Jill Kerby

KNOW THE RULES BEFORE YOU TRADE

 

Investment clubs were all the rage during the boom years; groups of like minded people, with modest amounts of discretionary income to invest would get together once a month to pick and choose individual shares that would create a portfolio that would, ideally produce profits.   A whole industry of training seminars and broking services grew around the new investment hobby. 

 

As a member of such a club, I also know the downsides: enthusiasm tends to wane after the first few meetings; a few people tend to dominate the club and the group can be easily swayed by the dominant figures. 

 

Another problem is that most members prefer to be presented with stocks to buy, rather than either do any research or assessment and anyway, the level of research can be very rudimentary, especially during a boom when everyone is already convinced that the shares will only keep going that way. 

 

The easiest part of the club is its organisation – the setting up of the rules and appointment of club officers, the collection of contributions, the buying and selling – all the things you may think could be complicated and time-consuming. 

 

In hindsight, probably every thinking member of an investment club set up in the last few years would do a lot of things differently – including my own club.  Aside from the half-hearted research, we foolishly failed to implement two of the most important rules of successful share investing/trading – the setting up of a trailing stop order which automatically sells shares that drop by a certain value and to never buy more shares once their price is in freefall. 

 

Professional traders and investors – at least the genuine ones who make more money than they lose – say that the vast majority of novices and the clubs they belong to make all of these mistakes and more. “Any idiot can make money in a booming stock market” they say.  It’s when markets are falling or highly volatile that you “you see who is swimming naked”, as the legendary investor Warren Buffett once famously remarked.

 

If you believe that there are many great shares to buy and trade right now then you might want to look over Dennis Gartman’s Rules of Trading which you can see in its entirety here:  (http://www.page88.co.za/cr/tradingrules.shtml) 

 

Keep in mind that many people believe that despite the recent, shaky, stock market rally, there is a lot of bad economic news still to come and globally, stocks may have some way to fall yet before they bottom out. Use this time before you get in to do your research and to ‘learn the rules’: 

 

GARTMAN’S RULES: 

-  Never, under any circumstance add to a losing position ... to do otherwise will eventually and absolutely lead to ruin!

- Trade with confidence; be willing to “change sides readily when one side has gained the upper hand”. [This is also where having an automatic trailing stop is essential.]

 

-  Your ‘mental capital’ – your fund of knowledge and research - is “more important and expensive” than your financial capital. 

 

-  Buy high and sell higher. “We can never know what price is ‘low’. Nor can we know what price is ‘high’. Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed ‘cheap’ many times along the way.”

 

-  Understand the fundamental differences of trading in a rising bull market and a falling bear market.

 

-  ‘Markets can remain illogical longer than you or I can remain solvent’ – John Maynard Keynes.

 

-  Sell markets that show the greatest weakness, and buy those that show the greatest strength.

 

- Timing is important…but very difficult. Trading runs are cyclical…trade large and aggressively when trading well; trade small and modestly when trading poorly. 

 

- To trade successfully, think like a fundamentalist; trade like a technician. 
Keep your technical systems simple.

 

- Respect and embrace the very normal 50%-62% retracing of share prices back to major trends. [The idea is not to be on the wrong side of the retracement.]

 

- Markets are driven be human beings making human errors and also making super-human insights.

 

- Bear markets [like now] are more violent than bull markets. 

 

- Be patient with winning trades; be enormously impatient with losing trades.

 

- The market is the sum total of the wisdom ... and the ignorance of those who deal in it and we dare not argue with the market's wisdom.

 

- If a market is strong, buy more; if a market is weak, sell more. [Just be sure about the true nature of its ‘strength’ and ‘weakness’.]

 

- Do the trade that is hard to do and that the crowd finds objectionable. 

- There is never just one ‘bad news’ cockroach! 

 

- All rules are meant to be broken…. but only very, very infrequently.

 

 

 

 

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JD writes from Dublin: In relation to the government guarantee on savings in banks, building societies and credit unions, will this guarantee stand if the country is bankrupt?  If the guarantee would not stand, do you think it would be sensible to move savings into property now?  

 

 

 

GT writes from Dublin: I really enjoy your column, I was hoping that you might at some stage do a practical feature (figures!) on how to calculate one's net income from gross income dealing with calculating tax deductions, insurance relief, income levies, health levies, tax credits, PRSI contributions. I find calculating one's PRSI contributions a mine field, the income levy and pension levy are fairly straight forward whatever about the pension/superannuation rates one has to make. If not do you have any book published or any book you would recommend that sets out in figures how to determine one's net income. It would be nice to be able to understand one's payslip. Hope you can help.

