Jill Kerby

What is the soaring price of gold and silver telling us?

By the time you read this, the price of gold and silver may have fallen back a little, or by a lot. Or maybe it will have kept going up.

Precious metals seem to have a mind and momentum of their own at the moment, but their price is simply reacting to the growing awareness all over the world that the ‘great correction’ continues:  during the boom years too many governments – and banks - made too many promises they couldn’t keep.  Too many ordinary people bought too much property and other stuff with too much credit that they cannot repay.

In Ireland, we know how it turns out when you have no choice but to own up to your – collective - borrowing and spending mistakes – your economy keels over and your state goes bust.

The people who are driving up the price of gold and silver these last few weeks are now worried that it isn’t just the Greeks, Irish and Portuguese who are bust, but maybe…sharp intake of breath …maybe the Americans too, whose budget deficit is $1.7 trillion and the national debt, $13.4 trillion. The US economy is in danger of a having a stroke.

The ratings agency S&P may not have much credibility left after the way they kept rating toxic, subprime mortgage bonds as a triple AAA risk during the boom years. But last week’s warning that the USA might not continue to deserve its top rating (which of course it does not) if it doesn’t get it’s hyperbolic national debt under control, still came as a shock.

‘The Emperor has no clothes’ is what the rating agency was actually saying.  And once that observation spreads, you have to wonder if the game is up and the 40 year experiment of an entirely fiat global currency system is also coming to an end.

The Chinese, who hold trillions of dollars and Treasury bonds in their reserves, responded by also expressing concern about US debt and deficits. Aware of the threat that rising price inflation poses, the government has recommended that Chinese people start buying gold with their savings. Purchases have quadrupled on last year’s volumes.

And in a most significant US move, one that many observers believe also had an impact on the latest price spike, the $19.9 billion dollar University of Texas Investment Management Fund – the second largest endowment fund after Harvards’ – has spent nearly a billion paper dollars to buy 6,643 bars of 24 carat gold bars. Not much of a vote of confidence in the greenback.

When the price of gold hits $1,505.34 an ounce (or €1,032.74) and silver, $46.16 an ounce (or €31.66) as it did when I wrote this article, you can be certain that investors will take profits and the prices will fall back. (Summer is often the ‘low’ price season.)  Since silver has an industrial utility it has a tendency for bigger peaks and falls. Some people will look forward to those dips as a buying opportunity.

I have been writing about gold’s steady climb in this column for the last seven years. It cost about $550 dollars an ounce back then.  Silver, about $7.  The physical metals haven’t changed at all since then, except perhaps that with each year they become a little bit more rare and costly to extract.  What has changed, is the amount of additional dollar bills (and pound notes, euro, yen, yuan, etc) that central banks have printed out of thin air.  It isn’t so much that the lumps of gold have become more valuable…but rather that the world’s paper money has become increasingly worthless. 

Gold has always been considered a store of value and until the First World War was even an acceptable method of exchange. Until 1933 in the United States, every 20 dollar bill could be exchanged for an ounce of pure gold. After the Second World War, only countries could exchange their dollars for gold.  After August 1971, the United States, already spending more than it was earning, went off the modified gold standard entirely and substituted the US dollar as the world’s reserve currency.

Since then, politicians – everywhere – have been spending beyond all their people’s means because they were no longer obliged to limit their spending and the volume of currency they issued against their reserves of gold and silver.

So vast is national debt, that governments can only issue more debt and print more paper currency.  It is why global retail price inflation is such a risk.

Gold is not cheap anymore, not like it was back in 2005.  But nor is it in a bubble. 

How many family members or friends do you know who have bought gold or silver coins or bullion? (Or exchanged their euro for Perth Mint certificates – gold held in Australia, see Goldcore.com).

The price will go up and down. But when everyone is buying gold (and not selling their scrap gold) and every other story in the media is about gold and every dinner party is chatting about it – just like we did about property during the boom – that’s when gold will be in a bubble.

Bank must be flexible if it wants to eliminate trackers

 Overpaying your mortgage has always been a good idea and I speak from personal experience. When we bought our current house in the mid-1990s, the interest rate was about 11%, but it quickly fell to 8%.

Instead of letting our repayment fall with the new, lower interest rate, we instructed our lender to leave it as it was.  It dropped to 6%. By 2002, the rate was even lower and we were on schedule to clear the entire, 20 year loan in just 12 years.

The size of our mortgage was a fraction of what most Permanent TSB tracker mortgage holders have, so the bank’s offer last week of a 10% bonus payment if borrowers agree to pay at least €5,000 off their trackers by June 17th, is unlikely to have same dramatic effect as it would have had on our comparatively modest loan.

However, the principle is the same:  by paying off €5,500 early, you avoid paying interest on that sum for the remaining term of the loan and you not only reduce the term of your loan, but its total cost.

PTSB is not making this offer for your benefit, of course. The trackers are a serious loss leader and the sooner they can reduce this part of their loan book, the sooner they will stabilize their fragile balance sheet. 

Where I think they have been shortsighted is in limiting the offer to multiples of lump sum payments only and to a starting sum of €5,000. 

Who, amongst their mainly younger, often first-time buyer customers, has a spare €5,000, let alone ten or 20 thousand euro lying around?

I suspect there are many more tracker holders who could overpay their loans on a monthly basis by €100, €200 or €300 a month. Why not allow them commit to overpaying their monthly repayments and then reward them at the end of the year with a further 10%?

