Jill Kerby

 

The Fair Deal Pyramid Scheme Collapses – What Can Be Done?

 

It certainly seemed like a ‘Fair Deal’ – for a short while.

But like all pyramid schemes, the Nursing Home Support Scheme was just another promise the government could never keep.  And like every pyramid, or ‘Ponzi’ scheme, the people who got in first are the ones who benefitted the most – in this case the 22,000 elderly people already in €1 billion annual Fair Deal scheme and the nursing home operators.

Many older people worry about how they will pay for nursing or institutional care in their advanced age– and for good reason. It is extremely expensive.

Nursing homes can cost from about €875-€1,250 to €1,245-€2,100 a week, depending on whether you are accommodated (and where) in a private or public institution. The public nursing homes, run by the Health Service Executive, charge the higher fees.

Until the Fair Deal subsidy programme was launched, the nursing care subvention rules meant that only those people with little or no means would be able to claim a suitable state subsidy for their care. Everyone else had to pay out of their own resources and this often involved selling the family home, using all their pension income or even tapping into funds made available by their families.

Last week, it was revealed that public nursing homes, run by the HSE are charging fees as high as €2,139 a week, about twice the rate charged by private facilities.  The average Fair Deal subvention is about €650 a week and it is estimated that there are as many as 500 new net entrants to the scheme each month (replacing those who leave the scheme or die.)

As we know, public service costs are often much higher than those of the private sector – it is the price we pay for a government providing services that the private sector usually provides more efficiently.

It comes as no surprise then to hear that the €1 billion budget that the HSE allowed for the Fair Deal scheme has already run out for 2011.  It isn’t just because of the way costs are dealt with, but also because of the inevitable high demand for a service that passes the bulk of a cost away from the patient and over to the taxpayer.

The 22,000 patients already in the system will be unaffected by the money running out, but all the new applicants will have to go onto a waiting list until the scheme gets another injection of cash.

The penny about the Ponzi-like nature of this scheme has certainly dropped so far as the new Minister for Health is concerned.

He understands now that a programme that isn’t property funded – with real money going into a real investment fund and being allowed to grow for many years to produce a large enough sum to start drawing down (like the now diminished National Pension Reserve Fund)– is never going to be sustainable.  The New Deal scheme was always going to have to compete against all the programme that are paid from general taxation.

So what can elderly people or their families do if they are desperate to fund a nursing home place?

Those people in immediate need will be accommodated in acute hospitals, said the HSE spokesperson said last week.  The government will try to find a new source of funding.

The collapse of the property market means it will be difficult to sell the older person’s family home, if they have one, at anything but a fire sale price.  Since renting it out will not generate enough cash to pay even a €4,000 a month nursing home fee, the fire sale may have to be considered.

Equity release loans against the value of the family home from the likes of Seniors Money are not available if the person is entering a nursing home; in today’s lending climate, it may also be difficult for family members who want to help, to raise a mortgage on their own home, even if they will inherit the property.

However, any payments made by a third party to meet someone else’s nursing costs are tax-deductible at the benefactor’s top rate of income tax. Collectively, siblings may be in a position to meet the nursing home costs from their own income with the help of the income tax relief.

This is one of those ‘something will have to be done’ moments.  Since ‘nanny’ – as in ‘nanny state’ - has run out of other people’s money, the families and friends of the older person in need of sheltered and secure nursing care may have to act.  Ask your tax advisor and solicitor along to the meeting.

 

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Pension fund levy is an unprecedented raid on your savings

Last week the government crossed a line. It announced that for the first time it would dip into the private wealth of its citizens by helping themselves to the money you have allocated to pay for your retirement.

The 0.6% levy, worth an estimated €1.9 billion on the value or €500 a year on average, will impact on company fund members, PRSAs and self-employed pensions, and AVCs, which many public sector workers use to top up short service years. 

The pension levy will affect approximately 800,000 people, of whom 65,000 are receiving their pensions directly from their company’s pension fund and could be affected.

The levy, if it proceeds, must be raised either by selling the assets invested in the scheme; by using the contributions being paid into the scheme; by reducing the benefits paid to the pensioners (where applicable); by selling company assets (machinery, property) in lieu or by making workers redundant and passing on their old wages.  Many schemes, already underfunded, will find it very difficult indeed.

Meanwhile, not a cent will be collected from the highest earning politicians or civil servants whose final pension incomes of €100,000 plus are funded from direct taxation in equivalent funds worth millions, but which are finally being capped at €2.3 million.

