Jill Kerby

Lobby a TD if you need access to your pension

GM writes from Wexford: I have a pension fund with Bank of Ireland Investments into which I have contributed €80,000 over the last 15 years. It is now worth less than my contributions, which I have recently ceased.

I have an overdraft and am behind with my mortgage repayments and have requested the bank if I could have these funds released to enable me to try and restore my life to some sort of normality - to pay my overdraft, reduce my mortgage repayments. Once again they have refused.

I need these funds now, not in seven years.  Bank of Ireland got itself into trouble as a privately owned company and the Irish taxpayer, people like me, has to five it what it needs, but when I’m in trouble, I can’t get my own money back? Is this a fair country we live in?

So many small business owners, and now, ordinary employed homeowners, are in the position you describe: they have money in pension funds, but are cash poor, with bills and mounting debts that have to be paid. Unfortunately, Irish pension legislation does not permit pension fund holders to encash their funds for any reason other than retirement or early retirement on health grounds. Nor can you raise a loan against a pension fund.

In its election manifesto, Fine Gael said it was prepared to look at amending pension rules to allow some access to private pension funds – as is the case in the United States and Canada, for example.  You may want to lobby your public representatives to this effect, but in the meantime, I’m afraid you will have to try and raise capital some other way. (See Comment).

Tracker bond fears

RD writes from Dublin: I’m wondering if you can help me with a query on behalf of my mother, who is 69. In 2007 on the advice of Ulster Bank, she took out two separate six-year policies each for €20,000 with Irish Life and New Ireland. The capital is guaranteed at maturity, but have not performed well and both are worth less than the initial investment. I am worried that these companies are not covered by the Government Bank Guarantee. Can you confirm this and my mother have any cover in the event that these companies closed down? Is there much likelihood that this could happen in the next three years?

 Six year tracker bonds, like the ones you describe, involve a large portion of the investor’s money being put on deposit to safeguard the capital over the term of the contract, and the balance used to track the performance of stock market indices. According to independent financial advisor, Vincent Digby of Impartial.ie, the millions of euro deposited by the tracker fund manager in their bank desposit account is not covered by the bank deposit guarantee scheme, which has an account limit of just €100,000. Corporate deposits – like a tracker deposit fund - are covered by the Eligible Liabilities Scheme, but only for institutions that joined the scheme between December 2009 and this coming June unless further extended. “Not only was your reader’s tracker deposit made in 2007, before the ELG came into existence, but Ulster Bank is not a participant,” says Digby,

However, Ulster Bank is part of Royal Bank of Scotland, and, with its parent bank Lloyds Bank, is mostly owned by the UK government. Digby’s view is that it is unlikely to fail in the next three years.  Nor is there any reason to believe, he says that Irish Life or New Ireland will cease trading. Nevertheless, there is no compensation scheme for life assurance account holders in the event that an Irish investment company fails. 

Deal or no deal

BT writes from Dublin: I have two mortgages on my house, a tracker worth worth €100,000 and the other, a €60,000 variable rate mortgage for an extension. I can pay off both with cash at the moment but I want to go to the bank and offer them 50c on the euro for the tracker, do you think that this would be right approach and would the bank take it as a serious offer?

Does the bank know you have sufficient resources to pay off the €160,000?  If they do, they are unlikely to offer you any deal for surrendering the tracker loan.  No harm in trying though. Do let me know you get on.

Put it in the post

SR writes from Dublin: I am an OAP with enough to live on with my pensions. My life savings are €100,000 and I would like to keep it together.  I would need €2,000-€3,000 from my savings for the little extras. I was thinking of investing €90,000 in An Post three year deposit scheme at 10% and keeping out €10,000 to do me for next three years. What would you think of this plan?

An Post savings bonds are entirely tax free, the return is very competitive and the post office has always repaid saver’s capital, which is state guaranteed. The income you receive from the bond is also exempt from the universal social charge (USC) which is capped at no more than 4% anyway for pensioners. 

That said, you are effectively leaving your entire life savings with a single Irish state owned institution, entirely denominated in euro. If price inflation begins to take hold – some suggest it already has and will get worse – you will have locked your funds in at rates that will not keep up with prices and the spending power of your capital will be at risk. 

A good, fee-based advisor should be able to suggest ways to spread your risk – into other assets than deposits: inflation-linked bonds; relatively low risk blue chip shares or pooled funds that produce annual dividends/income that exceed deposit rates and will hopefully be inflation-proof and precious metals that will act as an insurance policy against the ongoing risk of currency debasement.

Let us dip into pension nest-egg to crack debt crisis

 The new Minister for Social Protection, Joan Burton, acknowledged last week at the annual Irish Association of Pension Fund investment conference that pension trustees are ‘grappling with many difficulties’, that a new defined benefit pension model is necessary “if employers are to deliver the promises they’ve made to workers” and that a start in making pensions more equitable and fair has begun, starting with the way politicians, and to a lesser extent, the new public servants will be pensioned off.

It was her very first Irish public engagement after her appointment on 10 March, so she can be forgiven for not being able to fill in any details, or to even address what the new tax treatment of pensions will be, how deficits will be handled or how the insolvent state will be able to keep paying the out of control state pension bill.

But this Minister is really going to have to hit the ground running sooner than later because while the EU and IMF may be willing to keep paying her pension and that of her fellow public servants, there’s no agency or generous benefactor ready to bail out ordinary pension fund members in the private sector.  Not only have their pension funds been devastated by market losses, but the rules of their schemes are less favourable than those that apply to public sector workers and even company owners and directors.