Someone suggested that the short-lived deal is a sign of desperation on PTSB’s part. This may be so, but with 70,000 expensive trackers on their books, you’d think they’d be incentivising overpayments, no matter how modest.

Finally, many people who don’t bank with PTSB are wondering if their lender will follow their example and buy them out of their tracker, or better still be prepared to write off parts of their loan.

This idea, and widespread debt forgiveness for people in serious arrears has been overblown lately.

An AIB branch manager that I spoke to after CEO David Hodgkinson’s comments on April 12 about debt forgiveness for people in serious arrears, said the first he heard about it was on the radio just like the rest of us. 

“We’re going through files one at a time and I don’t expect that to change.”

Not worth the paper

What is the soaring price of gold and silver telling us? 

At over $1,500 and $45 an ounce respectively last week, how about that paper and ink banknotes, especially the ones with dollar, euro and pound signs are an unreliable store of value.

By the time you read this, the cost of gold and silver may have fallen as investors take profits but every price fall is a buying opportunity for anyone who shares the view that unlike fiat currency, gold and silver cannot in themselves be debased or printed out of thin air at the whim of politicians and their creatures, central bankers. 

The world’s sovereign, institutional and private lenders are beginning to wake up to the fact that the only way they will be repaid the tens of trillions they are owed by indebted governments – like us, but especially the United States - is with inflated, devalued paper currencies or not at all.

The Chinese – who are the biggest lenders to the US, and are very worried about rising price inflation, are encouraging their people to exchange a portion of their savings for gold.

Last week the $19.9 billion University of Texas Investment Management Fund, the second largest such endowment fund after Harvard, exchanged nearly $1 billion for 6,643 gold bars.

Hardly a vote of confidence for the paper dollar.

Gold and silver is real money. You exclusively trust paper banknotes at your own peril.

 In poor health

I had to laugh when I read how the VHI is now describing itself as the only ‘not for profit’ health insurer in the market.

That’s because it keeps making losses - €3.1 million in after tax losses in 2010 and €41.7 million in 2009.  It also lost €147 million on its older members, a sum that was only made up by the controversial health insurance levy subsidy that it gets from all adult and child Quinn Health and Aviva Healthcare members.

The levy went up 16% last December to €205 per adult and €66 per child and is nothing more than a tax to help bailout the VHI.

The Minister for Health is now talking about breaking the VHI into three parts, selling off two of them and keeping state ownership of the third part.

Whatever about the government holding onto a loss-making operation – nothing new there – he might want to address the problem of overstaffing, civil service pay rates, the defined benefit pension scheme it operates, its inadequate reserves and the six VHI offices that it still operates around the country, before the insurer is sold off. 

The VHI is a ‘not-for-profit’ company for many reasons, and none of them have been adequately addressed.

DEBT MANAGEMENT A GROWING INDUSTRY - UNFORTUNATELY

There’s a great deal of talk about debt restructuring and resolution in this country – and some it is finally focussed on the problems that ordinary people, and not just the insolvent banks – are experiencing.

But until the new government finds the time to properly assess the depth and breadth of this problem – and that won’t happen until the bank crisis is finally resolved and the IMF/EU/ECB deal is running smoothly -  the danger is that they will only apply temporary sticking plasters to what is becoming a pumping, open wound.

Last December, the Law Reform Commission produced an excellent report on ‘Personal Debt Management and Debt Enforcement’ that addressed our arcane personal bankruptcy legislation. At its core was a proposal that after a very lengthy and thorough assessment by a private debt facilitator, that the person’s debts either written off – discharged - immediately (this would apply to those with no assets, no income or realistic prospects of ever being able to repay the debt) or they would be are discharged after a period of three to five years as part of a mainly non-judicial insolvency procedure.  Formal bankruptcy was also proposed for commercial debtors.

The Law Commission system is not as generous re discharge as it is in the UK for example, where the bankrupt can be discharged within 12 months. But it is a huge advance on the absurd, expensive, unworkable court-based system here in which there is a minimum 12 years before discharge and sometimes, not even then.

This report is the best template the government has and they should be moving quickly to adopt it.  We are obliged under the IMF/EU/ECB loan deal to reform the law by next year, but like so many of our obligations to ‘the troika’ it hasn’t moved much further from its launch last December.

Meanwhile, there is the new Code of Conduct for mortgage arrears that most of the mortgage lenders have or will adopt. It deals with homeowners in arrears or even pre-arrears distress and requires the bank to work with the person to re-structure their payments before they pursue any legal course to repossess the property. There is also a one year moratorium before they can resort to the courts if the deal fails. 

The Code will give thousands of distressed mortgage holders some breathing space, but it doesn’t address the other unsecured debt they (or others) may be juggling car loans, credit card bills, other personal and HP loans, utility bills. 

Up to now, the main piece of advice for such people has been to talk to the creditor and/or to make an appointment with their local Money Advice & Budget Service (MABS) to prepare a personal financial statement that is then presented to the bank or creditor to start negotiations. 

Unfortunately, the non-mortgage lenders or creditors (in the car loan or credit card department) may not be so co-operative. They don’t care how it happens, they just want their money, say people who fall behind with these repayments.  

Meanwhile, at MABS, the numbers of people needing assistance has risen so sharply that long waiting lists for appointments now occur and they simply don’t have the resources with which to give as personalised a service as they once did.