 

 

 

JM writes from Kildare: I am interested in trying my hand at direct share investments and want to learn about the tax issues relating to the sale of shares as I am a PAYE worker and therefore never had to submit tax returns before. Do most investors use tax advisors/accountants for dealing with CGT/dividends etc and do they give advice? I have looked at the CGT booklet from revenue and the CGT return forms but cannot really understand them. Would the accountant usually charge a percentage or a set feeand would this wipe out your profit? I understand the first €1,270 is exempt of tax but the form is quite complex in terms of inflation/indexation relief & also if shares are bought via a rights/bonus issue etc, further rules apply. CGT appears to become even more complex when you buy more shares of the same stock, but at different times and in different amounts. Assuming I only sold a certain amount of those shares, at different times, how are all these factors considered in the calculation of CGT? Finally, assuming dividends are paid out every so often, how is the income tax handled in this regard? Do I just record total dividends once each year and submit all together or submit returns each time? How do I make tax returns for dividends?

 

 

 

 

JD writes from Dublin: In relation to the government guarantee on savings in banks, building societies and credit unions, will this guarantee stand if the country is bankrupt?  If the guarantee would not stand, do you think it would be sensible to move savings into property now?  

 

 

 

 

 

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

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

 

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Last week, Bank of Ireland Life launched two new capital guaranteed tracker bonds, those tired, opaque, derivative investments that promise to return your money after, typically, four to six years terms but put a ceiling on any growth the tracked indices of stocks may earn (if you’re very lucky)and pay no dividends.  

 

 

I’ve never thought there was an optimum time to buy a tracker bond: they are no more than glorified deposits, with a tiny portion of your stake exposed to specific stock price movements.  Whether the market was in the ascent or in decline, it was always more cost effective to put the bulk of your funds in the highest yielding savings account you could find and punt the rest on your favourite shares or low cost ETF; over six years, the yield on the savings was nearly always going to secure the capital that was tracking the shares.

 

 

With the markets so volatile, charges are still a big part of the risk you take investing in pooled funds of any kind. Some but not all life assurance companies and specialist fund managers spread their initial charges  and commissions over a number of years but too many still pocket up to 5% of every contribution as well as on-going management fees. 

 

 

The problem with trackers is that the charges are bundled into the derivative pricing and it’s impossible to compare them with the more conventional plans or to the much more transparent (and non-commission) direct, on-line providers like Quinn Life and RaboDirect. 

 

 

Quinn Life have no upfront charges and their annual fund costs are mainly in the 1% to 1.5% range; RaboDirect have just waived their usual 0.75% entry fee for the rest of this year, which is very welcome, and their fund prices range from 1% for some bond funds up to 1.75% for more specialist funds.  But the conventional life assurance providers and other fund managers are still not only charging high initial fees, but annual management fees as high as 1.75%-2% no matter whether your investment value goes up or down.

 

Bank of Ireland Life gently scolds what they call the ‘biscuit tin mentality’ that is prevailing among those ordinary retail customers who once saved their SSIA money with them, or invested to cover their children’s third level education.  

 

The biscuit tin seems a perfectly sensible option to me when not only do the fund managers – a year into the downturn – keep losing client’s money but seem to think it’s perfectly acceptable to pocket 5% of every monthly contribution and annually, another 1.5% or 2% or the entire loss-making fund. 

 

Here’s a novel marketing idea: why not announce that from May 1st all management fees will track the fund performance?

 

 

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We may all be mourning the collapse in the value of our property – it is after all, the way we measure our wealth in Ireland.   But there’s no profit in hanging onto a redundant house value if it means you’re going to overpay for your buildings insurance. 

 

 

The Society of Chartered Surveyors latest guide to house rebuilding costs shows that rebuilding costs are down 4%-5% nationally and that insurance companies should be adjusting ourpremiums on a pro-rata basis.  

 

 

The rebuilding cost of a typical three bedroom semi-detached house in the Dublin area is down about €9 a square foot to €292,500.  Rebuilding a 2000 square foot four bedroom property has fallen from €386,000 to €368,000 says the Society and it is in everyone’s interests to contact their insurer and adjust their policies, especially since the cost of home insurance has risen sharply in the past year – by 25% in some cases, according to the latest CSO figures. 

 

The substantially lower rebuilding costs relative to property market prices was always a sign of irrational house prices – and labour costs.  The boom also fuelled a great deal of inertia about how much we paid, a luxury that many can’t afford anymore. 

 

Non-life insurance premiums are on their way up – not just because of higher claims, but because the insurers are taking a hit on their investment income and from falling sales. You can check out the different rebuilding examples in the latest surveyors guide here: www.scs.ie .

 

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The higher income and health levies announced in the emergency budget will be tipping many people already saddled with substantial mortgage, car loan and credit card debt over that line between just about coping with their monthly bills and defaulting on them. 

 

Such people may want to check out The Financial Regulator’s new Recession Survival Guide (see www.itsyourmoney.ie) that deals with money management, redundancy and debt and suggests some practical ways to make savings of up to €3,000, including the old standby’s of cutting out the cappacino’s and bringing a packed lunch to work. 