Perhaps the Minister will read the letter in Question of Money this week from the pension fund holder who desperately needs access to the money he contributed over 15 years into his private pension fund.

This is his money, he says, not taxpayers’ and he needs it because he is in trouble with his bank and his home is at stake, but pension regulations forbid the encashment of a pension fund except for retirement, or on health grounds.

These are exceptional times.  The Minister even acknowledged that 35% of the wealth of our country has been wiped out in the past three years.  Yet there are rules, set by the state, that deprive adult citizens from acting in their own interests with their own money.

There are many very significant pension reforms to be tackled, which everyone knows will take a great deal of time that we probably don’t have anymore.  But there are also some relatively small ones that can be done quickly, such as letting the prudent saver dip into a pension fund in order to provide vital capital to a business that is being starved by their undercapitalized bank, or to keep their

Saving Grace

We are a nation of savers, or at least those of us still in employment are, though the numbers are falling slightly as the great recession continues to bite.

For example, the EBS in its latest quarterly survey, says that 84% of the population are now saving, though only 34% have a regular savings plan.  The remaining 50% put away “a little bit …when they can afford to”.  This supports Nationwide UK Ireland’s survey result in which it found that just 38% of us “save regularly”, down from 40% at the same time last year.  

Both agree that the under 50s, and particularly the 35 to 50 year olds, are struggling the most to set aside money: three out of five of this age group, according to the EBS, are now dipping into their savings to make ends meet.

The EBS says the average saver is putting away €319 a month, 7% more than saved in the previous quarter and it contradicts the Nationwide UK finding by reporting that numbers of people saving is up from 30% to 34% of its respondents.

These figures may be contradictory, but it is the findings of a third nationwide survey, from the travel and lifestyle website lastminute.com, that has shown a very different side to our reputation for thrift.

It found that one in 10 Irish people have a savings account that they keep secret from their spouse or partner; a third of them have more than €5,000 in the account and one in five say that their partner has lied to them about money. Another one in six say they’ve lied about the size of their debts.  The incidence is rising, says the company.

I’m not entirely surprised at these findings. There have always been couples who conceal their individual spending habits from each other or who leave all the financial details to just one partner.  Too often this lack of trust is more than just about money and reflects a deeper problem in their relationship.

That more couples are lying to each other about their debts and spending and hiding accounts looks like just another consequence of the deep financial distress so many people are experiencing when they can no discover they can’t meet their obligations anymore or support their families in the way they once did.

Financial advisors at the Money Advice and Budget Service have told me that many partners in a relationship only discover the precarious nature of their joint finances in the MABS office when all their income and expenses are laid out, and that it can be a very traumatic experience. 

Rising unemployment, taxes and higher food and fuel prices isn’t going to make this situation any better.  We need a national debate about our personal indebtedness – not just the banks’ indebtedness – and soon.

Stay in Spain's too short to avoid capital gains tax

FR writes from Dublin: My brother has a shop to sell here in Ireland. He now lives in Spain, for the last two years. Does he have to pay capital gains tax here in Ireland?

“If your reader’s brother has only been living in Spain for two years he is probably still ordinarily resident in Ireland,” says tax advisor Sandra Gannon of TAB Taxation Services in Dublin.  “He will be liable to pay Irish capital gains tax on any profit from the sale of his shop.  You only stop being considered ordinarily resident until after the third year.

“He may also be liable for CGT in Spain,” says Gannon, “but because of the double taxation agreement between Spain and Ireland he will get a tax credit for any payment he makes in Ireland.  He should check with a Spanish tax advisor.”  If the property is sold between January and the end of November, the CGT payment date will fall due in mid-December; if it sold in December, the CGT must be paid no later than 31 January.

 An Post risks

 PC writes from Dublin: As a regular reader, I note that in your advice to the retired civil servant with €130,000 to invest, (Sunday Times 6 March) you did not advise investing in An Post Savings, the interest of which is DIRT free.  I have noticed that you never advise on this investment. Am I missing something?

An Post is a wholly owned subsidiary of the Irish state. It has an exemplary record in providing tax free interest bearing products to the Irish people, its deposits are 100% guaranteed by the state and it carries no debt of its own to my knowledge.  However, my concern is more about the ‘state of the State’, and not so much the ‘state’ of An Post. Between our huge and growing sovereign debt and what we owe our bank creditors, the liability is now in the region of €250 billion.

I have asked the NTMA about the size of the deposit base of An Post and am still waiting for an answer, but what bothers me even more is how the state is exploiting its unique position in the wider savings market, first by promoting the 10 year National Recovery Bond and more recently, the new four year version. 

Not only is this a complicated product, but the 10 year version is an especially unappealing one in my opinion, with a mere 1%, taxed, annual return and a bonus that is only paid at the 10 year maturity date.  I think it is very foolish indeed to voluntarily hand over any more money to the Irish state, given the continuing uncertainty about our finances and its ongoing commitment to raise more taxes, but not to tackle its own spending, to keep filling the black hole in the banks.

Until our wider solvency issues are properly addressed, I think you need a great deal of faith to put your hard earned money into An Post, even if the return for conventional savings certificates or savings bonds is tax-free.   

Three or five?

PG writes from Dublin: We currently have a three year fixed rate mortgage with AIB (at 3.65%).  We can switch to a five year fixed rate deal at 4.39% without incurring any penalty charge.  The repayments at the moment are approximately €925 per month.  If we decide to go for the five year deal the payments will be approximately €985.  Therefore the extra we will be paying will be €60 per month.  At the moment we have approximately two years and three months left of the three year fixed deal.  In your opinion does it make sense to change to the five year deal to try to offset the interest rate rises which are imminent?

