Jill Kerby

Will You Outlive Your Pension? Let’s Hope Not

I once knew an elderly man who said one of the great delights of his old age was that his teeth would outlive him. He was someone who had survived the Great Depression, the Juno Beach landings and was born long before the marvels of modern dentistry (especially in rural Quebec and fluoride-free Montreal).

 I hope my pensions – my private one and the State one - outlive me.

The government’s intention, as laid out in the most recent report on the state of pensions in this country (I’ve lost track of how many there have been over the past 27 years since I’ve been reporting them) is that the broad changes  proposed in the Roadmap for  Pensions Reform 2018-2023 will do just that and make the three pension pillars – the State Pension, Private Pensions and Public Sector Pensions – affordable and sustainable.

Last week this column looked at how a new SSIA-like auto-enrolment pension should increase pension coverage from its current low rate of just under 50% and how by linking PRSI contributions to years worked will provide people with a better idea, at any stage in their working lives, of the kind of total retirement income they can expect.

The PRSI changes are especially critical given the wholly unsatisfactory treatment of workers – most of them women retiring since 2012 - who were forced to or voluntarily gave up employed work for a number of years, only to return to the workforce.

The annual averaging of their PRSI contributions over their lifetime has worked against at least 42,000 people who have been shortchanged. The anomaly was finally recognized and ends officially on March 30. Those affected will be returned to their full pension entitlements by the first quarter of 2019 and can expect a benefit refund for post-2012 loss of income. 

The restoration was necessary if only to ensure that the ‘total contributions approach’ could be included in the just published Roadmap which states that

in the future a minimum number of payments – still undisclosed – will be necessary to qualify for a full State pension and pro-rata pensions will apply for everyone else.

The government will also consider allowing workers “without a full social insurance contribution record increase their retirement provision by choosing to continue making PRSI contributions beyond State pension age and up to the actual date of retirement,” something that already happens in the UK.

This is an important development since the Roadmap also makes it clear that compulsory retirement dates need to go, especially the traditional 65 birthday which then results in workers having to apply for Jobseekers Benefit until they reach age 66 and can claim their State Pension. (Anyone retiring from 2021 will need to be 67 before their state benefits can be claimed so could end up on a Jobseeker’s payment for two years if forced to retire at 65.)

Not only are most Irish workers (outside of heavy industrial or farm sectors) more than capable of working well into their 60s, many people in our post-industrial society only start their full-time working careers in their 30s after years of graduate education, training, internships and contract employment. 

For them, a compulsory retirement in their mid-60s is unlikely to ever produce sufficient combined private/State pension income.

The Roadmap also sets out reforms to public sector pensions, but mostly enshrine changes that have already happened – like the extra Pension Related Deduction that was introduced as a consequence of the post 2008 financial crisis; from January 2019 it will be turned into a permanent Additional Superannuation Contribution.   

Also, public servants hired before April 2004 will have a new compulsory retirement age of 70 (though any 23 year hired by the government in March 2004 is unlikely to be surprised to find that all their friends in the private sector will also be retiring at 70 by 2054.)  

Are these two changes enough to guarantee the sustainability of this pension pillar?  Both the State and Public Service pension systems are woefully underfunded at the moment and future unfunded deficits are already reckoned to be in the hundreds of billions of euro.

The Roadmap claims, at least for public service pensions, that these measures will be enough. But success – the continuation of indexed, service-related pension of up to 50% of career-averaged earnings – will still be entirely dependent on pay-as-you-go general taxation. There is no mention of a new, invested, National Pension Reserve Fund.

The Roadmap for Pensions is an ambitious document and worth reading, (see www.social.ie ) all the more so since it will need a steady stream of taxation to keep funding our State and public sector pensions,  and positive global investment returns to support private sector pensions.

If only for these reasons, if you haven’t made any provision for your retirement yet, the best response of all to this Roadmap…is to hire a good, independent, impartial pension adviser. 

Time may not be on your side.

The TAB Guide to Money Pensions & Tax 2018 is available in good bookshops. See www.tab.ie for ebook edition.