Holders of Approved Retirement Funds, the post retirement investment account that many well off higher earners avail of will not pay the levy either. However, their ARF is subject to highest rate income tax on 5% of the value of the fund. A typical ARF worth €235,000 will have to top rate tax on €11,750 even if it is not drawn down as retirement income.

Having to pay the 0.6% levy on the value of a pension fund for four years will have a range of unexpected consequences, especially on the growth of the fund. If the government proceeds to lowering tax relief to 20% only; if the fund performance of a typical Irish managed pension fund remains at just 1.3% - the annual rate over the last 10 years, or if it falls further, this levy could cancel out all new contributions and even push the fund into a negative return.

Today it is estimated that the average employed private sector worker’s pension fund value is worth somewhere in the region of just €100,000 at age 65.  This fund will buy an annual pension worth just €3,500 and €5,000 a year.

This figure is shocking, especially compared to the average public sector pension of €20-€25,000 a year which requires an equivalent invested fund of €500,000-€600,000. (Public sector workers are certainly now paying more of their income for this kind of pension and medium to higher earning public sector pensioners even saw their incomes reduced in last December’s budget, with higher earning pensioners losing up to 12%.)

Funding a pension is extremely expensive, no matter what sector you belong to and especially if you start saving later than sooner and you don’t have top performing assets under investment.

Which is why the government’s decision to confiscate the savings out of private pension funds is so shocking and, and as a retrospective levy, perhaps even unconstitutional.  The law of unexpected consequences is likely to come into effect too with a sharp fall-off in pension investing and a much bigger retirement crisis in the future.

Meanwhile, anyone with a private pension or AVC fund (as so many public sector workers have) should speak to their trustee or an independent advisor about the levy and tax relief changes.

No one is arguing that getting the unemployed back to work is an important priority. Targetting retirement savers, the vast majority of whom are not saving enough in the first place, is ridiculously short-sighted.

Taking their private savings when the huge public pay and pensions bill has not been tackled, or other overspending and government waste has not been tackled and billions of euro are spent to prop up insolvent private banks and repay European bankers and bondholders is inexcusable. 

The government opted for the pension savings of workers because they thought it would be easy. Ministers are insisting the sacrifice of the few (and not all pension recipients including themselves) is for a good cause – the job’s initiative – but they’ve no idea how much the programme will cost, or how many full-time jobs will be created. 

If they have no qualms about stealing your savings for this good cause, they won’t have any about dipping into your bank, post office or credit union account when the next good cause comes around.  You now need to reconsider the safety of your cash savings, and not just from higher DIRT rates.

Eddie Hobbs suggests that every private pension fund holder send a short letter to their trustee or administrator instructing them not to act against any of the assets in their pension “without seeking written authorisation from me as beneficial owner of the assets.” 

 You can download the letter from Eddie’s blog at www.eddiehobbs.com .

 

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Theft of old age savings is the thin end of the wedge

The black propaganda coming out of the mouths of government ministers after the announcement of the four year 0.6% pension levy last week is the stuff of genius – George Orwells’. 

They have taken a leaf out of The Ministry for Truth guidebook in his brilliant novel, 1984: prudent saving by 800,000 members of private pension funds is now being depicted by the coalition as profiteering, because they received tax relief on their contributions. (This is taxation that will be repaid from their retirement income.) 

Meanwhile, the Big Brother politicians and civil service mandarins, whose pensions will be paid from the equivalent of pension pots worth up to €2.3 million, have arranged to exempt themselves from paying a cent for own pensions fund will be worth up to €2.3 million, and are paid out of taxation, are entirely exempt from paying a single cent.

Ministers are also justifying the levy on the grounds that pension fund managers were not patriotic enough over the years and invested too much in overseas assets.  Ironically, the same managers were previously condemned by the Pensions Board, the state pension regulator, for investing too much over the years in the tiny Irish stock market and for the catastrophic fall in Irish pension fund performance since 2007.

The Taoiseach and other ministers are also claiming that it will be the pension ‘industry’ that will have to pay this ‘modest’ 0.6% levy, but fail to mention that it is not the industry’s money that has to be paid. This is the actual savings, the deferred income of every pension fund member. Not a cent is substantial profits the pension industry extracts in fees, charges and commissions every year, even if the pension fund value drops for each of the next four years.

Why were they not also levied?

The government has crossed a dangerous line by targeting private savings, which do include those of the semi-state sector.