I hope you accepted this offer in time.  On Tuesday raised all its fixed rates, and the five year fixed rose nearly 1% to 5.35% from 4.39%. That extra €60 a month that you would have paid at 4.39% would go up another €52 per every €100,000 borrowed.  You don’t say what size mortgage you have, but it will certainly cost you more than €720 if you haven’t secured the lower offer.

A fixed rate – whether at the cost of an extra €720 or even more – is, in effect, an insurance payment against the chance that the variable rate would rise even higher over the next five years.

To judge whether that ‘premium’ is worth paying or not, you need to satisfy yourself that the cause for concern at the European Central Bank – price inflation in the wider eurozone, but especially in Germany, is real or not. The ECB has been guilty of printing too much money and buying up too much toxic debt from banks (like ours) and along with the US Federal Reserve, which has been pumping up the global money supply for the last decade, is now realising that this policy has finally resulted in the rise in commodity prices and a consequent rise in the price of food and fuel, in particular.  They have left interest rates too low for too long and must now try to squeeze the inflation genie back into the bottle by raising rates.

If you are confident that the politicians and central bankers have a magic formula to keep bond prices high (and yields low) and can keep inflation at bay without raising interest rates, then there is no urgency to fix your mortgage interest.  If you believe higher interest rates are inevitable, you will share my view that paying the higher monthly repayment will be well worth the five years of peace of mind you will hopefully get in exchange.

Workers sweat as government stalls on pension plan

I’m going to hazard a guess that reforming the way politician’s pensions are financed and paid in the future is going to be more problematic than the reform of the ministerial car fleet.

The shocking revelations during the election about the size of the pension pots and retirement incomes that were being paid to the retiring ministers and deputies suggests that eventually politicians will share similar, if not the same constraints as they rest of us do when it comes to funding our retirement. 

They will, hopefully, have to start contributing more to their pensions; ‘enjoy’ the same tax relief as everyone else; only collect their pensions at the standard retirement age and share the same restrictions to the total size of their pension fund as they seem about to impose on the private sector.  If, as suggested they substitute a 0.5% levy on all pension funds it will also apply to their own.

Surely they can’t stop there:  all pension reforms will have to be introduced for the entire civil and public service who like their political masters participate in a hugely expensive, final salary defined benefit pension scheme, the kind of which is being phased out here in Ireland and most western countries, replaced with much less attractive, but more affordable and sustainable defined contribution ones.

The problem is that while there was some hint of what Fine Gael and Labour would do by way of pension reform in their election manifestos – and the key ones for Fine Gael involved the pension levy and restricting the size of the retirement income to €60,000, they certainly haven’t been fleshed out in the co-alition’s 64 page joint programme for government.

What’s going on?  Is this that elephant in the room they propose to ignore until the bank crisis, national deficit and default risk are sorted out?  Until the new Minister for Social Protection Mrs Burton tackles the frightening – but more immediate issue of the expanding social welfare bill, the retraining of the advancing army of the unemployed AND a retiree lobby that thinks their members are immune by right of age alone from all spending cuts?

Surely all workers should be told now and not in next December’s budget if the coalition is standing over last November’s four year recovery plan and the proposal to cut pension contribution tax relief to the standard rate only by 2014?  Such payments need to be made by October 31st.

Not knowing whether you will have sufficient income left over to even keep funding a pension the government’s tax and austerity measures take hold is bad enough.  Volatile investment markets mean that everyone is second guessing those decisions.

Having no idea what are the rules of the game, or if everyone will have to play be them, just makes a bad situation worse.

The reform of the health service, meanwhile, gets its own chapter in the new programme for government, with nearly every page mentioning a wider role for the Minister for Health.  It turns the Minister into a sort of super manager with new units – like the “Special Delivery Unit” being set up “to assist the Minister in reducing waiting lists and introducing a major upgrade in the IT capabilities of the health system.”

 Really?  He is personally going to reduce waiting lists and introduce the new IT system?

That’s not all:  “The Health Service Executive will cease to exist over time. Its functions will return to the Minister for Health and the Department of Health and Children; or be taken over by the Universal Health Insurance system.”

 The Minister and his department will also have central roles in setting the terms and conditions for everyone involved, from the GPs who will be now be paid – less - by the state-cum-UHI; the new public hospital trusts and even the insurers who will have to construct the new government-designed contracts. 

 The size of the insurance payments, meanwhile, will be “related to ability to pay” with the taxpayers who can, paying “the premia for people on low incomes and subsidising premia for people on middle incomes”. 

 Isn’t that what higher taxpayers already do by funding the public health service, as well as their private health insurance premiums?  At least with the latter, under community rating, everyone pays the same premium for every plan, regardless of their income, age or state of health and if the cost gets too high, they can cancel their membership.

There are pages and pages of this insane stuff, including the proposal to keep the insolvent VHI “in public ownership to retain a public option in the UHI system” instead of breaking it up, selling it off and ending its dominant, distorting position in the private insurance market as the last Government finally admitted last May had to be done. 

 You may not the two tier health system, but 50% of the population voluntarily purchase private health insurance because they believe the private providers deliver a good service and the public health service - to which they have no choice but to also pay - does not.

The coalition’s aspiration – for a new insurance funded system that will deliver universal hospital and primary care based on medical need is very worthy.  In a very rich, highly efficient country it might even be affordable -  for a while.

How centralizing the delivery of all health services - even the parallel private ones that two million of us voluntarily pay for – back into the hands of any Minister and the existing Department of Health will provide an efficient, affordable or ‘fair’ health system is simply not possible. Not at any price.

