policies alone are costing you €620 a month; unfortunately, the cost of the premiums are calculated based on the size of the capital value of the loan, its duration, your respective ages and genders and the fact that you are both non-smokers and otherwise in good health.  The cost of servicing the mortgage is irrelevant. As for not paying the premiums this would be a breach of contract; it is also mandatory in this state to have mortgage protection insurance if you hold a mortgage property.  However, lenders have been known to accept a ‘life waiver’ for clients aged over 50, sometimes because the person can provide an existing life assurance policy or other collateral that could be realised and pay off the loan in the event of their death. I suggest you speak to a broker or your lender before you stop paying the premiums. 

 

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JN writes from Dublin: My employer pays €1,000 per year for my and my wife’s Plan B VHI insurance. Additionally we 'flex up' by paying an extra €1,000 ourselves to get up to Plan C Options. This extra €1,000 is taken over the 12 months by payroll deduction and facilitated through the company’s benefit scheme. I have been declaring the employers €1,000 as BIK and claiming relief on my €1,000 contribution. However with BIK being taken at source is this the correct calculation?

 

Tax advisor Sandra Gannon of TAB Taxation Services in Dublin says that you have been doing the right thing, except that you have been forgetting to also claim tax relief on the employer’s contribution, to which you are entitled because of the BIK you pay.  She says that you can seek up to four years of back tax on your tax claim. 

 

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BI writes from Dublin:  I am getting an extension and thinking of applying for a mortgage. I have €250k in savings in various accounts. Should I take out a mortgage or use my savings to pay for it. I am 50 years old and do not have a pension. What are my best options?

 

Mortgage interest rates are very cheap again – the best three years fixed rate is currently just 3.4% - and the most attractive lending deals are available to existing owners with plenty of equity already in their homes and good, secure jobs.  It also makes sense to borrow the extension money if you are able to lock in a higher interest rate for the €250,000; it’s when savings are a loss leader that it makes sense to use it to pay off debt or buy outright rather than borrow. That said, if you are the sort of person who looks at the longer term, you might believe, as I do, that interest rates will not remain this low forever.  There is a growing risk of price inflation – the consequence of the inflating of the world’s money supply – and when it spills over into the real economy, prices will go up and interest rates will have to rise to counter it.  The best way for any of us to get through these tough times will be if we have little or no debt, plenty of secure savings and investments and a regular income.  You shouldn’t count on your house to be your pension unless you are willing to sell it and live on the proceeds. That is all the more reason to be careful about mortgaging the property. 

 

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JK writes from Co.Wexford:  In 2007 my wife invested her SSIA in a single premium PRSA with Irish Life for which she received top up tax credit. It has since lost 45% of its value.  As she had no pension she also contributed on a monthly basis to a PRSA standard plan in 2007 which was also invested in a consensus fund and this has lost approximately 30%.  Does she leave them as they are and hope that the value increases or change them to cash and accept the loss or cash in both plans and put the money on deposit in a credit union and use the proceeds as her pension? Her employer does not contribute to the pension plan. 

 

Unless your wife is 50 your wife cannot cash out of her PRSAs.  She can certainly switch to cash or bond funds to protect her capital or transfer them to a different provider with funds she prefers at no cost.  She will be crystalising her losses by switching to a capital protected fund, but many commentators are now predicting the stock markets have a good way still to fall.  (See Comment.)  PRSAs at least offer some flexibility:  she can stop and start her contributions without penalty, but if she opts to put her savings in the bank, she will lose the tax relief on the contributions and will have to pay annual DIRT tax on any interest. 

 

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A pensions consultant told me recently that he’s never been busier; he spends long days ‘firefighting’ – trying to find ways to help trustees and employers to balance their known liabilities with their pension fund’s value. But he admits that with nine out of 10 defined benefit pensions experiencing shortfalls, stock market returns still plunging, and corporate profits also tanking, “it is an impossible task.”

 

Perhaps it’s just as well that the typical worker only has a vague awareness of all to this and that his fund, if it’s an Irish managed fund, is down 35% over the past year. 