 

 

But if you’ve hit a debt wall, and need more than helpful budget tips to stop your house from being foreclosed, you should get a copy of Eddie Hobb’s latest book, Debt Busters – Managing Your Money Through the Recession. 

 

 

Hobbs comes up with 192 pages of debt recovery and consolidation plans for a wide spectrum of debt experiences. He also reassures the desperate householder that they’re more likely to keep their housekeys if they voluntary present the bank’s debt resolution officer (once known as their ‘loan officer’) with a workable repayment solution than the person who does nothing but wait for the date of their mortgage foreclosure hearing before a judge.

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START TAKING SAVINGS/INVESTMENT ACTION NOW 

 

The initial reaction of many people who still have some disposable income and perhaps some savings to the April 7th emergency budget, will be to batten down the hatches and safeguard every penny they have until the next onslaught in December. 

 

It’s a natural enough reaction, especially if you happen to see colleagues or other friends and family members losing their jobs.  But it might not be the most sensible long-term course to take if you are also nursing some losses – from property or pension funds or other investments.   By being more pro-active now, without taking crazy risks with your money, you may not only prevent further losses, but see your balance sheet return to profit sooner than those people who take no action and hope instead that this bad news will just go away. 

 

Between now and December, you still have time to get your financial house in order as well as you can to prepare yourself for the next round of taxes and state service cuts that will have an impact on you and your family. 

 

The experts I speak to regularly believe there are steps you can take, some small, practical ones, and some bigger, more substantial ones that you should seriously consider: 

 

INSURANCE

Dermot Goode, a former private health insurance manager who is now an accredited fee-based financial advisor (tel. 01 685 4318) recommends that “everyone with health insurance review their policy and compare prices with the other providers.’  He also highly recommends that the self-employed take out income protection insurance (against illness, not unemployment).

 

“A recent survey I undertook for the Irish Broker’s Association showed that half of all health insurance members are either in the wrong plan for their needs or are paying too much for their policy.  Most people don’t switch insurers either because of inertia or because they don’t think they can. There are some coverage restrictions if you have a pre-existing medical condition.  But you might still be in too expensive a plan.” 

 

Goode believes savings of €400 or €500 a year are achievable for most families and individuals on higher plans who undertake a review, with or without switching providers. (With house and motor premiums on the rise, and the extra 1% insurance levy a non-life insurance a similar review should be a priority.  Use the services of a good, non-life broker.)

 

SAVINGS

Everyone should aim to have three to six months worth of savings immediately to hand and to secure the safest longer depository for the rest of their cash.  The return is important too, especially now that DIRT has gone up to 25%, but chasing yield is a risky business if you leave all your funds in higher paying accounts in highly indebted banks. 

 

The risk of higher inflation going forward is increasing with every extra bout of “quantitative easing” that takes place. Your deposit return will eventually go up too, but so will prices. 

 

Avoid falling into this potential savings trap by shifting a portion of your cash into tangible assets with intrinsic value like gold, say the Dublin gold bullion providers Gold and Silver Investments (see www.gold.ie).  Precious metals, like other commodities (oil, foodstuffs like grain, water), arable land, etc., are assets that may go up and down in price but will not disappear overnight. Gold and land being the only two assets that cannot totally disappear. 

 

The price of gold has recently come off its latest $1,000 a dollar an ounce high and at time of writing was $880 an ounce as stock markets react to the ‘glimmers of hope’ speech by President Obama.  Mark O’Bryne at Gold Investments is having none of it:  “The fundamentals of the US economy remain very weak, despite the recent strength of the dollar and increasing risk appetite.”  In the short term, gold prices may fall to about $850 an ounce –  but says O’Byrne, gold remains “the best insurance” against the devaluation of paper currencies when the inflating of the global money supply eventually spills into the consumer price market.

 

PENSIONS AND INVESTMENTS

Eddie Hobbs (www.eddiehobbs.com) is Ireland’s best-known financial commentator and advisor. He sends regular financial updates and investment recommendations to his clients and in recent years this has included a strong recommendation to invest in oil and renewable energy shares and funds. 

He warns that the next business cycle, once the deflationary one is finished, “is almost certainly going to be double inflationary, first from the increase in the money supply and secondly from a return to the commodity bull market. 

“When the cash dam cracks, the uplift, as ever, will catch sideline investors sitting on cash piles as prices quickly move forward. If you haven’t already done so you should consider new investments in energy and gold.” 

His three favourite energy fund picks are Eagle Star’s Global Commodities Fund, the New Ireland Innovator Fund and JP Morgan’s Global Natural Resources Fund.  Similar funds to these can also be accessed through RaboDirect’s investments where the buy and sell charges are relatively low compared to the life assurers and fund details are very transparent. 

 

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Last December when the Health Insurance Levy Bill was introduced, the Department of Health, which owns the Vhi and for whose benefit this bill was created, expected that it would be passed and enacted by the deadline the Dail set for it: Easter weekend.  

