Jill Kerby

 

GENUINE RECOVERY… STARTS AT HOME

 

At the recent Over 50s Show in Galway, I tried to explain to the people who attended the two personal finance seminars that I gave, what effect the massive, catastrophic, debts that we in Ireland and our most important trading partners, the UK and the USA have on their financial security.

Sadly, recovery doesn’t happen when banks are insolvent and there’s a shortage of capital to lend or when unemployment keeps rising, when house prices, incomes and tax receipts keep falling and record numbers of people save, rather than spend their hard earned incomes and pensions.

Under these conditions, you have an obligation to yourself and your loved ones to ensure that your savings are safe, that you aren’t paying more tax than necessary, that you have the wherewithal to get the best discounts and deals when you do spend, and that you generally have no hand yourself in making things worse.

If there are any positive signs, they come from the east, from the economies of China, India, Brazil and other developing countries, where incomes are going up along with demand for the kinds of basic goods and services that once fuelled the great consumer boom that began in the west after the second world war. 

These billions of hard working people want cars and fridges, mobile phones and meat-based protein.  They don’t have the personal catastrophic debt that we carry in the west and their governments have not yet completely wasted the high levels of savings or fiscal surpluses that they’ve earned.

Some commentators worry that the Chinese in particular are fuelling a huge credit and inflation bubble because of the way the central planners have sanctioned massive bank lending and enormous public works projects since the 2008 crash; these include a road network that is nearly the size of America’s despite only having a fraction of the vehicles and brand new – but empty – cities.

Still, China’s ‘day of reckoning’ is some time off – they hold a few trillions in foreign currency reserves and are on a big international asset and commodity-buying spree with much of this money. (A sensible thing to do as the western paper currencies they hold, relentlessly devalue.)

Our reckoning day is already here.  So is Greece’s.  And at least three other indebted euro-member states – Spain, Portugal and Italy – are also now in the crosshairs of the foreign currency and hedge fund dealers as they drive up their budget deficits and annual debts even as their tax revenue drains away. 

Despite the severe cost cutting in the public sector and other austerity measures, our fundamental problems are not being addressed and our tax take has dwindled to just €30 billion. However, the state’s annual budget, at €61 billion, is higher than it was when the crisis started in 2008. As my 16 year old would say, “go figure”.

The Germans and the euro-bankers seem to have finally woken up to the feeble ‘solutions’ their fellow politicians in the worst overspending countries have presented to them.  They’ve marked all our cards…time is running out.

My 10 point plan for the Over-50s audience might be a better place to start in protecting your personal financial position as politicians continue with their futile effort to solve a global financial crisis that was caused by spending more than we produced…by getting us all even further in debt.

1)    Be realistic, prepare for the worst …just in case.

2)    Protect your savings.  Don’t just chase the higher interest rate. Make sure your money is safely deposited in a solvent bank or financial institution.  Remember that the 100% government deposit guarantee ends at the end of September.

3)     Buy gold and silver to protect the purchasing power of your savings.

4)    Pay the correct tax.  Claim any tax allowances or refunds where applicable (such as DIRT).  With property taxes imminent, should you consider offsetting a potentially high tax by trading down, swopping property with adult children in smaller, less valuable homes, etc?  Take advantage of tax breaks – pensions, BES, film investment, Rent-a-Room.

5)     Invest in your health and home: buy a good private health insurance policy (check out the cheaper, corporate version of your existing one. Make your home as energy efficient as possible; do minor repairs before they get seriously expensive.

6)    Earn more, spend less.  Able-bodied seniors may want to start exploring part-time job opportunities, from baby-sitting to business mentoring.

7)    Get a lap-top and the internet to take advantage of retail bargains, discounts, vouchers and cost comparison websites.

8)    Save more, spend less.  All pension income/benefits is likely to be frozen at some stage.

9)    Invest…but only once you’ve educated yourself. Take a course, buy top newsletters (check out the Agora Financial stable of publications, including MoneyWeek) and aim for strong ‘value’ companies.