A new industry is emerging to fill this gap – debt management agencies.  They are everywhere now. Some are Irish, some are based in the UK.  They can operate with very different terms and conditions and costs.

Many are run by ex-mortgage brokers who, now that the property market has collapsed, have shifted their attention to the debt problems of their former mortgage clients.  Many would have sold inappropriate mortgages or encouraged far higher loans than they should have because of the huge commissions they once earned from such deals.

That said, there is certainly a need for good debt management advice.  It can mean the difference between an emotion-charged, on-going confrontation between the debtor and their creditors, in which “the one who shouts the loudest” secures the biggest payment that month, says Eugene McDarby of MoneyVillage.ie, and a realistic, sustainable arrangement that offers the best outcome possible to both parties.

Debt management agencies are not regulated by the Financial Regulator, but McDarby says they should be.  He and three other firms have formed the Debt Management Association of Ireland (DMAI) and have created their own code of best practice. (See www.dmai.ie)

McDarby, a former mortgage broker himself, offers a fee-based service – with an initial fee of €165 for three to six months and a flat monthly fee thereafter ranging from €35 to €50 based on the number of creditors with whom MoneyVillage negotiates.  This involves getting the creditors to agree to a certain reasonable, regular repayment for an agreed period as well as writing off a portion of the debt as full and final payment.

The key role for the debt manager is to act as an arbitrator, he says, but also to help rehabilitate the debtor so that they can get back their life and move on. 

Finding good, objective, affordable financial advice of any kind is always challenging. It will be even more difficult in an unregulated sector like debt management, so if you do seek the services of a debt management intermediary make sure their terms – and costs – are absolutely transparent. 

The DMAI is only a self-regulated trade body, and there only a handful of members, but it’s a start.

Failure to regulate private debt agencies will be costly

 The politicians are going to be arguing endlessly about how to get the banks recapitalised and our debts restructured, including mortgage arrears and negative equity. 

 This is because talk is cheap and it lets them postpone and avoid – for now - the tough choices that will have to be made eventually, probably by our IMF and EU masters if the latest reports of how the economy continues to weaken are correct.

 Meanwhile, real people who are carrying these great personal debt burdens - €180 billion worth -  are worrying themselves sick and in worse cases, ending their lives, as they juggle credit card bills and car loans, mortgage and utility payments, according to the results of a survey undertaken by the private debt management company MoneyVillage (www.moneyvillage.ie).

 It found that over a third of people surveyed hadn’t shared their debt problems with their spouse or partner or any other family member and nearly half would be reluctant to approach their family for financial help. Nearly a third said they knew of a close family member who was also under financial stress due to debt.

 The Law Reform Commission report on personal debt management and debt management was published last December year and remains the only template the government has to put a workable personal insolvency and bankruptcy procedure in place.  Bankruptcy reform is one of the conditions of the IMF loan deal. 

 It has to be fast-tracked on humanitarian grounds, if nothing else.

 Until then, anyone who isn’t keeping all their debt balls in the air should consider not just going to MABS, the state money advice centre, but the services of a reputable debt management company, which, for a transparent fee, helps renegotiate your debt repayments and debt forgiveness with your creditors.

 MoneyVillage director Eugene McDarby, who is also head of the Debt Management Association of Ireland which represents a handful of firms is leading the call for proper regulation of their industry by the Financial Regulator, without much success, he says.

 The Law Reform Commission acknowledges the need for private debt management agencies as part of their debt management process. The demand is clearly there and private companies are springing up, the majority of which are not members of McDarby’s self-regulating association.

 Have we learned absolutely nothing from the last few years?

 Teething problems

 Knowing how much it will cost before you commit yourself to a series of dental treatments sounds just like common sense to me. 

 It has taken years of debate and consultation between dentists, their representative body and the Department of Health, but a code of practice for Irish dentists was finally introduced last week. It will be policed another arm of government, the National Consumer Agency.

 The only reason I can think for the dentists - and GPs before them - resisting this simple, obvious, pro-consumer development, is that, as professionals, they didn’t see themselves as service providers, no different in the wider scheme of things than garage owners or hairdressers.

 But dentists and doctors provide a service just like the tradesman/mechanic who services my car once a year and tends to my motoring emergencies, offers a range of relatively simple, ordinary services as well as more complicated and even emergency-based ones. I respect and admire such skills, but knowing that they don’t come cheap, I buy health insurance, which like motor insurance, pays for exceptional events.

 I know dentists are very unhappy that the PRSI dental benefit has been decimated, but like medical card payments to GPs, they skewed the real price of the service. It is no co-incidence that dental prices in many practises have fallen since the PRSI subsidy has disappeared.

 Price lists are always a good idea because it helps the patient/customer decide whether the service or treatment represents value and it forces the dentist to set their prices based on the real market and how much real patients can pay – and how often - in this depressed economy. 

 The medical card subsidy means the prices GPs charge don’t fully reflect reality, but having a list up on the wall is still worth having, at least until they all become government employees under the Department of Health’s proposal for a state-run universal health insurance system to replace the HSE.

 God help us all then.

 Bank on foreigners

 Most commentators are pretty certain that fewer Irish banks means less competition for affordable mortgages, personal loans and overdrafts. 

 The worry, they say, is that interest rate increases won’t be passed onto savers.

 That may be true of the Irish banks whose needs to recapitalise are precipitating every decision they take at the retail level, but maybe there’s still some hope of fair play:  when the ECB rate went up a fortnight ago, the Danish owned National Irish Bank immediately announced it wouldn’t pass it on.