We have stuff…or we have stuff and kids and husbands.  Just no pensions.  

Still no pension?  Join the club. Fewer than half of adult working women in this country have an occupational or private pension. Thousands won’t even qualify for a contributory state pension.  We have stuff…or we have stuff and kids and husbands.  Just no pensions.  

Financial advisors I know – even the good ones who take their work seriously and charge appropriate fees for their time and expertise and genuinely care that their clients don’t get ripped off – say that ‘pensions’ is a hard sell no matter how well or badly the economy is doing. 

It’s especially impossible to get younger people to think about them, said one, rather nostalgically, “though clearly when you have extra dosh in your pockets and you’re liable to higher rate tax and PRSI, dangling the tax deduction carrot in front of people can, well, used to, secure a sale.”

The biggest problem isn’t even the lousy fund performance racked up by the vast majority of Irish managed pension funds – near zero over ten years, or less than zero when adjusted for inflation.  Instead it is the idea that you need to lock away 15%, 20%, 30% or more of your monthly salary for 30 or 40 years with no access to this money and no guarantee that you’ll end up with an investment fund that represents anything near the 5% or 6% projection growth rates that are used to illustrate how your new pension fund might perform once the 30 or 40 years worth of charges, fees and commissions to all the salesmen, middle men, administrators, actuaries, fund managers and regulators get paid off first. (Yes, even the regulators – in our case the Pensions Board get a tiny slice of your pension contributions via a levy the industry must pay them.)

The c 47% tax relief certainly helps (41% higher rate tax and 6% worth of PRSI contributions) but it now only represents a part of the tax that higher earners pay when the income and tax levies are included. But even the tax advantages of a pension are being clawed back as the Government roots around for ways to keep its fiscal head above water and the IMF from the door. 

Taxing ‘the rich’ – including the so-called middle class ‘rich’ with incomes over €36,400 who are amongst the largest contributors to private pensions – is their preferred solution rather than cutting their own wasteful spending, shifting public servants off unaffordable defined benefit pensions (though they say this will happen, eventually) and widening the tax pool to include everyone who uses or benefits from public services and programmes and earns an income.

Already there are caps on the amount that can be saved into a private pension, on the maximum retirement income and on the amount that can be claimed as part of the tax-free part of your final pension fund.  (Ask your advisor for the details – and fund accordingly.)

Frankly, the details are no longer all that important in the wider picture.

Pensions are becoming a luxury in this country, for the old age pensioner living on €230 a week who can’t live on such a small sum and needs to supplement it, to the young person out of work or the one working for an employer who needs to cut her cost-base; for the young family living on less money (thanks to levies, wage reductions and stealth taxes) and with massive negative equity in their home; to the established worker who is now being told by their employer that they need to stump up more every month to - just about - ensure that their pension will actually be there when they come to retire in five or 10 years.

If I’m painting a depressing picture about pensions – and I am a strong proponent for putting away money, lots of money, to fund retirement – it is because it is a depressing picture.

Pension funds have not delivered what the people who invested in them expected of them. 

Why?  Because in the case of the final salary, defined benefit occupational model, that model no longer works.  Not only are scheme members living far too long, but the investment decisions that were made were shown for what they were when the great 25 year bull market finally ended around 2000 and the level of contributions need were seen to be inadequate for both the company and worker.

For members of defined contribution pensions, which rely on contributions from employer and employee and the pot luck of investment markets to produce the final pension fund, and so can’t project the actual size of the income in retirement, the problems are not much different. 

Bad investment choices in the form of doing what every other investment manager did (which in Ireland was to buy too many Irish shares and property), increasing longevity and too high charges, fees and commissions have done their dirty work.  Ironically, the rare fund manager who did nothing but leave the workers’ money in the post office for the past 10 years would have outperformed every Irish fund manager over the same period.  (Ironically, there are pension funds that take such a risk-free route – mostly in bonds and cash – but they operate, successfully, but mostly on the continent.)

The only people who have emerged from the past 10 years to date, and especially the last three years with positive pension funds, are those few who were lucky enough to have invested in widely diversified, low cost pension funds or who had either the great good luck to be world-class asset pickers or just had great good luck.  Mostly, all over the world, but especially in the indebted west, pension fund holders have lost their shirts and skirts. 

So what do you do?

As someone who only lost half a skirt on her pension, and who has taken professional, independent, fund management advice for over 25 years… you need to take even better professional, independent, fund management advice.

A comfortable retirement isn’t going to happen unless, a) you have very little debt as your approach the typical pension age of 65 or 60, b) you have maximum service, ideally in a big, strong, solvent company with a solvent defined benefit, final-salary pension. (That doesn’t describe about 98% of Irish DB pension funds, by the way.)  And c) if you have other assets – a paid off property, shares that produce income, lots of cash, etc.

I say this because without some or all of the above in place you are probably instead going to be relying on the state pension, currently €230 a week (plus the rest of the social welfare package for pensioners that includes free travel, fuel and electricity allowances, etc) or a combination of state pension and personal savings.  And if you thought your home or perhaps more correctly, your mortgaged home would be your pension, that was never very realistic and certainly isn’t going to happen until the property market recovers to even a point where it can be sold, if needs be.

Before you try and find a decent advisor, not an easy task in itself if you don’t even have sufficient information about pensions to know what to ask them, the best thing you could do is to go onto the Pensions Board website and download all their brochures – a sort of ‘Everything you need to know about pensions but were terrified to ask’.