 The Irish Association of Pension Funds, which represents pension schemes, estimates that the ESB pension scheme will have to take at least €18 million a year or a total of €72 million from its members’ savings over the four years.

The average managed pension fund has delivered a disappointing 1.3% annualised return for each of the last 10 years because of poor asset allocation, stock market losses and high fees and charges. If members have to hand over 0.6% of the fund value and performance stays the same, it will reduce the return to just 0.7% a year, more than four times below the rate of inflation. 

Contrary to the ministerial spin, the common man’s private pension is very modest indeed.

The average member of a private scheme retires at age 65 with a fund worth an estimated €100,000. From this he can expect an annual private pension of between €3,000 and €5,000. If they qualify for it, they will receive the state pension of €12,000 for which they paid PRSI contributions as well.

The propaganda is already working on people who don’t understand the complexities of pensions, who can’t afford a pension, have no earned income anymore, work for the state and have been forced to take pay cuts and more in pension contributions or just think that all privately generated wealth is bad.

Perhaps they don’t care that the consequences of the levy (and the lowering of tax relief to the standard rate only) will hasten the end of private pensions and even cause considerable unemployment.

What might dawn on them eventually though, is that if the government can get away with stealing nearly €2 billion over four years from personal pension savings to fund what they claim is a good cause, they won’t have too many qualms about stealing another €2 billion from private deposit, credit union and post office accounts when the next good cause comes along.

 Since bank savings are no longer safe from confiscation (and not just a DIRT tax on interest) some people will be tempted to withdraw their cash from their bank or credit union and stuff it under their mattress. It will then be at risk from ODCs - ordinary decent criminals.

A better option to your mattress is to do what the really rich and insiders do (and even some politicians) and that is to legally open savings accounts outside this jurisdiction, or even outside the increasingly unstable eurozone.

Many advisors now suggest spending some of your euro savings to buy gold and silver coins. Even though some of us believe them to be real money, the government doesn’t. They look upon gold and silver coins held in private ownership to be a ‘good’, just like a suite of furniture or a picture you might buy to hang on the wall.

Once bought – and you don’t need to seek anyone’s permission to do so – the gold coins are yours alone and at least for now, are not subject to any levy or even capital gain tax unless sold for a profit, just like the three piece suite.

Since this financial crisis began, the vast majority of Irish people, to their huge credit, have been willing to pay the higher rates of income tax, social charges, levies and public service charges. Many still generously believe that our civil servants and politicians deserve to be amongst the highest paid in the world.

 

That may not last forever.

 

Germany calling  

The levy on private pension savings will only heighten the fear of many older people in particular about the safely of their life savings.

 

Thousands of people have already moved their money into non-Irish banks but if my postbag is anything to go by, many others would like to move some of their money out of Ireland altogether but don’t know how to.

One well known advisor, who asked not to be named for now because he’s fully committed to servicing his own client’s needs before taking on any news ones, has cracked that nut.

He’s made an arrangement with Deutsche Bank to facilitate his clients to open euro deposit accounts that will pay .5% on demand or 1.9% for one year fixed and to purchase German government bonds. 

He is charging a flat fee of €450-€500 on minimum sums of €200,000 which will be outside most people, but not well off pensioners or professionals with life savings. This cost, he says, works out at least as much as they would have to pay for return flights, accommodation, and translators, even if they could make their own banking arrangement.

 

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FIRST, YOUR PENSION FUND.  NEXT – YOUR SAVINGS?

 

This week the government was expected to launch a jobs budget with various

tax incentives for employers, training initiatives for the unemployed and

support for job creation ideas, such as a €3,000 cash reward for jobs

created by the great Irish diaspora.

 

Since this column has to be written well in advance I’ll assume the Tuesday

announcement went off swimmingly. No one can argue against the idea of

trying to find ways to get 440,000 unemployed people back to work.

 

There is a downside, however and it’s about how much such an ambitious

campaign with cost and who pays.

 

The way the government has chosen, is to impose a levy of between 0.5%-0.6%

on the retirement savings in the pension funds of 816,000 people who have

saving in private pensions.

 

These people are mainly employed in companies that have defined benefit or

defined contribution pension schemes, the self-employed with private

retirement pensions, people with flexible PRSAs (like contract or temporary

workers, many of them women), AVC holders (additional voluntary contracts

are used to top up inadequate years of service), and the holders of Approved

Retirement Funds, that can be taken out by people who want to delay taking

their full pensions.