 A few days later, the Dutch own deposit bank, RaboDirect increased their savings rate by 0.25%.

 The grotesque competition the Irish owned banks pursued is gone. Until they are sorted out, do your business with the real competition.

Diversify and conquer dangers to your deposits

JH writes from Cork: I am a pensioner in my late sixties who has a few deposit accounts and investments each under €100K invested in a number of financial institutions in this country and a last ditch deposit with Rabodirect. The investment money is not required for everyday expenses. I am attempting to look ahead to 2013 and am nervous that the deposits and investments here might not be safe in the event of Ireland defaulting on it's loans and perhaps the Euro collapsing.  I am considering shifting money abroad into US dollars, sterling and New Zealand dollar accounts. Can I do this legally and what are the risks apart from currency fluctuation? Also, would I have a tax liability here on interest earned outside the state and if so, could I claim credits for interest paid abroad? Since there are a number of financial institutions located in Northern Ireland, can you say which ones are guaranteed by the UK government?  

Before you do anything, you need to properly assess the risks associated with your savings and investment accounts. This means ticking boxes issues such as institutional solvency, currency strength, guarantees that may apply and appropriate asset selection in the case of your investments. It sounds to me as if you could use a proper wealth review by an experienced, fee-based independent advisor. If you have bulk of your funds in cash – here or anywhere else in the eurozone – you need to know that this carries inflation risk, aside from potential euro currency risk.

As price inflation rises, it will eat away at the spending power of your capital and you will need to achieve an annual return that beats both the rate of inflation and any deposit interest retention tax (DIRT) liability. Moving your funds to the UK is like jumping out of the Irish frying pan into their inflation fire if you intend to spend any of your money there: as of February, the annual UK retail price index (as opposed the more general consumer price index) is running at 5.5%.  Add 27% Irish DIRT on any returns from UK deposits, and your capital spending power depreciates (in the UK, at least) at a rate of 6.5%.

 I’m all in favour of diversifying away from euro only deposits in Irish banks as one of a number of ways of protecting your wealth in these volatile and uncertain times. But you need a sound, cost and tax-effective plan BEFORE you rashly move all your money off-shore or into other deposit accounts. 

 Banks is Northern Ireland, including those owned by AIB and Bank of Ireland are covered by the UK financial services compensation scheme up to a maximum of £85,000 (€95,500) per customer per bank. You can check here (http://www.fsa.gov.uk/Pages/consumerinformation/compensation/limits/index.shtml) for an overview of UK financial compensation schemes.

Show your metal

Mr SK writes from Co Sligo: On January 28, 2000 I invested €50,789.52 with New Ireland in two Evergreen funds and a European Securities Fund. Between them the units were worth €54,272.31in October 2010. Should I cash I the above or leave it for the present?

 Oh dear. The fund values you have been quoted do not include the 30% exit tax that you will have to pay on the €3,483 ‘profit’ your funds have earned, leaving you with a net profit of €2,438 on your initial investment or a cumulative return of 4.8%.  Divide this by 11 years (now) and you have achieved a net return of less than 0.41% per annum. Adjusted for inflation, which in Ireland is reckoned at about 2.6% per annum over the lost decade you’ve lost over 26% of the spending power of your original investment. 

 Had you simply left your €50,272.31 on deposit since 2000, you would have earned a real, inflation adjusted return of - co-incidentally -  0.4%, less DIRT, according to a recent Credit Suisse (?) survey.

Deposit accounts come with their own downsides, but they were clearly superior to poor performing, high cost investment funds. Can I suggest instead of leaving all your money in cash – if that is what you decide – that you at least consider converting a small amount of it into ‘real’ money as well – gold and silver, that can’t be devalued at the whim of central bankers and that in the past has performed well during periods of inflation?

Rent clawed back

 HN writes from Dublin: Soon after purchasing his house in 2007 a nephew of mine lost his job in the construction industry and was forced to emigrate to the UK to seek employment, save his house and honour his financial commitments. He has had no option but to rent the house to supplement its outlay of mortgage, insurance, upkeep etc.

 Under the current tax code I'm told that he has incurred a tax liability (in the region of approximately €9,000plus interest penalties by letting out his house within 2/5 years of purchase as a family home. Is this correct? Surely this is not equitable or right in this current environment? Finally, I understand that properties governed by the Mortgage Code of Conduct are (a) family homes or (b) the only property owned by an individual within the State?

 To qualify for an exemption from stamp duty as a first time buyer, your nephew had to be the owner-occupier.  Because he purchased his house before December 5, 2007 and then rented it quite soon afterwards, that relief would be subject to a clawback.  Until that date the claw-back period was five years; for purchasers after that date the claw-back period was reduced to two years. 

 From your letter it sounds as if it isn’t just DIRT relief that accounts for his tax bill.  If he did not declare his rental income or file an annual tax return, he would have also incurred penalties, to which you refer.  Fair or not, these were the regulations that applied to getting the property tax break in the first place.  Your nephew should consult a good tax advisor to see if he has any wriggle room with the Revenue Commissioners.

 The Mortgage Code of Conduct specifically refers to family homes only and not investment or rental properties, but Ulster Bank told me recently that they are meeting with customers having problems repaying their rental properties in order to restructure these loans without resorting to legal procedures.  Your nephew should also make an appointment to see his Irish mortgage lender.

