Jill Kerby

THERESA MAY TAKES ON PENSIONERS, IRISH ONES TOO

With the UK election just a week away, it might be worth examining how the outcome could affect Irish people with UK financial interests.

A very long history of emigration and employment means that tens of thousands of us have on-going financial ties with the UK that could get more complicated in the following months, especially if the Conservatives achieve another majority and if Theresa May’s Brexit team doesn’t achieve the liberal trade concessions they’re seeking during their negotiations with the European Commission.

Over 330,000 Irish citizens live and work in the UK and a few million claim Irish ancestry.  Another 121,200 Britons live here. The respective financial interests of the over 65s include everything from being holders of private pensions, life assurance and property and an entitlement to each other’s state pensions.

What is apparent from the cost saving changes that Mrs May and her Chancellor Philip Hammond intend to introduce after the election are going to have an impact on many of their devoted voters (and Brexit supporters) - older people.

The first change they’ve announced, to considerably dismay, is the end of the triple lock pension increase that was introduced by David Cameron in 2010 and which allowed for the UK old age pension to increase every year by either an automatic 2.5%, by wage inflation or by retail price inflation (their equivalent of our consumer price index, or CPI), whichever proved to be the higher.

Inflation has only recently been pushing 2.5%+, mainly due to the fall in Sterling after the Brexit vote last June, whereas until this year the seven years of the triple lock rise of 2.5% was proving to be extremely expensive, and according to Mrs May, a fiscal conservative, unsustainable in a rapidly ageing population.

Her manifesto has dropped the idea of any guaranteed increase and has been condemned by the opposition and by pensioner support and lobby groups who say that pensioners are among some of the most vulnerable people in the UK.

Their automatic winter fuel allowance will also be means-tested (as it is here in Ireland) if the Conservatives are returned to office.

This pension increase change may, of course, affect UK pensioners who have retired here as well as Irish ones who returned to Ireland with a UK state pension. This cohort will have already seen a drop in the Sterling value of their pensions since last June (and any private pensions) of between 12% and 16%. Unfortunately, the currency exchange volatility is likely to continue as the Brexit negotiations ebb and flow.

The irony of dropping the 2.5% “lock” is that the UK retail price index could go higher and mitigate against the loss of the lock, or average pay rises could exceed that amount (though that is much less likely). If this happens, some commentators are already predicting the pension locks could be thrown away altogether once the election is over and a Tory majority (as expected) is secured.

The other big spending cutback that involves pensioners is how the value of a family home will be calculated for the purposes of determining how much the older person will have to contribute to their long term care. This will also have an impact on inheritance plans.

At the moment, someone who needs social care in most UK local authorities (though this can vary considerably) must fund it with their own resources unless their annual income – from pensions, savings/investments, rents, etc – is worth less than £23,250 (c€26,937). The value of the family home isn’t included.

This means-tested ceiling will be raised if the Conservatives are re-elected, from £23,250 to £100,000 (c€116,000), but this time that cap will include the value of the family home.

There’s no question that anyone have to sell up and leave their home if their net worth exceeds £100,000; a partner will be able to continue to live in the home if they remain behind. But the cost of care of one or both partners will be collected from their estate by the local council once the person (or both partners) have died, leaving just £100,000 untouched.

The hue and cry in the UK is that even and individual or couple with a very valuable house, who lives many years with expensive care benefits, could end up only leaving an inheritance of £100,000. The cost of care, especially nursing home residence already varies considerably between local authorities in the UK.

This proposal is very different from the centralized Fair Deal scheme here which currently includes a higher asset exemption of €36,000 for an individual and €72,000 for a couple and aside from an annual contribution of 80% of annual income, only looks for 7.5% of the value of the person’s assets for just three years, regardless of the market value of your home. That cumulative payment can also be deferred and paid for the deceased person’s estate.

A hard Brexit is going to throw up an entirely different set of residence issues for Irish and UK people – young and old - in 2020. These pension income and elder care financial issues need attending to much sooner.  Consult a good adviser.

Please send your queries to Jill c/o this paper or by email: jill@jillkerby.ie

 (The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)  

HOW AWARE ARE YOU OF FINANCIAL RISK?  FOREWARNED IS FOREARMED

Behavioural economists have argued that for most people, the risk of losing money far outweighs the upside potential from a stock market investment. It’s also one of the reasons why soon after a crash, the stock market is shunned by ordinary savers or investors, despite the low valuations: they are transfixed by the losses that have occurred instead of seeing the terrific bargains that have appeared.

The fear of risking their money  – sometimes only based on what happened to other people’s money, not their own – can cause them to only save their money in a post office, bank or credit union.   They then rejoice that they weren’t caught up in the carnage that resulted from a crash. It’s certainly a common excuse since 2008 for many people to abandon or avoid taking out a private pension plan.

What they don’t take into account is the ‘lost opportunity costs’ of such behaviour.

Markets inevitably rebound from big falls. Over the long term – say, the duration of a pension fund, investing your tax deductible contributions is always better than just leaving your money in a deposit account where the capital is guaranteed to be eroded by DIRT tax, inflation and increasingly, the presence of nil to negative interest rates.  

Not only is this a major financial risk, but so is not taking the time to understand not just the importance of asset selection but also how costs and charges will impact on the value of your investment. The biggest risk of all to your future financial security is to not start investing as early as possible in order to let the magic of time and compound interest do its magic.