 

Up to 65,000 people are pensioners whose pension income could be reduced

because of the levy; the government had to pass special legislation to allow

for their pensions to be cut if their companies cannot otherwise absorb the

levy. 

 

A good sized indigenous Irish company with say, 400 pension scheme members –

200 of them pensioners and 200 still working and €50 million of assets in

the pension scheme will have to pay €300,000 a year to the government under

a 0.6% levy. Such a company may have to make five or six workers redundant

each year to be able to afford such a tax, said pensions consultants Tower

Watson – or resort to making huge cuts in pensioners benefits.

 

A self employed person who may have spent 20 years diligently saving and has

built up a pension fund worth, say, €200,000 will have to sell assets worth

€1,200 each year four the four years if a 0.6% levy is imposed. It won’t

matter if the markets have failed for any of those years. They will have to

pay in the region of €4,800, money they will not have for retirement and

more importantly, money that will not be able to keep growing and

compounding for another 20 years. Regular readers of this column will be

familiar with the magic of compound growth.

 

Confiscating people’s retirement savings, and only some people’s savings at

that, since 380,000 civil and public service workers and politicians are

exempt from the levy, is really just an act of theft.

 

If I went round to my neighbour’s homes and demanded – with menaces – that

they hand over a percentage of their savings because my son needed four

years of job training, the Gardai would be called and I’d be arrested.

 

The government will do so because they can – and because they can also

further amend contract law to allow them to do so.  There is no escape.

Under the law, once you transfer your earnings into a pension fund you have

no access to it until you retire (or retire early due to illness or

disability). 

 

A 20 year old who joins a company today will have to wait 48 years – to age

68, the new retirement age for him – before he can access his savings.

That’s a lot of deferred spending, yet by prudently making contributions

into a fund he is ensuring a comfortable retirement and avoiding being a

burden on his family or god forbid, on the ‘generosity’ and ‘charity’ of the

state.

 

Levies, or stealth taxes – are a popular option in this country when

politicians cannot impose any more direct income taxes, like now.

 

This pension levy is just one of a number of new levies that were introduced

since 2008; the 1%-2% insurance levy is expected to pay for the Quinn

Insurance losses and wil be added to the existing 3% general insurance levy

which originated in the 1980s with the PMPA and ICI collapses.  Levies are

seldom abolished, once imposed.

 

Pension industry officials believe that between this levy and the loss of

marginal tax relief on pension contributions between this year and 2014, it

could result in the end of voluntary private pension provision.

 

Ironically, a number of them told me last week that the raiding of pension

funds to pay for a government-led jobs initiative (an oxymoron if there ever

was one) could instead result in considerable job losses in the pension

industry and in companies that may have to make workers redundant in order

to pay the pension tax.

 

Companies and workers will need to reconsider whether it makes sense to keep

making any further pension contributions, at least for the duration of the

levy; The self-employed and ARF holders (whose funds are already subject to

a 5% will need to discuss with their pension company or advisor what assets

should be sold. 

 

After this raid on the €75 billion worth of pension savings here, anyone who

thinks that the €93 billion worth of savings in deposit accounts is safe

from higher DIRT, an exit levy or some other form of confiscation, is

woefully naïve.  

 

This is the only real, accessible wealth in this country now, and this

government is determined to get more than its ‘fair’ share.

 

jill@jillkerby.ie 

 

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Credit unions have chance to be lenders of first resort

The Irish credit union movement has been handed an opportunity of a lifetime:  to fill the gaping hole in retail bank lending and to become a genuine force in providing affordable, accessible banking services. 

That it is now fully cooperating with the Central Bank in the establishment of a statutory regulatory framework for the credit union sector is about the best news anyone who has been turned down for a modest personal or commercial loan will have all week, and anyone who doesn’t have a credit union account should be hightailing it to their neighbourhood credit union to start the very simple process of becoming a member. 

This doesn’t guarantee instant credit, but it begins the process of becoming eligible for some, which is more than being a customer of AIB, Bank of Ireland, PTSB or the EBS can offer these days.  

It was never in the interest of the hundreds of thousands of existing credit union members for the ILCU to think they could avoid more vigourous regulation, especially since credit unions have not been immune from the economic downturn. 

Some credit union lending committees made the very same mistakes that high street bankers did – they lent too much money for property purchases and ‘lifestyle’ loans and were not always as careful as they should have been about stress testing the repayment ability of their member/borrowers.