 

Sadly for the Vhi, but thankfully for private health insurance members, the bill, which had to be sent to the EU for a ruling to ensure that it wasn’t just a state price subsidy or loss compensation scheme, didn’t get the rubber stamp the VHI and Department of Health wanted.  

 

Instead, it seems that the people in Brussels who monitor European competition laws don’t think that this levy – which the Vhi says was to prevent them from having to jack up the premiums they charge to older members despite the presence of community rated premiums for everyone – is at all straightforward.  

 

In it’s present form, €160 per adult member and €53 for child members to be paid by the insurers and virtually all the money going straight to the Vhi, the levy certainly looks like a subsidy to the government owned insurer.  Some health insurance analysts believe the delay in approving the bill at EU level is about the unfairness of this transfer.  The Vhi, they say, is not only the dominant player in the three player Irish market, but it still isn’t under the financial supervision of the Financial Regulator, (as Quinn Healthcare and Hibernian Vivas Health are) and it is still not setting aside the full 40% of its premiums into a reserve fund as it is required to do so after an earlier EU ruling.

 

The impact of the back-dating of this levy to January 1, 2009 – without the EU go-ahead – is bad enough in that it will result in the transfer of about €35-€40 million from Quinn and Hibernian to Vhi in a full year.  But the cash transfer didn’t stop the Vhi from also increasing its premium charge by a whopping 23% from January, but not for corporate clients who appear to be receiving subsidies from ordinary members now.  This premium hike is more than twice the estimated medical inflation; the consumer price index meanwhile is -2.6%. 

 

The consequences of this levy proceeding are already well known to the cabinet, the Health Insurance Authority and the Competition Authority:  membership is already falling due to unemployment, but the higher premiums could eventually cause up to a 20% further fall in membership. 

 

All the people forced to give up their private health insurance - perhaps as many as 400,000 – this levy could end up being a very expensive way to preserve the Vhi’s status quo, but at the expense of the public health service. 

 

 

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Last week’s enthusiastic reporting in the Irish media of President Obama’s declaration that the first signs of recovery were appearing in the United States just shows you how desperate we are for some good news here. 

 

I don’t buy it for a second.  US unemployment is still soaring at about 660,000 people a month; yes, house sales rose in January and February but the delinquency growth rate among prime and Alt-A (slightly less than prime) mortgages has more than doubled; commercial property debt is exploding and personal bankruptcies were up 38% in March compared with the same time last year.  

And on the same day that President Obama was at his most hopeful, the Department of Commerce announced that US wholesale prices fell 1.2% in March, bringing the producer price index (PPI) down 3.5% year over year -  its steepest 12-month decline since 1950. US retail sales figures also fell by 1.1% last month and are down 1.2% for the entire first quarter, prompting the New York Times to comment about the “fragility” of the President’s glimmers of hope. “If consumers had turned the corner in January and February, they apparently did not like what they saw and quickly reversed course in March,” the Times quoted Richard F. Moody, chief economist at Forward Capital.

I was, however, very glad to see that RTE’s business reporter Christopher McKevitt didn’t let the Wall Street cheerleader (and securities analyst) who was brought onto the News at One to put even more spin on the President’s uplifting remarks, to entirely lose the run of himself. 

“So, in other words, all the money the US government has printed to stimulate the economy has had an effect?” asked McKevitt after all the cheering.    

“Uh, yeah,” the analyst replied. 

 

There’s a big difference between cash printed out of thin air having a short term effect on expectations, and money earned by hard work, prudent saving and investing and careful allocation to real businesses and industries (created by real entrepreneurs and not political hacks) producing a genuine recovery. 

 

President Obama insisted last week that if the US consumer will not or cannot keep spending money they don’t have or don’t wish to risk, then the US government must do so on their behalf, with money it doesn’t have either but will borrow, print or confiscate.  (If our government could have done the same, rest assured, they would have.)

 

If anyone can really spell out for me how the world’s salvation lies with such a plan, or in our own case, the taking on of €80 billion worth of overpriced property and land, which looks like it might cripple my grandchildren with debt, do let me know.   

 

I’m as keen as the next person to see a light at the end of the tunnel, a glimmer of hope, a green shoot.  

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NW writes from Dublin:  I have money invested in schemes like Standard Life Bonds, AIB Eurobond, Bank of Ireland Asset Management and Hibernian Investment funds etc. Obviously all of these products have lost value. Are they likely to recover in the medium time - I am in my 70's - or should I just liquidate all of them?