THE PENSIONS ROADMAP NEEDS MORE SIGNPOSTS

The Beast from the East upstaged one of the two big policy announcements the government made at the start of the month – the Pensions Roadmap.

Like the ambitious National Development Plan 2040, The Roadmap for Pensions Reform 2018-2023 includes multiple threads for the reform of private, state and public service pensions, but a much shorter time-frame:  by 2021, all private sector workers – and their employers – who do not already participate in an occupational pension scheme are going to be signed up for an auto-enrolment scheme that will involve contributions from worker, boss and a top up from the government.

The State Pension will also be reformed in tandem with the the introduction of the auto-enrolment one, making it more fair, transparent and sustainable, claims the government.

With a public consultation process about to begin, The Roadmap is “ambitious but achievable”, said Mairead O’Mahony, of Mercer consultants. It is also very necessary given that fewer than half of private sector workers are saving for retirement and Mercer research shows that  “70%...expect to live past 80, yet only 24% feel they will be able to afford to live comfortably for that length of time.”

O’Mahoney especially welcomed how the PRSI funded state pension is to be redesigned, with the number of lifetime contributions reflecting the final income (currently a maximum €12,663 or c34% of the average industrial wage).This simpler, more transparent ‘Total Contributions’ approach will allow workers to easily calculate what their combined final state and private pension income will be when they retire.  It’s also been suggested that workers who defer taking their state pension at age 66 (or 68 by 2028) will enjoy a higher income when they do finally decide to take it.

What the Roadmap hasn’t definitively determined is exactly how much worker, employer and state will have to pay into the new scheme, nor how tax relief will work. Government is understood to be considering a flat-rate tax relief of 30%, halfway between the current standard 20% people earning under €34,800 now get on their pension contributions and the marginal 40% rate relief that people earning over that amount receive.

Getting the tax incentive right will be important: in Ireland we don’t tax income diverted into a pension or any growth in the fund. The tax is paid when the fund (less a tax free amount) is turned into retirement income. (In other countries, like Australia it is the reverse and the pension income is entirely tax free.)

Will higher earners balk at being signed up to a pension that not only taxes a portion of the savings they contribute at 40%, but also taxes – at 40% - pension income that exceeds the lower standard income limit? The current system avoids this kind of double taxation by not taxing contributions, but it is extra generous if the pensioner’s total income ends up only attracting a 20% tax rate.

Pension advisers worry about another anomaly: what happens to people earning more than €34,800 who are self-employed, company directors with private pensions or have a PRSA – a personal retirement savings account - because their employer doesn’t operate an occupational scheme?  Will the 40% tax relief they currently get on their pension contributions be reduced to 30%?

The other concern about the Roadmap’s proposed new private pension – aside from the reluctance of employers to have to pay into it (at the moment no employer is compelled to provide any retirement provision for their workers) – is how the new auto-enrolment funds will be administered and invested. Will workers have a choice of investment provider or fund, or will there be a ‘default’ strategy? Part of the reluctance of many people to take out a pension, whether they are employed by a company or work for themselves, is the element of chance involved in the putting money into investment markets, and the notoriously high and the still opaque charges that too many investment firms and their agents apply to Defined Contribution pension plans.

This question of safeguards, not just to guarantee the honest and efficient administration of the money but to actually provide a positive return after decades of saving – is going to have to be addressed.

What workers want are Defined Benefit pensions – a pension that reflects the worker’s final income and years of service. But these are few and far between outside a select number of private and semi-state companies and the civil service, the latter whose indexed, DB pensions are paid from direct taxation.

But without those DB safeguards, the auto-enrolment pension being proposed in this Roadmap is going to a hard sell to many people who may have little spare income and have other saving priorities, like buying a home.

Next week: how the Pensions Roadmap proposes to change the State old age pension and public service pensions.

The TAB Guide to Money Pensions & Tax 2018 is available in good bookshops. See www.tab.ie for ebook edition.