That said, existing credit union legislation put a ceiling on the volume of lending a credit union could make and the regulators in the central bank appear to have intervened soon enough at some of the bigger credit unions that got themselves into trouble to avoid a complete melt-down. 

Ensuring the adequacy of reserves and other support mechanisms is what is behind the closer cooperation between the Central Bank and the credit unions, but once that is in place, the way is open for the credit union movement to develop into a much needed community banking service.

It’s only going to happen though if the common geographic community is expanded and tiny credit unions merge with nearby smaller ones which in turn merge with the more substantial ones.  They can then take advantage of their greater size, improve their technology and expertise and offer the standard services that frankly, anyone under 60 today expects of any institution into which they lodge a paycheque or pension:  access to an ATM and debit card, internet bill payment and cash transfers, as well a competitive deposit rate and lending facilities.

In other countries with strong professional credit union movements this is the norm and credit unions are popular and yes, even profitable, all the while holding onto their reputation for honest, decent, accessible providers of credit and safe harbours for savings.

The conclusion of the talks between the regulator and league and the introduction of legislation to make it so here can’t happen soon enough.

 

A sobering thought

 “Go easy, now,” said my friend, when I mentioned that I might write a comment about the research findings Aviva Health has published as part of Alcohol Awareness Month. “There is great merit in drinking…” 

 I’ll take his word for that – he’s certainly not an alcoholic and like everyone is finding life a bit taxing these days, pun intended.

 If you are typical Irish male, however, Aviva’s survey of (over 20,000 people over the past two years and five months) shows that you are spending €2,395 a year on alcohol and it you are a woman, €1,607.

 Since half those surveyed are drinking below those values, it sounds as if there are an awful lot of people – couples even – who could be making serious inroads into their credit card bills or significantly beefing up emergency savings accounts if they even cut their booze consumption by half.

 These figures also suggest that it isn’t just their bank statements that may be suffering.

Men are consuming an average of 15 units per week and women 9, which is below the guidelines of 21 and 14 respectively – limits at which point actual damage is being done to the person’s health.  

 The biggest drinkers are in Dublin and Louth.

Last year Aviva did a similar survey about smoking, with the very disturbing finding that smoking is on the rise, especially among young women. Anyone smoking a full-price pack of cigarettes a day – at c€8.50 I am told – can subtract another €3,100 off their personal balance sheet.

 

Flaws in the equation

The new National Consumer Agency (NCA) on-line mortgage rate change calculator (see www.nca.ie) is a handy, simple tool for the PTSB tracker borrower in particular who is thinking about taking up that 10% bonus payment offer if they make a minimum €5,000 overpayment to their outstanding balance.  It show exactly what the impact will be on monthly repayments and the total cost of the loan. (It also shows the impact of regular monthly overpayments.)

Unfortunately the calculator isn’t much use to anyone who wants to see the impact that shifting to a fixed rate for a few years will have. This is too bad since many financial advisors are encouraging borrowers, if they can, to fix their repayments before the ECB base rate goes any higher.

 This is the third calculator on the site, but the NCA might want to consider adopting the calculator on the www.thisismoney.co.uk site that does calculate the impact of fixed interest periods. Meanwhile Irish fixed rate borrowers can use the data by just substituting the pound sign for the euro.

 

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THE PROPERTY MERRY-GO-ROUND THAT JUST WON'T COME TO A HALT  

 

“I was just in Ireland and was amazed at how people believed that the worst was over and that a rebound in the real estate sector is now. The Irish economy is years away from bottoming out – as long as the country insists on paying off corrupt creditors instead of simply defaulting.”- Max Keiser

Sometimes you really need to listen to outsiders.  Outsiders, that is, who don’t have an axe to grind, like our ‘friends’ in Europe, or at the IMF. 

Keiser’s apocalyptic prediction was made in the same week in April that the first distressed auction of over 80 repossessed properties took place at the Shelbourne Hotel. 

You may recall the picture that appeared in the papers the next day:  crowds of people jostling on the Shelbourne’s steps as the Bail Out Troika boys from the IMF, EU and ECB were walking past from their gig at the Department of Finance.

Anyway, April was an eventful month, just like the previous 30, since that fateful night in September 2008 when the property-imploding bankers and the government set in train the process of bankrupting the state. 

Max Keiser (of Keiser Report fame on RT.com) was just the latest international pundit/journalist/broadcaster to pay us a visit and declare what is resoundingly obvious:  the Irish state is broke and should admit it. 