10)Count on your family, friends and community to help you through the economic downturn.  The government’s decision to keep rewarding corporate failure and insolvency with the future earnings of our children and grandchildren should be proof enough that real salvation is going to be found closer to home.

ends 

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WE ALL NEED TO ADAPT TO THE “NEW NORMAL”

 

 

“I guess we have to get used to the idea that this is the ‘new normal’”, a friend of mine who owns a little café in Dublin, said to me recently. 

 

Her revenue is down about 30%; she’s laid off staff, taken a pay cut herself, but is still in business.  She’s also had a long talk with her bank manager and while they won’t extend her much credit, they are pleased that she’s also slowly reducing her debt and overdraft use.

 

This is a good news story, in my book.  It’s a sign that small business people are learning to adjust to the ‘new normal’ that is a very different business environment than the heady days before 2007.

That’s not such a bad thing either.  The boom was a false economy, built on a mass of debt and spending, driven by cheap money, tax breaks aimed at a particular industry – property and construction – supported by a corrupt, incompetent political, civil service and banking elite that were all personally benefiting from the rising fees, commissions and tax revenue that ensured re-election and the continuation of the political gravy train.

 

Since this column is about personal finance, let’s look at what’s happening on the debt front, starting with the outstanding €110 billion householders owe:

 

Despite the new legal code of practice that prevents the banks from pursuing legal action for mortgage arrears unless at least a year has passed, this only applies to cases involving the family home, not investment property, and only if the debtor fully cooperates with the bank in facing their liability and how to deal with it.

 

The banks have also eliminated all tracker loans and have or will be increasing interest rates.  They’ve tightened up mortgage lending and switching conditions; require higher down payments; an unblemished credit and savings record and secure employment. They are not extending the total mortgage based on a couple’s combined income anymore, nor will they easily sanction a loan if the down payment comes from a parent or parental guarantee.  The biggest lender over the past year – AIB – has closed the switching window to existing homeowners who want to move their loans (especially costly fixed rate ones.)

 

Since very similar lending conditions now apply to personal loans as well, debtors (or those people in serious negative equity) need to take a realistic stance when trying to sort out their long-term debt position:

 

-       Make a list of your debts, how much you owe each creditor each month and how much annual interest applies.

-       Prioritise your debts by interest rate and how essential is the service/product.  For example, if keeping the lights or heat on is your top priority, you must pay your ESB or gas bill first.  Consider that while your mortgage interest cost is the lowest, if you build up arrears you could lose your house. Credit card debt is the most expensive, but it is a non-recourse loan – it is not secured on your house. However, this won’t stop your goods being seized if your unpaid balance is handed to the sheriff.

-       Cut your lifestyle costs to the bone, shop around for lower service costs (insurance, utilities, etc) and do a family budget.

-       Once all this is in place, contact your lenders or creditors before they contact you and make a proposal to them for a new debt repayment schedule that results in them eventually being paid.

-       Get a copy of Eddie Hobbs’ book, ‘Debt Busters’, which takes you through the above stages.

 

MABS, the free money advice service, can also help you with this process as can FLAC, the free legal aid centre that helps with serious mortgage arrears.

 

One ‘solution’ you should avoid – certainly as a first resort - is to hire a debt consolidation or management company to sort out your finances.

 

These companies are springing up all over the country. A very large UK operation is understood to be opening an Irish office soon, but they are entirely unregulated, and anecdotal evidence suggests that their high costs and low standards could create yet another future misselling and governance problem.

 

Banking consultant Bill Hobbs has just submitted a draft consumer protection code on consumer debt managers to the new Expert Group on Consumer Indebtedness in which he calls for the introduction of a set of standards that will oversee exactly the sort of services they offer, how they advertise their services, gather and use client information, disclose their fees and charges, conflicts of interest, how they correct errors and handle complaints, etc.