Then go on their pension calculator (http://www.pensionsboard.ie/index.asp?locID=458&docID=500 ) and fill in your details:  if you’re 35, earning €50,000 a year and haven’t started a pension yet, but hope to retire at 65 on 60% of your salary (using today’s figure for ease of illustration) you’ll need to start saving €833 gross a month right now for the next 30 years. 

That’s right, every month for 30 years. This will produce a private pension (only if your fund performance achieves a steady 5% per annum) of €18,024 and the state pension of €11,976, which will then be taxed at the highest rate of tax, currently 52% (and 56% for some higher earning self-employed.)

Yes, I know that doesn’t make much sense even if with the 47% tax rate is still available (which reduced the net monthly contribution to a more palatable €492.)  How long higher rate tax relief is going to last is another question that will only be answered when the government gets around to issuing its long delayed White Paper on pension reform. 

The danger is that political pressure will result in the creation of a standard 33% (give or take a few percentage points) tax relief to everyone.  If that happens, higher taxpayers will have to rethink their pension plans altogether…or get used to the idea of living off the state pension, ideally in a warmer, sunnier, lower cost jurisdiction.

Now where are those Spanish property brochures…

Pressure Fine Gael over unfair PRSA tax change

JH writes from Dublin: I wonder could you confirm if the following is true? I have been told my employer’s 5% contribution to my PRSA is now considered a benefit-in kind and is subject to tax and the universal social charge but a private pension scheme is not treated this way. Unfortunately I changed moved to a PRSA on the advice of our company broker who said there was no difference between the PRSA and the private scheme we were in, except there would be onerous new rules for the trustees of our scheme and high training costs.

Unfortunately, as a result of changes in the 2011 budget and Finance Act, an employer who contributes to an employee’s personal retirement savings account (PRSA) will have to now deduct PRSI and universal social charges from the employee for the PRSA contributions the employer makes, whereas no such deduction applies if the employee is part of an occupational pension scheme or is a recipient of a public service pension.  This is deeply unfair to people like you with a private PRSA, or anyone who works in a company where there is a group PRSA to which the employer contributes. If your employer stops making contributions to your PRSA you might consider rejoining the company scheme, but be careful about costs, charges or penalties.

The government has spent a great deal of money promoting PRSAs and especially in making them mandatory for companies without an occupational plan.  At a great cost, the Pensions Board has to pursue employers who don’t comply with the law. Now the government is undoing this work and expense by imposing a tax penalty only on PRSA contributions made by employers.

Unfortunately the Pensions Board, despite their other mandate to advise the government has taken no position on this matter, their spokesman confirmed. You could formally complain to your TD or the new pensions minister, though the pensions industry warned the previous government this PRSI/USC charge could destroy the PRSA market but it went ahead with it anyway. The new coalition programme makes no reference to it either.

Spread the risk

TR from Wicklow writes: I have received letters from Anglo Irish Bank, AIB and Irish Nationwide B/soc re my deposits being transferred and that they will still be covered by the Deposit Guarantee Scheme.  However, none of them mention the situation if I already have a decent sum deposited with the receiving institutions.  Say I had €60,000 with Anglo Irish, now transferred to AIB, but already had €60,000 with AIB.  I was covered before but am I now €20,000 over the guaranteed limit in the one institution or has the guarantee been re-written?

 You are correct that the deposit guarantee only covers sums up to €100,000 on an aggregate basis.  I suggest you shift amounts in excess of the €100,000 as a result of the transfer of your Anglo Irish deposit, into another institution.  Or, you could open a fixed rate account before the end of June at AIB with a sum in excess of €100,000 and avail of the Eligible Deposit Guarantee scheme.

Home truths

GM writes from Wexford: I have a home worth €320,000, and an outstanding mortgage of €45,000. I had started to build a new family home close by and had a mortgage offer in place from Bank of Ireland. I had invested €410,000 on the site and part construction of my new house when my business failed due to withdrawal of funds from the bank. I have run my own small building company for the past 30 years, never getting into any difficulties. My business and my life was destroyed by decisions of people who had made bad mistakes. I have tried to raise the capital to finish my partly built home but have failed to do so. Could you advise on anyone that could help? I require €200,000 for five years to finish it and pay off the existing mortgage at interest only, for, say, five years. I will then let out the existing property to fund the interest only mortgage or until the current climate changes. As it stands at the moment my new home is starting to fall into disrepair, unless something is done soon, my hands are tied.

I am very sorry that your business has failed and that you now left with an existing home that you are unable to sell – or rent – until you can secure the additional €200,000 loan. However, without a verifiable, steady income with which to pay off the new loan (and your existing €45,000 mortgage) I doubt if any bank would consider lending you the money.

This is little consolation, but you are not alone.  There are thousands of people in a similar situation to your own, each despairing in their own way about their debt problems, the uncaring position of the banks and the ineptitude of the government to act in the interests of its citizens and not just bankers and our paymasters in the EU and IMF.  I’ve spoken to a number of very good financial advisors about this debt/capital dilemma, but none of them believe there are any easy solutions. They do all say that you must speak to your creditors and provide them with a realistic assessment of your personal financial position. You should also share your anxiety with family members who may be in a position to help you and with your local priest or minister if you have one.  Is there anyone in the family who would ‘buy’ a share of your new house and let you repay them in the future when your income or the property market picks up and the other one can be sold?

If you are at risk of falling into arrears on your family home, contact MABs and their help, seek protection under the new Code of Conduct on Mortgage Arrears.  Good luck.

Why keep funding a think-tank that produces poppycock?