Meanwhile, he isn’t the first outsider to scratch his head about our continuing obsession with property. 

After addressing his many Irish fans at a public seminar that evening, the exuberant, irreverent Keiser (who is a big hit on Al Jazeera after calling for a fatwah on ex Goldman Sachs chairman and US Treasury secretary Hank Poulson), Keiser appeared on Tonight with Vincent Browne.

He was clearly unfamiliar with how the contrary Vincent is a national treasure who is supposed to instill fear in all who sit before him. Keiser, who described our failed bankers and regulators as crooks that we should have clapped in irons long ago, couldn’t believe his ears as Browne defended their right to their good names prior to appropriate legal action.  (At that point one of the other panelists should have explained to Max about the ‘best boy in the class’ syndrome from which we suffer.)

The Shelbourne auction was just another display of how delusional we remain about property, how easily we fall for scams.  It was astonishing to me – and no doubt to Ajai Chopra and his sidekicks that all those people who packed into the Shelbourne and who bid up nearly every property to as much as 30% over the reserve prices, were convinced they were getting bargains. 

They simply couldn’t wait to be parted from their money. 

Did any of them wonder if the 8%, 9%, 10% rental yields that some of those apartments and houses boasted would hold up when their capital values fall another 10% or 20%? Or when a real property tax is introduced?  When interest rates keep rising? When it dawns on the market that strict lending conditions become the norm?  These are not the circumstances by which one makes much of a capital gain. 

From a strictly investment perspective, property will be worth buying again in this country when absolutely no one wants to and when the idea of home ownership becomes so repulsive (because of all the above) that we all suffer from buyer’s regret. 

The gullible, the stupid, the clueless, the optimists, the carpet baggers and the deranged will by then have all thrown in the towel.  The newspaper property pages (such as they are) will have turned into a property column. 

That is the how a true bubble-inspired economic bust finally ends, and only then does Mr Market realize that the bottom has been reached and the asset class – property really is truly cheap, represents good value and is worth buying. 

That clearly hasn’t happened yet, not when some people think that the first repossession auction itself is ‘bottom’ signal.  You should know that the opposite is true when estate agents and mortgage brokers are jumping up and down again suggesting that first time buyers should now be confident about snagging their bargain dream house. 

This is a compendium of some of the remarks I’ve heard or read:  “These discounts show just what great bargains are out there”;  “These are ‘real’ prices and don’t forget, stamp duty is just 1%’’; “Yields on property are fantastic”; “There’s a shortage of property in Dublin and as these bargains are snapped up, future auction prices might not remain this low”.  

And the grand-daddy of all quotes:  “Negative equity doesn’t matter so long as this is your long term home”.
*                             *                                  *

It has been suggested that the majority of the auction buyers last April were cash-rich culchie farmers and fat cat professionals from Dublin’s leafy suburbs.   

Who knows, but let’s hope for their sake that their pockets really were stuffed with wads of euro and that if they were financing these so called bargains with mortgages that they fixed their rates.  Inflation, at least will help whittle away their debt. 

The collapse of property prices in Ireland isn’t over.  You buy into this market as an investor at your peril. You must buy into it as an owner-occupier in the clear realization that unless you make a substantial downpayment you will be in negative equity and will find it difficult to sell up, switch lenders or borrow more for many years. 

In a country as burdened by debt as ours, you’d really, really have to be besotted by the look and location of any house to actually slap down hard earned savings and brave a mortgage. Given how taxes, interest rates and the cost of living are all going up – but wages are not – this is a love affair that had better last.

That said, even uber-bear Max Keiser would probably agree that Irish property will someday be worth buying and owning again.  Bricks and mortar have a long track record in every western country, notwithstanding periodic bubbles and inflation-adjusted depreciation, of modest, capital growth.  

Someday, when our economic depression finally burns itself out, when the property overhang has been cleared or bulldozed, when NAMA is long gone and no longer distorting the market and when, someday, genuine demand returns for nice houses and apartments …then it will be worth investing in and owning property again.

Someday.  Just not right now. 

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‘Permission-to-live tax’ lets the reckless off the hook

 

Just because an election promise is made not to raise income taxes, doesn’t mean it won’t happen. 

If the money has to be found, the new government can always call the new revenue something else.  Here in Ireland we have a tried and tested definition - and it’s called ‘a levy’.