 

These debt management companies (DMC) charge their clients in different ways, explains Hobbs:  some charge an upfront fee plus a monthly sum for taking the single payment you make to cover all your debts (or the new repayment schedule) and distributing it to your creditors; others take a proportion of the savings that might be negotiated if all your debts are refinanced.

 

This is a process that you do not have to pay for if you can prepare your case properly, consult a MABS official or even go to your local credit union for help.

 

The danger of a whole new unregulated body of debt managers emerging as tens of thousands of people try to get used to the ‘new normal’ of our heavily indebted society is that they could end up being the real winners, not you.

 

 

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ENDOW YOUR CHILD WITH A GOOD FINANCIAL HEADSTART

 

My extended family is …well, extending.  I am now of an age that my older brothers and sisters are becoming grandparents and a whole new set of financial responsibilities are being assumed by the young parents – their children.

Unfortunately, like so many other 24-35 year olds, these new mums and dads are carrying a burden of debt that we never did at their ages: huge mortgages, personal loans and credit card debt.

Nevertheless, every parent wants the best for their baby – good health, happiness and financial security. One – older – friend of mine, an older parent with five children ranging now from age 13 to 23 kept his priorities simple and steady:  “The only thing every parent should give to their child, after lots of love of course, is a good education and good teeth.”

Meanwhile, other friends whose children are only now moving to secondary school, in addition to the education and teeth, thought they were doing the right thing five years ago by buying two investment properties which, in addition to their family home they thought would be their legacy to their children. 

Perhaps…if they hadn’t borrowed so much money – about €400,000 – to fund the two rather ordinary apartments. Now in negative equity, they should have just stuck with the orthodontal bills and private school fees (alas, neither of which they can afford today either).

Every family, and every parent is different, but the following is as good a list of suggestions as any on how you can give your own children a good financial head start in life.  It isn’t so much about your children, of course, but about what you can do to protect their interests should anything happen to you, as well as pass on good money habits that will let them become financially independent: 

-       Write a will.  Name your spouse as sole beneficiary (keep it simple when the children are young) and make sure to name guardians for the children. If your combined estate is very large, consider a discretionary trust in the event that you both die.  The trust I have in place lasts until my son is 25 to try and avoid what financial advisors call the ‘porsche syndrome’.

-       Ensure you and your spouse have adequate term life insurance and income protection and/or serious illness cover in place until the children complete their education.  Check the latest www.itsyourmoney.ie life insurance cost survey from the Financial Regulator. A good advisor can also help you determine how much you need or can afford.

-       Don’t spend more than you earn. Live within your means. Try to borrow only for asset purchases – a house, your own education/retraining.

-       Be a regular saver – for your child. Tax-free An Post savings certs and bonds are ideal because children cannot reclaim DIRT tax (or dividends). The five year fixed rate Childcare Plus account is designed for child allowance and pays 20% interest at the end of the five years.) Low cost ETFs are ideal investment options. Again, a good advisor can help you decide what investment assets to choose.

-       If this were the UK, you would be able to set up a private pension for a baby, and claim the tax relief. But here, parents, grandparents, godparents or others can at least gift a child €3,000 per annum with no requirement to pay or even declare the gift. If it is earning a tax-free return this is a good start towards a college fund, but ideally, you want to find a higher return for such a long period.

While it is unlikely that a baby or young child is going to be the subject of much longer term financial planning, now may be a good time for older, well-off parents to endow a child (either a minor, in trust or an adult child) with the transfer of title of a property.

The collapse of house prices, but the raising of the Capital Gains Tax over the last 18 months from 20% to 25% and the lowering of the Capital Acquisition Tax threshold by over €100,000 means that now might be a good time to undertake such a transfer before the tax position becomes even more unfavourable.

A child can be gifted, tax-free, up to €414,779 before the 25% CAT on the balance must be paid.  (The parent will have to pay capital gains tax on any gain unless it is their principal private residence.) 