Why do we taxpayers put up with the Economic and Social Research Institute?  Why do we allow our hard-earned money to continue to be lost to a quango that is so frequently wrong in its economic predictions and conclusions about even the most obvious things – like access to credit or banking services?

Last week, to considerable media attention, a 161 page long ESRI report on the causes of ‘Financial Exclusion and Over-indebtedness in Irish Households’, left out two of the most important – and solvent – sources of both savings and credit, the league of credit unions and the post office. Yet its main conclusion is that one in five of the population who it defines as having limited incomes, “does not have access to the basic building block of financial services, a bank current account”. 

Without this precious current account, the ‘unbanked’, as the ESRI calls them, are disadvantaged when it comes to accessing  “affordable credit, small savings facilities and insurance for home contents” and the other financial services the rest of us take for granted, like receiving wages and welfare benefits, paying utility bills, availing of short-term credit and having 24 hour access to cash. 

This is utter poppycock, yet ESRI doesn’t stop there.  There are pages and pages devoted to our higher levels of mortgage debt arrears and increasing poverty that have absolutely nothing to do with social inclusion and the lack of bank accounts.  If anything, it has been caused by too much access and too many sources of credit/debt, not too little. (It then says things like, “While indebtedness is not problematic…”)

I’ve no idea how this report ever got past the peer review stage, but just for the record, one fifth of the population are not ‘excluded’ from holding a bank account or from credit, savings or household insurance because of it.  The thinking, responsible adults who choose not to have current accounts do so because they are too expensive for the size of their income, needs or circumstances.  

However, 2.9 million people are members of 508 not-for-profit, cooperative credit unions on this island. Hundreds of thousands of them have low incomes, yet have collective savings of €11.9 billion. They also borrow billions every year, loans worth up to €38,092 or 1.5% of the credit union’s total assets at some of the lowest interest rates on the market. Every single loan is insured. 

Like An Post, another bastion of savings, credit unions allow members – at no charge - to pay their bills, transfer money to and from other accounts and creditors, buy a range of insurance products, investments and foreign exchange.

After Postbank closed last year, it facilitated its customers, including my 17 year old son, who had either a Postbank issued credit and/or ATM card to get another card from An Post affiliate banks like AIB and NIB. The latter bank still offers free banking.

Banking branches and competition might be shrinking in this country, but there are credit unions and post office branches in most communities. Like the GAA they have emerged from the financial destruction of this country with their reputations intact and, for the most part, solvent.

The policy wonks at the ESRI need to get out more.  Better still, maybe they need to fund their next report out of their own pockets.

Get out of the car

What a bunch of comedians are those fellows at the Institute of Advanced Motorists.

Last Monday morning, even my husband, who is normally mute before his second cup of tea, laughed out loud at suggestion by the man from the Institute of Advanced Motoring that by washing and polishing our cars, the advanced aerodynamic effect would help reduce our soaring petrol bills.

Emptying the boot of golf clubs, ejecting the roof rack or box, turning off the ‘air con’ AND keeping the windows shut will also help.

I have a better suggestion:  get rid of the car. If that’s not possible, car-pool.

Once you become one of the ‘uncar-ed’, as the ESRI would say, you can always use public transport, taxis, a bicycle or the power of your own two legs to get you to your destination and still savings thousands.

We need to get real in this country.

Oil is a precious, finite resource that the liberated people of the ex-kleptocracies of the Middle East and North Africa may not want to keep selling to us so cheaply. Chances are the oil price spike will recede as demand falls back (due to the higher price) but it probably won’t return to $50 per barrel again, the price it fell to after the 2008 spike.

Meanwhile, anyone with any money to spare might want to consider investing some of it in the black stuff. Two of the financial newsletters I subscribe to suggest keeping an eye on Canadian producers – they mentioned Canadian National Resources, but also the Canadian Oil Sands Trust, a pooled fund of six of the top Canadian oil companies.

Canada, is the most stable and least hostile oil producer to the world’s biggest consumer, the United States and it has no axe to grind with anyone else…which is no small achievement these days.

PENSION REVIEWS SHOULD NOT BE DELAYED – ACT NOW

As our personal debt burden worsens – and it will as interest rates rise – the new government will have to finally have to acknowledge this growing burden on individuals, their families and the state.

It should have been dealt with much sooner, but it will, unfortunately mean that two other difficult personal finance issues could be sidelined – the chaos and increasing cost of our three pillar pension system and the huge dilemma for so many people, especially older ones, about how to safeguard and grow their savings as inflation risks rise.

Our three pillar pension system is complex, expensive and increasingly, unsustainable.

Civil and public sector pensions are paid mainly general taxation (especially now that the National Pension Reserve Fund is effectively gone) and from maximum net (after tax relief) worker contributions of about c7% per annum.  The cost of benefits is closer to a 20% plus annual contribution. The total public service pay bill will cost €2.23 billion in 2011, compared to €1.35 billion in 2005.  The bill has increased by 65% in the past five years and by 2050 will cost €8 billion.  The total, mainly unfunded liability for the entire existing public service now amounts to c€108bn, according to the Comptroller and Auditor General.

Meanwhile, the state old age pension costs c€6 billion out of the total state pensions bill of €9.2 billion – and has also soared in the past decade. However, along with the cost, the older population is growing faster than the younger one that pays the state pension bill directly from taxation.  The pension time bomb fuse is now much shorter as a result of our state insolvency and revenue that has fallen to just €34 billion.