Most investment advisors are generally reluctant to advise older clients to have a high exposure to stocks and shares and other volatile assets.  The main problem with such exposure is that as a retired person you are unlikely to have the future earning capacity that a younger person would to make up for investment losses. I spoke to Dublin based independent advisor, Vincent Digby about your situation (his website is www.Impartial.ie) who said that not only is capital preservation “as important an issue for your reader as capital growth” but that you should be clear about your personal needs and objectives for your before you make any decision to cash out any or all of these funds. “This is always the criteria that should drive asset allocation” says Digby.  Before he could advise anyone about cashing out, he says he’d need to know more about your particular circumstances and whether these funds have been producing an income or not. “It’s possible that your reader has sufficient other assets – pensions, cash savings and property that is generating income and he isn’t touching the capital in these funds.”  You should have your portfolio reviewed as soon as possible (this stock market rally may not last) and check first to find out what penalties, if any, may apply in you do decide to encash them.  Once this is done you should be in a much better informed position to consider other options, such as secure cash deposits, a combination of cash, bond and cash funds and inflation-linked bonds.  

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SH writes from Dublin: My daughter is a post-doctoral researcher currently being paid from a European Union Marie Curie scholarship. Her sponsoring college in Ireland is the University of Limerick, through which her Marie Curie monies are paid. She has completed two years research in MIT in Boston and is currently back in UL for her third year of the scholarship, which ends in October 2009. She opted out of the university pension scheme at the start of her scholarship. The University of Limerick is currently deducting the pension levy from her scholarship salary even though she is not in any pension scheme. Is this a valid action on the part of UL? How can one be obliged to pay a pension levy when one is not a beneficiary of a pension?

 

 

 

The fact that your daughter is on the university (ie, the state) payroll means that she would automatically have been liable for the pension levy, but your point that she should be exempt since she is only in temporary post and not a member of the pension scheme hasn’t been missed by others like her:  your daughter should contact the Trinity Research Staff Association which is protesting at their inclusion in the levy as well.  On their website - http://www.tcdlife.ie/trsa/?Pension_Levy - they discuss this anomaly and encourage research staff to send letters to their local TDs to lobby to lobby the minister for finance for an exemption and to organize a petitions. According to the website, “There is a clause in the [legislation] where a case can be made to the minister for finance to exempt a group or class of employees based upon specific conditions of their employment that distinguish 

them from other classes or groups of public servants.”  The Association has also made available a draft letter to send to public representatives and a list of all the e-mail addresses of Dail TDs.

 

Ends

 

 

DD writes from Cork:  I took a redundancy package from my job in July 2004 and the company allowed me to take an income stream spread over seven years which I receive fortnightly. Since the income levy was introduced it has been deducted from my fortnightly income. But as this was a redundancy package, does it come under the rules which exempt redundancy payments from this levy?  I would appreciate your view on this matter.

 

According to the Revenue (statutory redundancy payments are exempt from the income levy as are ex-gratia redundancy payments in excess of the statutory redundancy amounts, subject to certain limits. These limits are “up to €10,160 plus €765 per complete year of service in excess of the statutory redundancy.” This basic exemption “can be further increased by up to €10,000 if the person is not a member of an occupational pension scheme.”   If your statutory redundancy falls within these limits then the levy should not have been deducted.  I suggest you go back to your company and speak to the HR manager or finance officer to confirm whether or not you are liable under the Revenue exemption rules which you can access here: http://www.revenue.ie/en/practitioner/law/income-levy.pdf)

 

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LAST WEEK WAS JUST THE FIRST TAX ATTACK

 

We once had the highest price inflation in Europe, so it should come as no surprise that we now have the highest price deflation – currently -2.6% but expected to be nearly -4% by year end. 

Politicians have been quick to point out that the falling cost of living is a buffer against the higher taxes they introduced last week, but the selective nature of those falling prices makes this theory easy to dismiss.

For example, the CSO reports that clothing and footwear prices are down about 9% over the past year, furnishings and household equipment down 4.2%, petrol is down 14% and mortgage interest has halved. But the cost of food has only reduced by -0.5% and some items and services are up sharply – like insurance premiums (19%), education (5.5%) and health services (9%). If you don’t have a mortgage and don’t need any more furniture or clothes (for the next season, at least), your cost of living is hardly improving. 

Meanwhile, last week’s budget will result in a typical middle earning private sector worker on €50,000 a year losing about €3,000 as a result of the tax and health levies; if this person happens to have two young children and was in receipt of the early supplement allowance, that loss will rise to €4,000 this year and €5,000 in a full year.   The public sector worker on the same sort of wage is much worse off: once February’s pension levies are factored in he or she is about €7,000 poorer.  

With only a third of the tax loss recovered by this emergency budget, there is a great deal more tax pain to come in December and it might include: 

a property tax on your principal private residence as well as the €200 that already applies to a second home;

 

 

means testing or taxing of child benefit payments;

 

further erosion of mortgage interest relief for remaining recipients of the relief (those within seven years of purchase);

 

reduction of pension contribution relief;

 

the re-introduction of third level fees;

 

the substitution of even higher tax rates and tax bands than the equivalent of the income levies, say to at least 45%-47% at the top rate and 23% at the standard rate.

 

Between now and next October/December you should try to get your existing finances into focus and perhaps offset some of the additional damage that will be done in the next budget.