 

However shocking that figure is, it looks even worse the closer you get to retirement. Ideally, pension fund holders should be shifting their assets out of equities into safer funds like cash and bonds starting at least 10 years before retirement, but pensions were already reporting near-negative returns over the previous decade even before the slaughter began last September.  

 

You might need longer than that to recover a 35% loss if you happen to be 55. Meanwhile, so many self-employed people I’ve met can’t even remember where they put their pension documents let alone who sold it to them, yet they could be facing a wipe-out if they don’t take some corrective action. 

 

For those brave souls who have reviewed their retirement nest egg, it’s not a pretty sight. Judging from the letters I get from readers, most say they don’t know what to do:  they thought, like I did, that a well diversified, ‘buy and hold’ pension fund strategy was a prudent course, but that theory has been turned on it’s head.

 

Our portfolios were filled with ‘blue chips” like banks, big retail giants and strong companies or sectors with good cashflow, profits and markets to sustain long term growth and steady dividends. 

 

But investing models are as defunct as the financial services and markets they facilitated. 

 

Forbes.com wrote last week about how Warren Buffet’s ‘buy and hold forever’ strategy has been misinterpreted by an entire generation of investors and fund managers: “Buying and holding stocks can be extremely risky if you wind up holding the wrong stocks. Investors should remember that Buffett has a lot of expensive and very talented help in making investment decisions, so he buys very good stocks at low prices and doesn't often get stuck holding onto big losers.”

 

Someone else suggested we ask ourselves: “Whatever about continuing to hold onto these ravaged shares or funds, if I had ten grand to spare would I actually buy any more at these prices?”

 

Some say a rally is due any week after February’s sharp sell off.  Others say the markets will halve again before they hit bottom but the only certainty is that shares will definitely go up…or down. 

 

Perhaps the safest assumption you should make about your retirement at this stage, is that it might not be for as long as you once anticipated. 

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The Credit Union League moved quickly to reassure members of the Mitchelstown Credit Union that their savings were perfectly safe, despite the fact that all business loans have been suspended and strict limits put on all lending.

 

Seeing as the Mitchelstown CU is probably not unique, this reassurance will only go so far with credit union savers who may have already spent some time queuing nervously in bank lobbies, moving their money to whichever institution they thought was the ‘safest’ at the height of the crisis last October. 

 

It was the Regulator for the Credit Unions, Brendan Logue, who shut down commercial lending at Mitchelstown, after it was revealed that four of their five biggest such loans have gone pear-shaped.  Last September the Mitchelstown board had to publicly deny that it was in any financial difficulty after rumours prompted many members to close their accounts.  

 

Back then – before unemployment really took off and markets crashed, it had €200 million in assets, €35 million in outstanding loans and another €65 million under investment.   

 

Six months later this balance sheet has undoubtedly been weakened, though the League went to great pains to assure its members that Mitchelstown is solvent and that savings up to €100,000 are covered by the Government guarantee and the League’s own protection fund.  

 

The credit union regulator Mr Logue – one of few in the Financial Regulator’s office – hasn’t pulled any punches in his reports about the amount of work needed in raising the operating standards of individual credit unions, but that his resources have been limited.  

 

There’s another trouble over the banks without the credit unions adding to it:  and they may not even know it yet, but we’re all going to be relying more on community lenders like the credit union and the post office banks before the great depression of the 21st century is over.  

Whatever Brendan Logue needs, he should get. 

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 ‘The rich are different than you and me,” F Scott Fitzgerald is incorrectly quoted saying to Ernest Hemingway. He replied, “Yes, they have more money.”

 

Well, as it turns out, our blanket assessment of bank directors as fat cats wallowing in huge sums of money that they spend buying up needle thin apartment blocks in Dubai is a shade off-side: according to the report on the disclosure of the 186 bank director’s loans that came out last week, they also needed to borrow for all the same mundane reasons the rest of us do.

 

No doubt Mary O’Dea, the acting Regulator, and consumer director, will helpfully remind the 32 with outstanding credit card debt that it really pays to set up a monthly direct debit to clears the balance every month. 

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