TOO MUCH SPENDING ISN’T GOOD FOR US EITHER

One half of the population is saving; the other half is in debt.  As the quarterly consumer spending and debt repayment statistics from the central bank show, no one is spending more than they have to; even the new car buyers are made up of mostly people replacing their older vehicles via the car scrappage scheme or the huge discounts that the car manufacturers are offering.

Meanwhile, businesses all over the country, already starved of overdrafts and new capital are closing for lack of custom.  Yet the nation collectively, in not broke, even if the banks and that state itself is:  the latest Central Bank figures show that there is over €93.2 billion in household savings as of February 2011. This figure is down substantially – by €700 million – from January and by over €3 million since last September, which of itself is worrying since it reflects the impact of higher taxes, unemployment but also the fear of the future austerity that the new government is now also committed to by keeping to the existing EU/IMF loan terms and interest payments at least for the next four years.

So what can be done, in the light of this unfortunate state of affairs can be done to at least encourage the heavy savers to ease up a little and take the family to dinner more often, buy a new spring wardrobe, go on a weekend break in our glorious east, west, south or northern counties, or even get the garden landscaped or that kitchen extension?

Is there any way to get those people who have savings as well as earned incomes or pensions, to feel confident enough to stop postponing a purchase or project that in itself isn’t going to do anything to convince foreign bondholders to stop treating us like pariahs or recapitilise our bust banks?

Confidence is certainly the key at this very basic level and restoring it amongst those who have some disposable earnings or savings so that it makes a real difference in your community is where it will start.

I know there is some disquiet about the on-line, discount voucher companies that are operating now in most towns and cities in the country. The offer huge discounts in many cases for goods and services if you buy a voucher and cash it in with the merchant within an advertised period.  Some merchants are unhappy at the amount of pressure they now feel under to participate – so widespread are they becoming. Others aren’t happy with the margin they lose to the organisers on top of the discount to the new customer, but I know a number of retailers that I’ve dealt with through CityDeal.ie (which is part of a UK company) who are thrilled at the new business that has come in their door as a result of their participation in the scheme. 

The people who buy the voucher (which they only offer every few months) tell other family and friends. The purchaser inevitably spends more than the discount on drinks or dessert if the discount is on the two main courses from a restaurant, for example.  They become repeat customers in many cases.

The vast amount of money that we have been saving over the last two to three years – as much as 11%-12% of disposable income at the height of the saving boom last year, has for many older people, who may have been prudent savers anyway (a very good thing) has for some become a habit based on fear and foreboding.

Even pre-retirees, people in their 50s and early 60s, who would have also had more disposable income because they were, as a group, carrying less debt an earned more than 30-45 year olds who are carrying the bulk of the personal debt in this country, have cut back, even though they represent most of the theatre audiences on any given night, the ‘regulars’ in many restaurants and the buyers of anything reckoned to be a luxury:  expensive grooming sessions, higher value clothing, jewellery and travel.   However, even they are spending less than they did before the recession.

If local businesses – and our friends and family who run them and work in them -  are to survive over the next few years we, the people -  not the banks and not the government - are going to have step up to the plate and spend some money with them.

Yes, our taxes are going up.  Yes, state services will get more expensive and we’ll be paying more for lots of essential things that are out of our control like petrol and much of the food we import.  But there are also plenty of opportunities to cut the price of many of the necessities:  electricity and gas prices have become very competitive and now the ESB is even in on the game. Go to www.bonkers.ie to see how you can save on your fuel costs, mobile, landline phones and broadband/TV provider (I switched to UPC and saved over €500).  (The bonkers.ie also shows you how to make big savings on mobile, broadband and landline bills and lets you find best current account, credit card and savings rates.)

It will be Easter soon.  Be generous.  Treat yourself to a CityDeal.ie or LivingSocial.com voucher offer in your community. Take some friends or family along, especially if they’ve been struggling to meet their bills and don’t have a stake in that €93 billion sitting in the country’s deposit banks and credit unions.

It could be a long recession.  We need to develop some good spending habits again.

High Irish interest makes the UK a land of low return

PL writes from Cork: I am retired with Stg£80,000 on deposit in Nationwide UK.  Is it better to convert to euros and invest in Ireland or look for a better return in Britain or elsewhere?

Interest rates offered by some Nationwide UK Ireland demand accounts are much higher than equivalent deposit rates you could earn from a UK account. Here, for example, the easy access demand account offers 3% gross on a minimum balance of €2,000; in the UK is it just 0.45% or 0.55% (the latter if you are over 60) on minimum sums of £. However, the three year, on-line fixed rate in the UK range from 3.85% to 4.10% gross interest (depending on the size of the deposit which starts at £1) compared to the three year return you will get here from Nationwide UK of 3.3% gross on a minimum balance of €3000.  You don’t say what sort of account you have with Nationwide UK, but you would want to compare UK savings rates with your existing return and what foreign exchange costs and commissions are involved before you transfer any money here to a solvent, deposit taker here in Ireland, which of course includes Nationwide UK Ireland.    The www.lovemoney.com site is very good for comparing up to date UK savings rates.  If this £80,000 is all your money, you should also read up on the devastating effects that inflation and tax (if you are eligible for DIRT) can have on the spending power of your savings.  Inflation is c4.5% in the UK and is creeping up here too, so you might want to consider diverting even a small amount of your money into a non-cash asset or investment fund that would counter the loss of spending power.  A good fee-based advisor could certainly help identify such assets.