Just in case other tax reliefs that weren’t touched last week are targeted in December, make sure you are claiming all existing tax reliefs for the past year and for the four previous years (the maximum back tax period). Mortgage and health insurance relief is now applied at source, but you had to make the application in the first place so double check that you are receiving this relief.  Make all your health and dental relief claims (now only available at the lower rate) and for bin charges, union subscriptions and rent allowance. 

This may be the last year you have in which to maximise tax relief on private pension and AVC contributions and there is a very good chance that top rate relief will fall to either the lower, standard rate, or be set at a single rate. Also, there is a risk that the size of the tax-free lump sum payment from your matured pension – currently 25% for the self-employed and directors or one and a half times final salary for employed workers will either be reduced, or the lump sum will now be taxed. (A figure of 17.5% has been mentioned.) You might want to speed up your retirement plans if you can.

A property tax is a near certainty, though no one is exactly sure how that will work – either as a lump sum, or as a percentage of the rateable or market rate value of the house.  (The latter assessment will take much longer to set up so the government will more likely go for another levy in the short-term.) 

If you are retiring this year and were thinking of moving abroad, or even if you wanted to trade downwards or sell and rent, you might want to do it this year.  Property prices are still falling but they will only go lower once the property tax and lower mortgage reliefs come in. (Parents and children might want to consider swopping houses now.)  The other danger is that a capital gains tax on the sale price of a principal private residence might be introduced – that rate has already gone up (for CGT and capital acquisition (inheritance and gift) from 20% to 25% from May 1st).  If you are gifting someone a property or other asset you will want to get that paperwork done by May 1st. 

The raid on our incomes and wealth has been so substantial that I strongly advise you to finally hire - if you haven’t already - a good fee-based advisor to prepare your an in-depth wealth review and report.   

Next week, I’ll report back from a few of them – Eddie Hobbs included – on their top recommendations for surviving the next tax raid on our money. 

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RL writes from Dublin:  Our family has a Multi-Trip travel policy with VHI that cost €95 and doesn’t expire until the end of the year.  I was recently made redundant and have lost my VHI cover from work so my husband and I decided to switch all of us to a cheaper provider (Hibernian).  However, when the Hibernian person asked if we wanted travel insurance, I told them we already had it was VHI and they told me that policy was now cancelled. I was never told this when we bought the insurance.  It seems that you can only keep the travel policy if you remain with VHI and there is no refund – in our case for at least seven months worth of payments.  Is this correct?

 

 

I’m afraid so.  I checked out the terms and conditions for the multi-trip policy on the VHI website and under ‘Principal Exclusions and Conditions’ it states “All members on a Multi Trip policy must hold relevant Vhi Healthcare Hospital Insurance” and that “Cancellation of your Vhi Healthcare Hospital Plan will result in non-refundable cancellation of your travel policy. There is no refund on any cancelled policies after the 14 day cooling off period” even if you have months to run on the policy. .  According to Dermot Goode, a financial advisor in Dublin who specializes in health and income protection insurance, “None of the insurers will refund your money after the 14 day cooling off notice is over and but VHI is the only health insurer that does not allow the policy to run out if the person switches their cover to Quinn or Hibernian Aviva. Even if your VHI policy expires in 2009 before the travel policy does, and you don’t renew with them, the travel policy will be null and void.”   This unfair condition needs to be amended and you should consider not only formally complaining to VHI, but to the Financial Regulator and your public representatives as well. 

 

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PB writes from Co. Mayo: I have a tracker mortgage with AIB with a balance of €67,000 due to expire in April 2015. My monthly repayments are €578.54 per month based on the tracker rate of 2.1% (margin of .6% over ECB rate). I wanted to reduce the term of my mortgage by exactly five years without reducing my monthly repayments. When I rang the bank less than 12 months ago when the interest rate on my mortgage was at a higher rate than now I was told the it would cost me €21,000. I rang them again last week and was told it would now cost €25,000, but not believing this was an accurate figure, I rang them back the same day and was told it would cost €27,000! I subsequently received a letter confirming the later amount.  In 2006 courtesy of an SSIA, I reduced the term of this mortgage by eight years and it cost me € 32,000!  

 

I'm afraid these figures don't add up for me. Let’s assume your current tracker rate never changes and you continue to pay the same mortgage repayment for the next six years and four months to April 2015: at €578.54 per month (by 78 months) this is a total repayment of €45,126 – well short of the €67,000 capital balance you say is still outstanding.  I suggest you ask your lender to supply you with a hard copy schedule of payments that shows you how much it will cost you each month to reduce the term of your loan from six years and four months to just one year and four months – that is, over five fewer years – or the size of the lump sum you would need to pay. (Not all tracker loans allow for lump sum payments off the capital, so check that too.)  Reducing the term of a mortgage is commendable, though at these current low interest rates you would be better off reducing more expensive debt like credit cards, overdrafts and personal loans, should you have any. 