Finally, private pensions, which have accounted for approximately €3 billion of annual tax subsidie, are the only pension pillar to have been subject to wide-ranging changes:  the maximum size of funds that can be saved has been reduced by half to €2.5 million; the maximum annual income on which tax relief contributions can be claimed has been reduced sharply to €115,000; the size of the lump sum that can be taken capped is now €200,000; employer PRSI or USC payments no longer qualify as tax relievable, for private pensions and PRSAs. And if the new government adopts it, the Fianna Fail proposal to cut tax relief to the 20% standard rate only by 2014 will end the incentive for anyone earning top rate tax to buy a private pension due to the double taxation they will end up paying. An alternative suggestion is a temporary 0.5% levy or tax on the size of all personal pension funds, but for someone soon to retire with, say, a lifetime’s savings of say, €250,000, a four year levy will result in a minimum loss of €1,250 a year.

With so many anomalies applying to one set of pensioners over another – many of these changes don’t apply to occupational or director’s or public service pensions – the pressure will be on by different lobbies to repeal or extend the changes.

Each pillar participant needs to act now in their own interest.  I’m not convinced that much reform of public service pensions will be achieved, but if it is, it could mean much higher contribution rates by workers and possibly even the end of the defined benefit scheme in favour of a defined contribution one in which final benefits will depend, as they do increasingly in the private sector, on the value of the investment fund.

 Younger civil servants especially need to think seriously about how they will be able to afford to fund such a scheme. They should start investigating the implications by checking out the excellent materiel on the Pensions Board website, www.pensionsboard.ie . 

 Private pension holders still have this year in which to make 41% tax relief pension contributions. Otherwise they could face a pension fund levy this year (or the tax reduction from 2012). There will be no way to avoid the levy unless you retire before it is introduced.  Is this possible? Can you afford to retire at 60 or 63? Will your company avail of the new, higher value sovereign annuity for you? 

Older workers – with five or more years to retirement certainly need to safeguard their existing gains. Most stock markets have recovered their 2008 losses but many are predicting a correction is overdue:  you should shifting your money gradually to safer assets like defensive shares, inflation-linked bonds and some cash and even precious metals.

All the major pension companies now have defensive pension funds that are designed to safeguard existing funds or into which cautious pension investors can begin saving.  Speak to your trustee or broker about them. Don’t delay.

Meanwhile, state pensioners need to be prepared in the next year for a possible cut in their pension as all expenditure is reviewed and the state’s finance’s deteriorate further and anomalies are highlighted.  There is a huge transfer of wealth going on from young to older generations and immigration is one of the consequences of this.

Are you getting the best and safest savings rates possible from any savings you may have?  Do you qualify for the DIRT exemption?  Is your savings inflation proofed? How can you maximize savings and investment returns while minimizing risk?  Can you still afford to live in Ireland if taxes and costs keep rising and your income keeps falling?

 These, and other savings issues will be the subject of next week’s column.  

If you want to play safe, pay off your mortgage

OS writes from Dublin: I am a retired civil servant with a reasonable pension, savings of €130,000 and a 1.6% interest rate tracker mortgage with monthly repayments of €1,232, €75,000 outstanding and five years remaining. Like a lot of other people I am extremely worried about the current financial situation and fear for my savings if anything should happen to the euro. Should I pay off my mortgage and if so, what advice can you offer regarding the remainder of my savings. If I continue with the tracker mortgage how can I then safeguard my lifetime savings?

My personal view about mortgages hasn’t changed in 20 years:  if you can afford to pay off your home loan, do so, especially by your retirement, if only for the peace of mind it gives you.  My husband and I cleared our mortgage nearly 10 years ago with a voluntary redundancy settlement he received when we were only in our 40s. We haven’t regretted it for a moment. We could have used the windfall to buy a second property mortgage or other investments, but we decided that it was wiser to clear the mortgage and all our other debts first. (We still don’t have a second property.)

 While you don’t have a large outstanding mortgage balance, as a retired person you are living on a fixed income from the state that looks set to be further reduced by higher taxation.  Also, if the ECB does increase its base rate this year this will in turn raise your tracker repayment. (With just €75,000 left to repay, every 1% rate increase will cause your mortgage repayment to rise by about €45 a month.) 

If you clear your mortgage, you will still have approximately €55,000 to invest.  There are many offshore, non-euro based investment and assets that you could consider and there is nothing to stop you from putting some or all of this money into non-euro currency account or short term bonds (or even in ‘real’ money like gold and silver) until you choose one that suits your age, risk profile and expectations.   Since you now have the time, start doing your own research.  Read up on the various options; find a good fee-based advisor to help you in your search.   Good luck.

Road to Arrears

AC writes from Co Mayo: I have a mortgage with Ulster Bank for a property that was originally my home but is now rented out (as I have moved elsewhere and married). I lost my job in July 2009 and the bank agreed to interest-only payments ever since. Now they are only offering me an 11% discount on my repayments. I still can't afford their offer, as I am still unemployed and my husband cannot afford to pay on my behalf as he has three mortgages in his own name (including our family home). He would sell at least one of his properties and I would sell mine if the market allowed it. Has the bank the right to insist that my husband's income be considered in this matter? What options do I have if I cannot afford repayments? I presume the Code of Conduct on Mortgage Arrears does not apply.

First, according to John Hogan of the Leman Solicitors in Dublin, unless your husband’s name is also on the mortgage deed of your rental property, he cannot be held legally responsible for your debt, nor, from what you write, does it appear that he has much leeway either to cover another repayment.

The arrangement you have in place with your bank since July 2009 pre-dates the introduction of the Code of Conduct on Mortgage Arrears, but unfortunately the code doesn’t apply to you because it is no longer your principal private residence. This is too bad because the code not only sets out the mortgage arrears resolution process that the banks must follow for customers who have fallen into arrears, but also ‘pre-arrears’ customers.