In a fix

DC writes from Limerick: We recently bought a house, have just finished refurbishing it and have an option from AIB to fix it over two, three or four years. Our mortgage term is for 27 years. I am currently a mature, full-time student, working part-time while my wife works full-time in the educational sector. She is down about €400 a month after levies and USC.  For how long should we fix our mortgage, considering the current climate and proposed ECB rate hikes over the coming months?  I will possibly be staying in college to pursue a Masters or PhD after I finish my undergraduate studies. We have one child and one on the way, so money will be tight for the next while.

I think you’ve answered your own questions.  If money is already tight, your short to medium term earning prospects are diminished because of your studies and another baby is on the way, fixing your mortgage repayment makes a lot of sense, assuming of course that you can afford the higher repayments.  If ECB interest rates are raised two or three times this year - as many commentators expect they will be – and again next year, then your decision to fix your rate now will certainly pay off AND provide peace of mind.

As interest rates rise, the banks may increase the fixed rate or even withdraw their existing offers, so you may want to make up your mind sooner than later, However, before you sign any fixed rate contract find out what penalties will apply if you have to break the contract before it matures.

Border dispute 

SG writes from Dublin: I wonder if you could help me with a pension query. I work for the UK subsidiary of a French multinational and am based in Ireland and am paid in euro. My employment began in January 2004 but because of the delay in having a suitable pension arrangement in place for Irish employees it was not possible for me to organise my current PRSA plan until January 2007. I had to instigate this process myself. The UK pension plan did not seem to me to be a suitable option for Irish employees resident and paying tax in the Republic of Ireland but if it had been I would have been entitled to the relevant employer pension contributions from April 2004, which was approximately 4% of my salary.

Given that no arrangements were in place at the time is it possible, or is my employer obliged, to pay the pension contributions from April 2004 to December 2006 retrospectively into my current PRSA? I have asked and they have said no. This seems rather unfair as my understanding is that company pension contributions form part of my overall remuneration.

Unless your contract of employment states that you are eligible to join the company pension scheme and they are obliged to make contributions at an agreed rate, there is no obligation for your company to make retrospective contributions for the period in which you were not in a pension scheme.  If there was no occupational pension scheme in place at the Irish division of the company in 2004, the company should have arranged, under Irish pension regulations, to put a group PRSA in place for the employers to join.  You would not have been obliged to join it – you could have purchased an individual PRSA or even a private pension known as a retirement annuity contract (RAC). Employers are not legally obliged to make contributions to PRSAs, but if the company operated occupational schemes in the UK or France it would not have been unreasonable for you to ask them to make a contribution to your PRSA.

You might want to consult the Pensions Board if you are not sure about the company’s contractual obligations to its Irish employees or whether you have any grounds to seek retrospective contributions to your PRSA.

The rules of most pension schemes are quite transparent, but your firm operates across three borders and there may be something in your employment contract or the company’s operating rules that requires them to fund their Irish employees pensions.  You can reach the Pensions Board at LoCall 1890 656565 or www.pensionsboard.ie

We haven’t hit rock bottom yet in the property market

House prices in Ireland are still falling, reports the latest Daft.ie price survey, just not at such a brutal pace as we’ve experienced in the last couple of years.

It would be great if the property price bottom was really in sight – they are down another 3.1% over the last quarter, but I think there’s more downside to come, and that also seems to be the view of Eoin Fahy, the chief economist for Kleinwort Benson Investments, who wrote the commentary that accompanies this latest survey. 

The great first wave of dramatic price falls is over, he suggests, but the second down wave could be on its way, this time directly related to the number of defaults and repossessions that are happening, and the hike in interest rates from the ECB and lower value loans, when the banks do start lending again.

There is a theory that every financial correction is equal and opposite to the deception that preceded it.  Professor Morgan Kelly of UCD, who predicted the great property bubble collapse, subscribes to it and so do I: a mere 45% average fall in prices since 2008 suggests that there is some way to go in my Dublin city neighbourhood where houses that were sold for a million euro at the height of the boom are remaining unsold at less than half that price.

Confidence will really only return when houses like mine are genuinely affordable again to people who aren’t worried about the security of their jobs or their savings and the banks are functioning normally.

Meanwhile, two readers, pointed out that I missed an important point last week when I was commenting on the ongoing risks some parents take by going guarantor on their adult children’s mortgages.

“I didn’t go guarantor a few years ago when my son asked for my help because I thought the asking price for the house he wanted was ridiculous,” Mr RD from Dublin told me.  “We’re all glad it didn’t happen, and today he not only has more money for his downpayment, but the risk I would take in going guarantor would be much less too because the asking price is half what it was three years ago.

“Unfortunately, the bank isn’t letting parents go guarantor anymore, and even though he doesn’t even need my help, they say they won’t lend him the money now because they don’t think his employment is very safe.  You can’t win.”

A Waterford reader, Mr KW says that a more sensible approach, “is to go in as a joint buyer. 

“What’s the point of going guarantor if you might end up the owner.  I’ve told both my children that if they are really stuck I will consider buying a quarter or maybe a third of their starter house with them.  So long as they don’t lose their job, this arrangement should make it easier for them to make repayments, especially now that prices have fallen so far.”

Shrinking savings

One of the reasons some of our European neighbours are reluctant to forgive us our debts, or even reduce the interest rate they’re charging us on the billions they’ve loaned us, is that they think we all pay ourselves too much. 