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JK writes from Dublin: I am interested making an investment in gold.  I have decided not to do business with the agent for Perth Mint, and would prefer to buy into an ETF which tracks the price of gold.  I have contacted my broker (Sharewatch), and they tell me that there are several ETF's that relate to gold prices, and that they can execute trades for those listed on European Stock Exchanges.  I would prefer to avoid the UK stock exchange.  I have found it very difficult to find information about Gold ETF's that might be available on European Stock Exchanges: can you suggest a starting point for me, or better still an ETF that you would consider worthwhile investing in?

 

 

ETFs are indeed a cheap way to buy and trade gold and other precious metals with mainly just stockbroking commission and a low annual management fee of usually under 0.5%. But the ETF involves a counterparty risk that you may not wish to take; physical gold that you buy (but must store securely) carries no such risk, nor does buying in certificate form from the likes of The Perth Mint of Western Australia where your gold is kept, assuming of course that it doesn’t shut down or otherwise disappear.  Before you buy a gold ETF or any other kind of gold (the Irish Stock Exchange now sells a gold miner ETF that represents shares in 10 leading gold mining companies) you should do some more research yourself.  There a few recent articles on this site http://goldprice.org/buying-gold/ that will give you a lot of background on the different ways to buy gold ETFs, bars and coins, even buying and selling scrap gold. 

 

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It’s easy for the Minister for Finance to say that the tax increases introduced on Wednesday will only bring people back to the tax levels that they were living with two or five or eight years ago, depending on their level of income.

 

The problem is that these same people went and committed much of the tax reductions they were awarded – and encouraged to spend, remember – on mortgages and car loans and crèche fees that still have to be paid every month. 

 

Some mortgage holders on variable or tracker rates have been extended a lifeline by the ECB in the form of seven interest rate dropsand these will help to   buffer the impact of the doubled income and health levies levies, though God help the homeowner who locked in their huge mortgage at a 5% fixed rate last year and now can’t get out of it. 

 

But even that extra €400-€450 interest savings for the typical €250,000 mortgage holder couple won’t offset the budget increases if their incomes exceed €75,000, the tipping point for the 4% levy (and higher PRSI liability) or if they are public servants and are already stunned by the c€4,000 net pension levies introduced last February. 

 

Include two young children into this scenario, with €1,000 in early childhood payments gone for 2009 and €2,000 next year and the proverbial garda/nurse couple with combined income of about €80,000 will have to scramble around to find about €9,000 over a full year to meet all their tax, pension bills and current child-care bills. (I’ll believe that single year state crèche announcement when it’s up and running.) 

 

Even these figures don’t take into account the upcoming property tax, the further loss of the child benefit payments (of €3,940 for two children) and the possible loss of all mortgage interest relief. 

 

More money had to be found to meet the deficit, but it’s come from the wrong source and these are staggering sums in a single year. 

 

Since housing is the biggest expenditure homeowners have, and interest rates will not remain this low forever as the US and other governments scramble to inflate the money supply with trillions of dollars worth of bail-outs and loans, Irish homeowners might want to lock in their interest rate gains by securing fixed rate of 3% or less. 

 

If you’ve already seen a drop in income, or a partner has lost their job and you can’t repay your mortgage – but genuinely believe you have a good chance of finding a new one - prepare a budget and refinancing proposal for your lender and tell them you will pay what you can.  If this isn’t a realistic prospect, you should realistically consider a voluntary default arrangement with your bank that involves a rental, buyback option so that you don’t become homeless. 

 

The second family car may have to go and the overseas holiday.  Middle-income parents that were already struggling to pay private school fees may want to reconsider this hefty expenditure (especially if they have more than one child enrolled) and start planning on how to pay college fees from next year. 

 

The airwaves have been full of shocked tax-payers in the vulnerable 25 to 50 age group this last week who admitted they were already living paycheque to paycheque. They must now do what the government did not do on Tuesday: cut their expenditure to the bone and face their creditors head on.

 

*                                 *                                  *

Two recent surveys, from the Financial Regulator and Postbank, were lost in the run-up to the emergency budget but need to be revisited in light of the amount of extra money that is now going to be sucked out of the consumer economy. 

 

The Regulator’s survey on our financial capability revealed that fewer than half of us (46%) are able to keep track of our finances and nearly six out of ten have made no provision for a drop in income. 

 

Meanwhile, the latest savings index from Postbank, showed that 60% of savers don’t know what interest rate they are earning on their deposit funds and are probably just as much in the dark about the fact that the Dirt tax of any interest earnings went up from 20% to 23% last October and will now be subject to 25% tax.  That said, a bigger number of people surveyed by Postbank say they are increasingly worried about the safety of their money in those bank accounts, despite the 100% guarantee on all Irish banks and An Post savings, including Postbankaccounts.   

 

Is this money safe?  Well yes, so long as the government’s original €400 billion guarantee for Irish bank deposits and liabilities up to the end of next year stands up and from this week, the five year guarantee of the specific €80-€90 billion toxic property and construction debt that’s been crushing the Irish banks. 