Meanwhile a property that a parent continuously shared with the child for at least three years can also be inherited entirely tax free by the child under CAT regulations.  (The child cannot already own or partly own any other property and must not sell it for another six years.)

Finally, no parent should feel obliged to leave their adult children an inheritance, especially if their own retirement is at stake.

Instead, the best financial gift you can give your child is the one you sowed when they were growing up: that there is a huge difference between money earned, spent wisely and saved, and money borrowed and wasted.

Ultimately, it is the difference between freedom and enslavement.

 

 

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YOUR 2010 PENSION TO-DO LIST:

 

-       If you belong to a company that offers you pension fund membership, and makes a contribution, take it. The self-employed can never match this kind of funding.

 

-       Pay a fee rather than commission to an advisor, even if it is to only try and get you into a lower cost, but steady performance, no frills, highly diversified fund.

 

-       Get your existing pension fund reviewed.  Find out the size of your losses in both percentage and cash terms.  Ask your trustee (if you belong to a company scheme) what went wrong and what they are doing about it.

 

-       Try to balance your pension assets according to your age and risk profile: the younger you are the higher your stock holdings could be was the old rule of thumb, but you need to also know exactly what companies, sectors you are holding in your fund. Too many fund managers bought too many risky shares in their effort to produce higher returns, not good, safe returns. Remind them that this is a pension you have asked them to manage, not your dream of owning a red Ferrari some day. (Part of the problem is that this was their dream too.)

 

-       Find out exactly what impact charges and fees have had on your occupational or private pension. This is called the ‘RIY’ or reduction in yield. Then try and reduce this impact. Aim for low cost annual management fees of under 1% at the least – check out ETFs – Exchange Traded Funds and other low cost index funds.  Demand that 100% of your money is invested in the account – that means, no more 5% bid-offer spreads.

 

-       Watch out for PRSAs.  While the personal retirement savings accounts are very flexible and suit women pension fund investors because they allow you to stop and start contributions without penalty, the charges on Standard PRSAs are simply too high at up to 5% of your contributions and up to 1% annual management fees.  Consider a discount broker or a good, fee-based one that charges a reasonable Standard PRSA fee, or better still a transparent, low cost non-standard one. 

 

-       Get married to someone with a good income. Have lots of daughters and be very nice to them. 

 

You think I’m joking?  It’s a whole lot easier and far less stressful to fund a pension when there are two incomes coming in, and even if there is only one income, you can rely on the other person’s retirement income as well as your own in your old age.

 

As for having lots of daughters, they might be your best pension plan of all.

 

In all the years that I have been writing and speaking publicly about personal finance and pensions, I have never met a (nice) older person or couple who was genuinely worried about their old age when they had a bevy of daughters, who they knew they could rely upon to help them achieve a modicum of comfort and joy in their old age.

 

If you really do have time on your side…planning for a baby pension (triplet girls is what you should be aiming for) sounds a whole lot more pleasurable and promising than trying to find €800 a month for a pension fund, though doing both might give you an optimum return.  

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I own an old house with, it seems, a very bad government energy rating. 

 

The windows are only single glazed, though most of them still have the original, slightly wavy Victorian glass.  The beautiful high ceilings, open fireplaces, and oak floorboards inadvertently pump cool air around the house all year round, making for rather chilly winters and comfortable summers.  The attic is properly insulated, but not ‘finished’: only half of it is floored.

 

This is not, by the new energy efficient standards, a “green” house.  More mauve to blue, I’d say.

 

However, it is located in a city neighbourhood within the Dublin canals, on a street lined with magnificent sycamores and chestnut trees. There are Luas stops at both ends of the road, two buses stop outside my door and the biggest city hospital is at the end of the block. 

 

If you are from Galway or Sallins, you will appreciate how this house is on high ground and is not subject to flooding or subsidence.  It is structurally sound and every tradesman who has ever walked in the door says the same thing about its foot thick walls, the arches and bay windows and the elaborate ceiling plasterwork: “They don’t make houses like this anymore”. 