They say we pay less tax and social insurance than they do, that our civil and public servants make more than theirs – and take more holidays - and that our social welfare payments are higher than theirs. 

Even middle class welfare is higher here, they say, with Irish parents paid €140 a month (€150 last year) for the first child compared to €100.40 in Finland, €147 in Germany, (in the form of tax credits),  €110 in the UK and just €11 in Poland. (The figures come from 2010 OECD Family Database 2010.)  

That our cost of living and personal debt is higher cuts no ice, and it’s our own fault we didn’t sort out the child-care problem during the boom years when the money was available.

With this kind of subjective ammunition being fired at us, let’s hope the Germans, French and Finns don’t stumble across the latest Central Bank figures on our household savings, which now amount to over €93.2 billion or nearly €22,000 per man, woman and child.

With this kind of money resting in our deposit accounts, and the state-owned banks paying unsustainable 3.5% interest rates, our European friends may suggest we start using our savings if we find the existing EU/IMF debt package too expensive and we’re unwilling to balance our national budget.

They have a point – senior civil and public servants are paid more than their prime ministers, let alone our own, but since last September, household savings here have fallen by over €3 billion from €96.22 billion to €93.25 billion.  Since January over €700 million has been drawn down. It hasn’t all flowed out of the state to safer banks; the bulk is being used to meet day to day bill and the shock of the new universal social charge (USC).

If that rate of depletion continues over the course of this year, the state household nest-egg will be worth €8.4 billion less.

Give us an Irish Isa

Some day, when the bank and debt crisis is over – there’s no harm in a little optimistic thinking – and we become a normal society of prudent savers and careful spenders again, whoever is in charge of the Department of Finance should consider the merits of the excellent Individual Savings Account or ISA that our British neighbours have enjoyed for many years.

The UK  2010-11 tax deadline for choosing a cash or stocks and shares ISA has just passed but the limit that you can save, entirely tax free for 2011, has been raised to £10,680.  Anyone over the age of 16 can put up to this amount of taxed income or earnings into an account for as long as they like and will pay no tax on the return.

As tax relief on pension contributions is tightened both in the UK and here, the ISA is expected to become a viable alternative to expensive, complicated pension plans, especially for the self employed or workers whose (few) employers don’t contribute to PRSAs.

Introducing an ISA would certainly be a quick solution to the uncertainty surrounding the funding of personal pensions at the moment.

STRESS TEST YOUR OWN FINANCES – LET THE BANKS WORRY ABOUT THEMSELVES

We’ve heard a great deal about stress-testing lately and how this latest bank stress-testing exercise if probably one of the most expensive cases of shutting the barn door after the horses escaped in the history of global finance.

Fundamentally, the idea of a stress-test isn’t a bad thing.  Engineers and architects do it all the time, thank goodness.   On a personal level, we all probably instinctively weigh up the pros and cons before we make really important life decisions – like taking up or leaving a job, getting married, having another baby.

Financial choices are especially suitable for dispassionate stress-tests and a recent mortgage repossession case before the Commercial Court certainly proves how badly things can turn out without one.

The case involves a couple who agreed that their son would remortgage their family home in order that he could buy an investment property. The son failed to keep up the repayments on the new €135,000 loan, and built up €40,000 worth of arrears.  The total debt is now €170,000. He has done a flit, and the parents, who cannot repay the arrears, have been given until next January to find alternative accommodation after which the sub-prime lender will take possession of the property.

High cost sub-prime loans haven’t been called ‘financial weapons of mass destruction’ for no reason. This loan was clearly not stress-tested properly by either the lender or the parents; if they were unable to keep up payments or make up any loss from their own resources, they should never have allowed the loan to proceed.  

With thousands of parents having gone guarantor during the boom years on mortgage loans for their adult children, they should be doing their own version of a stress-test right now. Do you have the resources to repay the loan if your child loses their job or their income falls? Could tenants be installed quickly if needs be? Could the property be sold if it is in negative equity and could you raise a new loan to meet any shortfall?  

There are loads of examples of transactions that should be stress-tested – ideally before you sign a contract or make the commitment, starting with:

Buying a property:  Always ask the lender for a printout of the monthly, annual and total cost of repayments at interest rates that are at least 2%-3% higher than the offered rate and over at least three different repayment terms of 20, 25 and 30 years.  The effect on both monthly cash flow and the total cost of the property will astound – and humble – you.

Hire Purchase agreements:  Buying on the never-never is expensive and can be very messy if you want to terminate the contract before the final payment. There may also be a final ‘balloon’ payment.  Before you buy this way, see if you can purchase the item using a cheaper credit union or personal loan.

Private Education:  Sending a child to a private school is a huge commitment and one that many middle-class parents aspired to over the last 20 years after third level fees were abolished.  Expect to pay, at today’s fee rates, c€6,000 a year or at least €36,000 for one child over six secondary school years.  Is this expense really affordable?  Do you have more than one child? Can it always be funded out of income or savings, or is the family going into debt to afford this long-term commitment, say, by using credit cards, personal loans or drawing down equity in the family home?

Investments:   Tens of millions of euro in after-tax savings have been lost over the decades by unwise, badly considered investment purchases.  Today, investors are locking into expensive fixed term investments that can result in a loss of capital or other penalties if you withdraw your money early. They should be stress-tested based on worse case scenarios in which you might need this money sooner.