 

Personally, I’ve made sure that my savings are mainly outside the Irish banks and in those that are not carrying the same legacy of catastrophic sub-prime or property-related debt as the Irish ones or some of the international banks operating here.  I’m also attracted to the fact that these other non-Irish institutions (and Postbank, where my son is about the open his first solo bank and savings account) never had boards stuffed with overpaid and clearly incompetent directors and executives.  

 

(For the record, I write a column for the web-magazine of one of these banks, RaboDirect and have another column in the regional press that is now sponsored by Postbank, but I’d also like to say that the interest I’m earning is less than that offered by Anglo Irish, AIB or Bank of Ireland, the three most indebted banks.)  

 

If this budget doesn’t focus people’s minds on the need to pay attention to their personal finance and their return on their money, I don’t know what will.  

 

Get your heads out of the sand.  Face up to your debt and your falling standard of living.  There is more bad news to come in six months time.

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CONSIDER CONSOLIDATING YOUR DEBT AS TAX CHANGES BITE

 

The debt problems that many readers find themselves in right now will only be sorted out if it is paid off, written off or inflated away. Borrowing more money will be no solution, unless of course you can reduce the overall cost of servicing your debt.  Consolidation may be best answer.

This column had to be written before the much-anticipated mini-Budget on Tuesday, but I don’t think I’m wrong in predicting that the tax increases and spending cuts that have been announced are not going to make it any easier for someone with personal loans, credit card bills and a mortgage to keep up with their payments. 

It has mainly been mortgage holders who benefitted from the seven ECB rate cuts since last October (from 4.25% to 1.25%). Credit card and overdraft rates have actually been going up and not every personal loan borrower has been given the lower interest rates that some lenders have advertised. 

 

PERSONAL LOANS/CREDIT CARDS

The ECB rate cut is unlikely to have any effect on your personal loans or overdrafts which are typically still in the region of 9%-10% and c12% respectively.   Shop around for the best lending rates and don’t necessarily expect to get the ‘headline’ one:  the lower the sum you want to borrow, the higher the interest and your credit rating will be taken into account. NIB, Halifax and AIB currently offer the lowest loan rates (according to the Financial Regulator’s survey, see http://www.itsyourmoney.ie/personalloancomparison )

Overdrafts should be used sparingly, and ideally only if you have set up a budget plan account with your bank that spreads all your bills over 12 months with the overdraft kicking in only during those months when outgoings exceed your income. 

Credit card rates – which average at about 15% between the 12 providers (see rate survey at http://www.itsyourmoney.ie/creditcardcomparison) - have been going in the opposite direction to the ECB – upwards for cash withdrawals and penalties if you miss payments or go over your agreed credit limit.  

The cheapest cards are currently available from AIB and Bank of Ireland, at 8.5% and 9.5% respectively and the dearest is from Ulster Bank at 17.9%.  You need to check minimum income requirements and other conditions before you apply for one; keep in mind too, if you switch providers, that there are only three 0% card rates available: from Halifax (6 months), B of I (6 months) and NIB (5 months) after which you go onto their higher ordinary rate.

 

MORTGAGES

If you are struggling with your debts now, you should move quickly to consolidate them onto your mortgage if your lender can be convinced you are a good risk.  (If all you have are problem personal and credit card loans, check out your local credit union: they are often very sympathetic to people wanting to clear their unwieldy unsecured debt.)  

Nearly all the main lenders (except Ulster Bank and KBC – formerly IIB Bank) have agreed to pass on the latest ECB rate cut to mortgage holders. For some lucky borrowers with long standing and very low tracker premiums, this means their repayment could now be as little as c2% - c2.25%. 

Even those people with ordinary variable rates, now down to just 2.75%-3%, will have seen monthly savings on a €250,000, 30 year, homeloan in the region of €500, or €6,000 a year.  Refinancing personal and credit card debt onto this rate would represent a huge overall monthly savings and a way to stave off the worst of the additional tax burden you will soon be carrying.

Tracker mortgages are no longer available, but if you are in a secure job and have a healthy amount of equity in your home you might consider switching either to a cheaper variable rate provider or even considering a two or three year fixed mortgage rate. 

AIB brought their three year fixed rate of 3.1% and National Irish Bank, a two year rate at 2.83% down with the March ECB rate reduction and may yet bring it down again after last week’s cut. Check with your own lender to see what their fixed rates are and get them to work out the overall monthly savings if you were to add personal loan balances as well. 

The most important thing to do, IF you can refinance your debts is to try and increase the repayment – even by €50 a month – so that the short term car and credit card debt doesn’t end up attracting 20 or 25 years of long term interest.

Most of all, of course, you mustn’t build up any more personal or credit card debt until it is paid off.  Your priority must be to cut your spending and outlay to the bone; and hope that the hair-shirt tactics our government has adopted actually works.

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