 

My house may not have a triple A energy rating, or whatever it’s supposed to have, but it has stood solidly for over 110 years, sheltering first a British army officer and then a number of families from revolution and civil war, a global ‘Emergency’, various recessions and booms. The plumbing and heating function to my standard and this house, over the nearly 16 years of our occupancy, has suffered no lengthy power outages, or water shortages – we are lucky to share our power lines and water mains with the hospital at the end of the street.  

 

My heating bills certainly spike dramatically in the winter, and yes, double-glazing the windows is probably a good idea that I will get around to, but the draughts do not detract from the fact that I own a desirable, late 19th century house and that I accept it for what it is.

 

What I object to is being forced by the state to produce, at a monetary cost and under threat of a fine or imprisonment, an arbitrary, energy-rating certificate to a willing tenant or purchaser.

 

I was recently reminded of this by a tradesman who I asked to quote a price for a replacement porch door – a very green feature that was already here when we moved in – and who I know would also love to renovate the windows.  He warned me that the government might someday link property tax to energy ratings:  “The worse the rating, the higher the tax, missus.  You don’t want to be on the wrong side of that.”

 

If he is proved right then we are in even worse trouble.

 

What it means is that a group of inept, sanctimonious politicians with a green axe to grind, who hold the balance of power in one of the most incompetent governments in our history, could force higher taxes on property that neither they personally, or the state, inhabit, own, or pay to maintain, on the grounds that they don’t like the amount of energy the legal owners use (and pay for).

 

What, or, better still, who’s next?  Fat people? Smokers - again? How about old people with dicky hearts? They’re certainly not very energy efficient.

 

Meat eaters would be a very good new whipping boy for the Green world improvers, and a tax on every steak or carton of milk, a substantial source of energy revenue. Not only does meat and milk production require massive energy (and water) to get it from farm to table, but cattle are said to be one of the single, biggest contributors to global carbon-based pollution…yet the animals, land and the profits generated are exempt from direct carbon tax.  

 

Of course this policy of arbitrary greenification is not new. There hasn’t been a storm of protest from car drivers who are already subject to higher taxes if they drive larger engine, higher carbon emitting vehicles.  Perhaps it’s because we’ve been reduced to being a nation of whipped dogs for so long that no one can remember when – or even if – there was a time when the government was the servant of the people and not the other way around.

 

I neither seek nor expect any kind of state help, assistance or subsidy for owning this house or any other. I reluctantly acknowledge that my house is a taxation target that the government cannot resist.   But I am not willing to accept that it should be taxed to an extent that it cannot attract otherwise willing buyers or tenants – who would know from the moment they crossed its 110 year old threshold that heating a house like this to modern semi-d standards would always be a challenge.

 

Nevertheless, I will pit my beautiful old house against all the energy efficient houses that ended up under five feet of water last November, or that lost power for days on end during the Christmas cold snap or that are still without regular running water today.

 

There are worse problems with Ireland’s housing stock that need contending with than making every house conform to arbitrary energy ratings.  Where were energy regulators and supervisors and green do-gooders when the flood plains were being built upon, when housing estates, wholly dependent on car ownership (or two) sprang up in the middle of nowhere?

 

And shouldn’t those of us who live within walking, cycling or public transport distance of work, school and amenities, and where car ownership is unnecessary, not be awarded with carbon tax credits?

 

I’m not sure that man alone, over just 200 years out of two billion, is to blame for heating or freezing our planet.  Perhaps Mother Nature is just up to her old tricks, causing yet another climate shift with or without a nudge from us.  It certainly bothers me that the Greens and their energy police, so adamant about cause and effect, are pinning the blame on those they’ve identified as energy ‘abusers’.

 

So let them be fore-warned:  others may sit back and accept their mugging, but the moment an energy tax is slapped on this old house…will be the moment this old house fights back.

 

ends

 

 

 

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