I expect Ulster Bank wants a higher payment from you, as they do from all their standard variable rate customers, because, even though you are unemployed, you have been making your interest-only payments and they must believe that you have further resources at your disposal, including your husband’s income.

If you have not already done so, says John Hogan, you should contact the bank and explain that by demanding a higher repayment, they are risking you becoming yet another customer who could fall into arrears on their debt. mortgage. Ask for a meeting to discuss your case and bring with a budget statement that will outline exactly your financial circumstances and the efforts you and your husband are making to meet all your debt repayments and essential personal expenditure.

Until the property market recovers, so that some of your properties can be sold, or until you find another job, coming to a mutually satisfactory arrangement with the bank is in your and their interest. A spokesperson for Ulster Bank told me said that they have done 27,000 mortgage and debt ‘flex reviews’ since the summer of 2009, which include non-principal private residences. “I urge your reader to contact us,” she said.

Ends  

To claim or not

BC writes from Dublin.  I am the secretary of our tennis club that has suffered some roof damage this winter. I got a quote for €450 to repair the damage, but there is a €250 excess on the policy. Should we bother claiming?  There has also been some minor damage to the court lights that will be a separate claim.

Your club is better off paying for the damage out of the club’s contingency fund and only claim against your insurance policy for higher value events, says Sean O’Connell of The Insurance Shop in Fairview. A small €200 claim like this – even with the €250 excess – could make it more difficult for you to challenge next year’s premium increase or to get the best deal from a new insurer if you decided to switch providers. He also recommends that you review your policy to make sure that it will delivers the proper level of coverage, and that you have the right security in place. “Too often these days, the cost of damage done to the premises during a break-in is greater than the goods that are stolen,” says O’Connell.

Insurance gender ruling must be vigourously enforced

The European Court of Justice has determined that gender has no place in the setting of insurance premiums, but no one should imagine that this means that young male and female drivers will automatically pay the same price for cover come the December 21, 2012 deadline.  Or that all older men and women, who are also going to see some other premiums adjusted due to this decision, end up paying the same for life insurance or pension annuities.

The Court’s ruling may have been blunt, but insurance pricing “is as much art as mathematical science” an actuary told me. Lots of other factors determine individual insurance premiums.  Initially young women drivers could end up paying up to 25% or even 30% more for their car insurance while the fall in the premium for the young male driver may only fall by 10%.

Meanwhile, as an older woman, my premium is unlikely to be impacted at all by this decision, said my broker.  The price differential between female and male drivers is long gone by the time you hit your 40s or 50s.  However, the cost of life insurance and pension annuities will drop because the premium all women pay for statistically living longer than men in this country will also have to go from December 22, 2012.

It is unfortunate that some people - younger women, older men - are going to be financially disadvantaged depending on the insurance contract they buy, but most commentators think the differentials will eventually balance out.

“I don’t think they meant to,” a broker told me, “but the court decision certainly means that heterosexual couples will cancel out gains or losses that used to exist while older lesbian couples – once they age out of their higher car insurance - will certainly benefit from the most from cheaper life insurance and pension annuities.  A gay couple will probably pay the most – the motor discount won’t be huge and they’ll both now pay more for life insurance and their retirement.”

Meanwhile, the policing of the new order should be interesting.  It won’t be easy to work out whether a premium is up or down once the inevitable annual price rise is factored in.  No doubt the National Consumer Agency will keep a careful eye on the insurers and will be as energetic about policing these new prices as they are about catching out the mispricing of biscuits in the nation’s corner shops.

Not safe as houses 

It’s only right that the new government should tackle the growing mortgage arrears and negative equity problem right away, but they need to stop promising that no one is going to lose their homes on their watch: that is simply not in their power to give.

Last week, new figures from the Central Bank showed that at least 10% of all Irish mortgages are in arrears or have been restructured, about twice as many as this time last year. Meanwhile, about a quarter of those that have been restructured have not be successful, and the mortgage holders have been unable to cope with the new repayment terms. 

This is also the experience in the United States, where the property bubble burst two years before ours in the summer of 2005. Despite numerous intervention programmes and billions of dollars advanced by federal and state governments to prevent further foreclosures or voluntary repossessions, the numbers keep going up as property prices keep falling.

If our economy doesn’t recover significantly over the next year the impaired mortgage figure here could again double, leaving one in five mortgages in difficulty, which will put us not far off the US figure of one in four and no closer to a resolution.  

So before any more money that we don’t have is flung into a new financial black hole, maybe the government should consult first and find other options that don’t necessarily involve another taxpayer’s bailout. 

Find a Coke float

I’ve mentioned before that adding ‘world dominator’ shares - companies that dominate their sector or global consumer market - is a good idea for anyone trying to create a well-balanced share portfolio.

Such companies which include the likes of Microsoft, Amazon, Gillette, Unilever are household names and have great moats of cash, carry low amounts of debt, have top class managers and best of all, keep paying steady dividends, regardless of what’s happening in the wider economy.

In Warren Buffett’s latest investment letter to his Berkshire Hathaway stockholders, he highlights this very issue by noting how Coca Cola, “paid us $88 million [in dividends] in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn't be surprised to see our share of Coke's annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.”

If anyone ever needed an example of both the power of compound interest and patience, this is it. 

That doesn’t mean you should run out and buy Coke shares. The real secret to duplicating Buffett’s extraordinary success is to identify the next Coke, or Apple when they’re cheap and on their way to becoming a world dominator.