Last week, a proposal to introduce yet another levy to pay for the €620 million state bailout of Quinn Insurance, currently under administration, was leaked. It has been suggested that a levy of between 1%-2% will be charged on general insurance policies like motor and home cover on top of using funds in the Insurance Compensation Fund of just €30 million.  The levy could last up to 10 years.

Taxpayers are naturally wondering why they should be penalised for Sean Quinn’s reckless gambling on Anglo Irish shares, which has resulted in his business being taken into administration and now being sold off.

This is now the way the losses of too large fail private banks and corporations are being dealt with by the government, no matter how much further such socialised capitalism drives the state into insolvency.

We’ve been here before:  the collapse in the 1980s of the PMPA and ICI (Insurance Corporation of Ireland, by then owned by AIB) resulted in a decade long imposition of levies on all insurance customers.  They ended by 1993, but a 3% levy is still in place on non-like insurance contracts.  A 1% levy applies to all life assurance investments or protection policies, while the 2% health levy and 1% income levy are not subsumed, along with PRSI, into the new 7% Universal Social Charge.

Health insurance members now pay a flat €205 levy per adult member and €66 per child  to subsidise the loss-making state health insurance company VHI and the Revenue is intent on now collecting the controversial €200 parking levy, which employers who provide a parking spaces for their workers must pay, or pass onto their workers.

Meanwhile, the government is understood to be considering imposing a 0.5% levy on the value of all private pension funds as a way to pay for its new jobs creation programme. This would cost every retirement saver with, for example, a €200,000 accumulated fund, €1,000 every year.  (Such a fund, incidentally, will produce an annual income of about €10,000-€12,000 a year.)

If the additional 2% levy is applied to all general insurance contracts (and not just car and house cover) and the pension levy is also introduced, someone earning €50,000, could end up paying over €3,000 a year from levies on typical house, car, payment protection, travel and life insurance contracts, USC, private health insurance (for themselves and one child), a work-based parking place and a pension fund worth €200,000.

Levies fall between direct and indirect tax and are just as surreptitious as the latter.  But if you drive a car or own a mortgage, you have no legal choice but to buy the accompanying insurance.

Life insurance is not a luxury if you have young children nor is a pension fund if you believe like I do that all state pensions are already unsustainable.

To paraphrase the Austrian School economist Frank Chodorov, ‘a levy is nothing more than a permission to live tax’.

 

Negative thoughts

Only a trickle of people, mostly young couples, spend their weekends traipsing through show houses anymore.

With mortgage loans so difficult to secure, estate agents admit that many are just curious to see how low prices have fallen.

They know – and so do lenders - that some gloomy commentators suggest prices here could fall by another 30% before the bottom is reached. If that prediction comes true, even the luckiest, most prudent borrower with a substantial down payment, who buys now, could find themselves in negative equity.

Nearly a year after some lenders were first prepared to advance negative equity mortgages – a move that was quickly discouraged by the Financial Regulator – the idea has been resurrected as a way to help unlock the frozen property market.  It means people who are able to meet their existing repayments, but need to move to secure new employment or to accommodate a growing family, can sell their properties and move on with their lives.

This time, if it happens, the lending conditions are expected to be much tighter.

For example, a person with an existing mortgage of €300,000 on a house worth just €200,000 would be able to secure a new loan of €300,000 but only if they bought a new property of say €200,000.  If it cost €250,000, they would have to raise the additional €50,000 themselves.

Finding an appropriate new property at the lower price might be difficult for someone needing more space, but it might be feasible if the person was moving outside of Dublin where €200,000 buys a lot more house than it does in the capital.  Either way, the lender’s intention is going to be to limit the opportunity for the borrower to fall further into the red.

Without some provision to carry negative equity with them, thousands of young families and productive workers will be stuck where they are.

I know someone who wants to move back to Dublin for work reasons, but is reluctantly going to have to turn herself into a landlord – because her lender will not allow her to sell her house that is in negative equity. 

“I had a buy to let apartment a few years ago I was able to sell at a loss two years ago, and I hated being a being a landlord. Even then, tenants were demanding rent reductions every six months and I’m told it’s worse now.”

Negative equity mortgages could work on a case-by-case basis especially if they are taxpayer neutral and avoid any risk of moral hazard.  

The Regulator is keen that lenders don’t dangle them in front of borrowers in exchange for them handing in their valuable tracker loans – there’s no evidence to suggest they are willing to write off negative equity – but I expect there are plenty of mortgage holders who would willingly cut a deal if they could be clear of their equity shortfall.