FAMILY HEALTH INSURANCE PLANS BECOME MORE AFFORDABLE

The first quarter of any new year is the busiest for health insurance renewals with about half of the entire c2.2 million members of the three private healthcare companies deciding whether to keep their existing plan, and as so often happens, pay the inevitable increased premium.

Not so this year.

According to health insurance adviser Dermot Goode of TotalHealthCover.ie the three insurers, VHI, LayaHeath and IrishLifeHealth have begun reversing the cost of premiums on a significant number of their plans, a process that finally recognises the financial health of their companies – and from April, a reduction in Health Insurance the nation.

For VHI, the state-owned insurer, dropping the cost of plans has been justified by the fact that they are in profit and have sufficient reserves in place (something that was not the case for many years). Like many publicly owned companies (owned in this case by the people of Ireland) it is now in a position to properly reward its shareholder/customers.

The ongoing difficulties in the management of the public health service – long waiting lists for diagnostic and treatment services, a shortage of hospital beds, poor access to timely out-patient treatments continues. 

For many parents, who may now have the extra money to add their children to their own policies it is access to out-patient services that are often the most important: being able to afford to bring their children (over the age of 6) to the GP or a specialist quickly; securing tests when worrying symptoms appear,  avoiding multiple doses of antibiotics while waiting to see for example, if a safe, effective tonsilectomy operation will ‘cure’ their child.

With all three insurers having announced significant price reductions, I asked Dermot Goode to list his top family plans. You don’t have to have your children on the same plan – a different plan might be apppropriate, but the family ones will often include added discounts.

VHI Healthcare

“VHI reduced most of their plans by 5%-7% from March 1,” explained Dermot. “They are also continuing with their 50% discounted offer for child cover on plans such as One Plan Family (€149) and Parent & Kids Excess (€155).  We prefer the latter plan as the excess is only €75 per private hospital stay.

“The One Plan 250 scheme from VHI has now been reduced from €916 to €855 per adult and this offers reasonably good hospital cover with the first two claims subject to a €250 excess (€150 for day-case).  This plan has shortfalls on certain orthopaedic and ophthalmic procedures when carried out in private hospitals which needs to be noted.

“A family of two adults on One Plan 250 and the kids on Parent & Kids Excess will cost €2,108 for the year.”

Laya Healthcare

“Laya Healthcare offer free cover for the second and subsequent child under 18 on their Essential Health 300 and Essential Connect Family schemes,” said Dermot explained, adding that “on the latter plan, you pay €239 for the first child and the remaining children are insured free of charge.

“For young adults thinking of joining, the Essential Health 300 offers good value at €895.  This plans covers all public and private hospitals with a €300 excess payable on the first two admissions per person.  This excess reduces to €125 for each day-case procedure in private hospitals.”

A family of two adults and two children, “will cost €2,025 for the year on the Essential Health 300 scheme, but I understand that Laya will be replacing this deal with a better offering from April 1 in that they will be giving free cover for the second and subsequent child on seven different plans with the best of them being the Flex 125 Choice.”

Irish Life Health

“Good news from Irish Life Health is that they have just announced that they will be reducing the cost of many of their public hospital (level 1) schemes from April 1 in line with the health insurance levy reductions,” Dermot told us.  “The company is also still offering discounted rates for children under 18 on their Select Plus (€180) and Nurture Plans (€179).  

“It has also launched a new range of Benefit Plans with Benefit 2 – well priced at €875 per adult – covers most public and private hospitals with a €300 excess per private hospital stay, reducing to €150 for day-case procedures.”  However, this plan, he added also has some orthopaedic and cardiac procedure shortfalls at  private hospitals. A family of four on the Nurture plan will pay €2,108.

Finally, he listed his recommended ‘Corporate’ Adult plans:

VHI Company Plan Plus Level 1.3 at €1,128 per adult (includes day-to-day);

Laya Simply Connect at €1,180 per adult (includes day-to-day) and

Irish Life Health 4D Health at €1,045 per adult (day-to-day cover not included)

The TAB Guide to Money Pensions & Tax 2018 is available in good bookshops. See www.tab.ie for ebook edition.