Retirement Planning:  Ireland’s deep fiscal and national crisis means that everyone should be stress-testing their retirement provision, whether they work for the private sector, public sector or are in receipt of a state pension.  Major pension tax relief reform is inevitable and is going to impose a ceiling on private pension funds, tax free lump sums and limit the size of annual pensions on which tax relief can be claimed. 

Civil and public service pension payments are mainly unfunded by the employer (except in some semi-state companies) and are unaffordable and unsustainable. As with the state old age pension, today’s workers need to stress-test their future pension income expectations. 

Everyone needs to work out how much they think they will need to live on in retirement and then come up with a plan to make up for the inevitable employer/state/personal shortfall that all three are facing.

Stress-testing is something that financial advisors (or the officials at MABS) are very good at.  Pay this person a proper fee for their time and expertise…and then rest more easily.

Be ware of putting your nest egg in one basket

MO’L writes from Dublin: Your reply to PC in last week’s Sunday Times on An Post risk makes me uneasy. Last year I put most of what I managed to save over more than 30 years into both An Post 5.5 year savings bonds and three year certificates. I was made redundant two years ago and am still unemployed. This represents every last cent I have and what I really must know is, was this a dodgy decision on my part given your hugely well-informed opinion on the foolishness about giving the State more money just to bail out the banks? To be more precise, are the two An Post schemes I mention here as potentially exposed in your opinion as the ten and four year bond schemes referred to in your reply to PC? Is it time to think about withdrawing my money altogether before the state of the State becomes so bad that default is inevitable?

I can only repeat what I have written before: you should not leave the bulk of your wealth in a single asset, whether this is cash, property, bonds, equities, commodities, precious metals, etc. While each asset category has its strengths and weaknesses, investment markets are fickle and can be volatile.  Cash is particularly vulnerable to inflation risk; diversification spreads your risk.

No one knows for certain if the Irish state will default on its debts, or what will be the outcome. If you are confident that An Post will always honour its deposit commitments even if there is a sovereign default, then you should be able to leave your life savings with the state-owned deposit taker and sleep peacefully.  If you are not reassured, then consider moving some of your money to other, non-Irish deposit institutions or to other assets or investments that suit your needs for income and security.  If you encash your bonds or certificates before the final maturity date, the total interest will be less than if you kept them for the entire term.

Rate dilemma

 JO’S writes from Limerick: I have a 35 year, €135,000 mortgage which I started in 2007. For the first three years it was on a fixed rate of 5.60% but has now come to an end. It automatically switched to a tracker loan for the remainder of the term. The interest rate I am now paying is 1.15% above the ECB rate so I am now paying 2.15%. I'm reading various reports that interest rates are due to rise once or maybe twice in the coming months. My question is, do you think that this is going to become the norm with interest rates on the rise for the next few years and do you think it would be wise to fix or try to continue with the tracker?

The 2.15% interest rate you are now paying is 3.45% less than your previous fixed rate. I reckon this represents a savings of at least €200 a month, or €2,400 a year.  At 3.7% over five years, PTSB’s fixed rate – the best one on the market at the moment - is 1.55% higher than your current tracker rate, but still lower than your previous fixed rate. However, this advantage wouldn’t last long if the 1% ECB rate started to rise by 0.5% increments. 

European interest rates have been kept artificially low to stimulate economic recovery, but price inflation is a growing concern. The situation is extremely fluid however, and there has even been some wishful thinking expressed that the European central bankers might postpone a rate rise because of the developments in Japan and North Africa, which could stifle economic recovery.

This isn’t an easy decision:  do you opt for five years of payment certainty or do you stick with a 32 year guarantee that your mortgage rate will never go 1.15% over the ECB rate and hope that even if the ECB rate were to rise significantly, it wouldn’t stay there for too long.

Default Position

WO’S writes from Dublin: The first query relates to both prize bonds and/ or post office bonds invested over a fixed period. If the amount invested by an individual exceeds €100,000 and the government does default is any of this sum reimbursed under an EU guarantee? The second query relates to capital gains tax. Can a loss by an individual in financial shares be offset against a capital gain on the sale of an Investment property? In order to avail of any offset does the loss have to occur before the gain?

Yes, you can offset your capital losses from shares against a capital gain made from the sale of property. The loss can be carried forward in time until it uses up the value of the gain.  As for your first question, the Irish state alone guarantees any money that you save in post office bonds or in prize bonds. Neither product qualifies for any of the Irish deposit guarantee schemes, nor are they guaranteed separately by the ECB or any other European agency.

Missing Years

CMcC writes from Dublin:  I am a 45 year old nurse, with a lot of interrupted service during my career, who started working for the HSE in 2005. As a member of the PNA union I get advice from Cornmarket. The adviser has suggested that I try and top up my pension with a guaranteed AVC. I vaguely remember a PrimeTime programme a few years back on Cornmarket and AVC's which makes me think they were not a good idea. Are AVCs suitable in my situation or would a PRSA be better?

The wisest thing for you to do is to engage a truly independent, fee-based advisor to help you address your retirement needs, especially since pension tax relief is scheduled to be reduced to the 20% standard rate by 2014. Cornmarket Financial Services are a division of Irish Life Permanent Group and its commission-paid sales people do not offer the same selection of products or advice to the civil and pubic service union members than is available from a truly independent, fee based advisor. Set up and maintenance fees and charges are notoriously high, so every insurance policy or investment you have ever purchased from Cornmarket should be independently reviewed.