 

 

 

 

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Rate expectations rise if you deposit outside EU

 

MM writes from Dublin: I am confused by the answer you gave in your first question in the Sunday Times (17th April) and would ask you to clarify please. Are foreign deposits taxed in Ireland at a flat rate 27% under an EU directive or is your statement  "Irish residents are liable for top-rate income tax on deposit interest earned abroad"?  Presumably this refers to the same deposits?

 

If you open a deposit account in a bank within the EU, you will have to file an Irish income tax return and pay Irish DIRT tax of 27% on any return.

If you are also subject to withholding deposit retention tax in that country, under double taxation agreements, you can claim a tax credit here up to the Irish DIRT rate. If you deposit your money outside the EU, the interest you receive will be subject to your highest rate of income tax, which might be the marginal rate of 40%. Again, any retention tax charged in that country might be subject to a double taxation agreement so that you can claim a tax credit. 

You must declare all off-shore accounts to the Revenue Commissioners, who incidentally are very interested in Irish people who have opened Swiss accounts in particular.  You may want to ensure that you are entirely tax-compliant before doing so.

 

Outside interests

NW writes from Dublin: I currently have approximately €100,000 saved in Bank of Ireland and AIB. I am concerned my investment is not safe in these Irish banks.  Could you advise if there are any foreign investment banks that would be safe and would there by any implications for withdrawals or tax that could occur?

If your €100,000 is on deposit in AIB and Bank of Ireland, it is guaranteed under the Irish bank deposit guarantee scheme. From your letter, however, I’m not entirely clear if your money is on deposit or tied up in investment funds offered by the investment arms of the banks, and as I wrote recently, there is no compensation scheme in Ireland for insurance fund losses. 

 

If you are concerned about leaving your money in either of these banks, despite the deposit guarantee, you can shift it to solvent, non-Irish banks such as RaboDirect, owned by the Dutch Rabobank; NIB, which is owned by Danske Bank of Denmark or Nationwide UK (Ireland). The same DIRT rate of 27% applies to all interest paid by these non-Irish, but Irish-based banks. Another option is to put some or all of your money into an offshore deposit account within the EU or eurozone.  Irish DIRT tax is payable on any returns.  If you open accounts outside the EU you will pay your highest rate of income tax on interest earned.

 

If your money is under investment with AIB - Bank of Ireland’s investment arm was sold to the US investment managers State Street - and not just on deposit and you are still concerned, I suggest you speak to an independent advisor about other options.  Returns from Irish based investment funds are subject to exit tax of 30% and there may be exit penalties as well as new set up costs and on going charges if you change providers. 

 

 

Life decisions

MM writes from Dublin: I have a friend who has invested quite a substantial amount of money in Irish Life and Permanent TSB.  The cost of his shares are now averaging €2.7 per share. Will this person ever get to buy premium shares at discount price within Irish Life before they are sold onto a new company? He may be in a position to borrow money to buy shares, that is, he would hope to buy shares at €1 each and hope some day that they would increase to €3.70 and hopefully get all his money back.

What will happen with these shares? Will they go with Irish Life or Permanent TSB? Can you forecast whether PTSB will survive as a bank without Irish Life or will they be taken over by a bank e.g (Bank of Ireland) and if so what will happen his shares? My friend is very worried and concerned with the present situation, I would be very grateful on any information.

I can understand how worried your friend must be, but the future of Irish Life and Permanent has not been settled yet, though it is expected that the flotation of Irish Life, as a separate entity to their banking arm, will go ahead some time later this year. It has been suggested by the Institute of Investment Managers that existing shareholders be given first options on buying new shares, but that is all it is – a suggestion.

The position of Permanent TSB is even more uncertain. It is not being considered as part of the ‘two pillar’ banks to be created from the reformed AIB and Bank of Ireland, nor is there any expectation that it will be separately floated on the stock exchange. It may or may not be sold to outside interests.

Meanwhile, I think your friend needs to lower his expectations about his existing shares.  At time of writing the stock was priced at just 16 cent and it would take a very significant increase in the fortunes of a separate Irish Life plc for him to ever recoup his losses. 

There are many excellent, less risky stocks or investment funds that your friend could consider buying to achieve a decent annual dividend, potential capital gain and to help rebuild his wealth. If he has the time and money, and wants to build some investing skills, I suggest he consider signing up for the one-day stock market investment seminar offered by www.InvestRcentre.com

 

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