THE MORTGAGE ARREARS CRISIS ISN’T OVER…BUT THE CHAOS IS COMING TO AN END

A decade ago I attended a conference about personal insolvency hosted by the management and accountancy consultants Grant Thornton, who also happened to be one of the biggest personal insolvency practitioners on these islands.

The conference pre-dated the new insolvency and bankruptcy laws that were being planned by the government but it was clear that the main causes of the surge in personal insolvency and bankruptcy cases was the collapse of property prices and a surge in unemployment. The best solution then came from a Norwegian speaker, recalling their own property crash in the early 1990s: deal with the arrears quickly, he said. (They set new mortgage values for such cases at 100% plus 10% of the new market value. Insolvency regulations allowed people with overwhelming debts a quick, fresh start.)

Fast forward to 2018 and the disastrous Celtic Tiger property bubble that took a decade to inflate (from 1997) is still floundering pathetically, in full view, a decade later. 

Instead of coming up with a humane, realistic solution for distressed home owners in tandem with the bank rescue (controversial as it was), mortgage arrears were allowed to build up, empty or abandoned homes were left idle (and still are) and a proper,comprehensive strategy to deal both with strategic mortgage defaulters and those who were always going to struggle with their excessive debt, was never undertaken. 

Instead, too many ‘solutions’ were adopted in a piecemeal fashion: to this day the terrible post-Tiger debt creature keeps getting little pumps of oxygen demanded by politicians, housing and homeless charities, the media. Judges side with homeowners who show any initiative to try repay their property debt.

Last week’s stay of execution on the sale and disposal of another 20,000 of the so-called ‘non-performing’ mortgage loans owned by PTSB and Ulster Bank is the latest iteration of this decade-long debacle.

Will the vulture funds that want to buy the billions of euro worth of cut-rate mortgages have to become regulated bodies like the middle-men credit service agents they employ? At time of writing the Finance Minister has asked the Central Bank to ‘review’ the current mortgage arrears regulations to see if this is entirely necessary, as the opposition parties and debt charities insist.

What does appear to be happening is that anyone shown to have declined to engage with Ulster Bank or PTSB and have paid nothing against their mortgages (in some cases for up to seven years) may find they have run out of road,  With no deal on the record, and no appearances before a judge to plead their case for more time, such people will finally hand back the keys.

According to the banks, some of the owners have simply been unreachable, having moved out, emigrated or simply disappeared. Others, who are still living in the property will, if they qualify, have to seek to be re-housed by their local authority.

But other homeowners, who have forbearance arrangements in place – like reduced payments or interest only loans or even split mortgages – are also included with the defaulters because technically, their loans are also ‘non-performing’ compared to their original loan agreement.

The risk, say those opposing the sale of these loans to the unregulated vulture investors, is that replacement forbearance deals (if the one made with PTSB or Ulster Bank runs out, say after a 5 year term) may not be forthcoming and the newowner may set new repayment terms that can’t be met.

Forcing these vultures to come under the regulation of the CB, warn the banks, may scare them off or produce a worse sale price which may weaken the banks’ balance sheet.

Either way, this is one of those ‘rock and an even harder place’ for customers with so called, non-performing loans they are now diligently paying. Unless they have a cast iron contract that states that their forbearance measure is permanent and can never be altered, they may have to live with a certain amount of uncertainty, regulation or no regulation, and regardless of who owns their loan.

For those PTSB and Ulster Bank customers who haven’t engaged with the lender, and who simply don’t have the money to make any reasonable payment, they need to contact the Insolvency Service of Ireland. (www.isi.ie). There is no cost now for their services or for engaging a Personal Insolvency Practitioner (PIP).

Mortgage holders with any bank or lender (even a vulture investor) who finds themselves unable to pay their mortgage and/or other debts, should contact their nearest MABS office which runs Abhaile, the highly successful mortgage arrears service which provides a range of free support services and has kept many people and families in their homes.

The mortgage crisis isn’t over, far from it. But the chaotic phase appears to be.  And for that, I suppose we should be grateful.

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