But financial risks come in many different guises. And includes lots of smaller events than not just setting up a proper, long-term pension fund.

You put your money and finances at risk if you don’t install proper anti-virus security on your computer but do your banking on-line or use unsecure retail websites. You open yourself up to cyberware blackmail that way too.  If your bank or credit union is hit by a cyber attack or its employees embezzle money from your account, their insurance will cover your loss.)

Still on the banks, anyone who leaves more than €100,000 in any single bank risks being “bailed in” – that is, losing a percentage of your savings over that Bank Guarantee Scheme deposit amount – should an Irish bank ever go bust in the future. (Cypriot depositors with over €100k in their account lost up to 40% of the balance back in 2011.) 

New EU rules mean that the next time a bank goes bust in the Eurozone, their depositors will also have to bail it out, along with shareholders and bondholders.

There are two other extremely commonplace ways that we put our hard-won earnings at serious risk.

The first is not bothering to read a legal contract, whether an insurance policy, a bank loan - both big-ticket items - or even something as commonplace as a utility or mobile/broadband contract, a gym membership or on-line subscription.

The small print of such contracts is where the financial loss may loom, especially around deductions and exclusions, or the consequences of missed repayments.  You could be putting your own or your family’s financial security at risk by not being clear about what you are buying (like a mortgage) or committing to. 

Yet surveys keep showing that people spend less time arranging expensive financial contracts or loans, than they do in buying a new mobile phone or for holiday plans.

The other big financial risk that people take all the time is to spend their future income, today. 

The widespread use of credit in the form of expensive overdrafts, credit card loans and personal loans to fund lifestyle purchases they could otherwise not afford – that is, stuff they don’t actually need, paid for with money they don’t have -  is still relatively ingrained here, though borrowing rates are (to our credit) much lower than there were in 2007.

The risk we take in living beyond our means is that without substantial savings (ideally 3-6 months of net income) even a minor illness, a temporary job loss, or even the cost of having a new baby can tip a person into a chronic, or even catastrophic financial decline.

The best way to reduce this risk is

-       to know the difference between needs and wants,

-       to save early and regularly in your working career and

-       to aim to borrow only to buy or invest in assets, like a home, education or training and not in liabilities, such as expensive cars, holidays, rooms full of new furniture, etc.)

The financial world is a risky enough place these days and there is more institutional and sovereign debt in play globally than there was back in 2007.

You don’t need to make it worse by taking unnecessary risks with your own hard earned money and income.

PORTFOLIOMETRIX IRELAND…a new era of personalized investment portfolios

14 Fitzwilliam Square Dublin 2  +353 1 539 7244   info@portfoliometrix.ie

Fermat Point Limited, trading as PortfolioMetrix Ireland, is regulated by the Central Bank of Ireland.

DON’T EXPECT MUCH PENSION CHANGE FROM UPCOMING PAY TALKS

Try as the general population might, you just can’t get away from pension news these days. Unless you are in your late 40s or 50s, and feeling the jet stream of time behind you, pensions are never a priority. 

They should be, especially for every young person starting their first job, but they are not. The life assurance company or financial planner that can crack that nut is going to be the next Apple Inc. You can then buy the stock and enjoy an early retirement.

So in spite of our ongoing apathy and inertia, at the start of this month, there was widespread coverage of the Minister for Social Protection Mr Varadkar’s comments that he favours the introduction of an SSIA-type contributory pension product, into which every new private sector worker, and those without an occupational or private pension, would be automatically enrolled. Employers too would have to make contributions and the state would provide some form of tax-related, regular contribution.

Then, last week, public sector pensions hit the news. The independent Public Service Pay Commission recommended that the underlying value of guaranteed, pay and service related public service pensions be front and centre of the next round of pay negotiations with the state’s employees.

The PSPC stated that any new public service pay deal take into account how valuable are those guaranteed pensions that c350,000 public servants receive.

Chances are that any new remuneration deal will convert the hated pension levy, which averages out at about c5% after tax relief and is paid by most state workers earning over €28,000, into a permanent pension contribution. At worst, public servants might even have to pay a little more, depending on their income grade.

All this interest in how to slow down the ticking of the public and private sector pension time bombs is very welcome, though I’ve heard all these proposals many times. But they also looks remarkably like the blueprint that created Dublin’s original Luas tram service with its Green and Red Lines…that never met. (Anyone who lives, works or visits the city these days knows just how expensive, time-consuming and disruptive correcting that decade old design mistake has been.)

Pension membership is already at 100% in the public service. The changes that are likely to be proposed in the private sector will be much more wide-ranging, and if the SSIA style plan is adopted, it will be sewn onto a soft-mandatory, auto-enrolment pension from which probably no more than 10% of workers will opt out. (Opting out isn’t an option in the public service.)

The only point at which these two very different pension public and private systems might come into sync is how the yawning coverage gap, currently 100%/40% respectively will likely close once auto-enrolment happens.  Other than that, I can’t see much change: poorly pensioned private sector workers will continue to fund and subsidise the more generous, unsustainable pensions of their co-workers in the public sector.

Before my public sector readers bristle with outrage and fire off an angry email (my address is below and I welcome even your angry feedback), it is a fact that public and civil service pay is funded by taxation, or in the case of semi-state companies, subsidies, generated by the private sector.

Of course public servants earn their incomes and pay income tax and PRSI, USC, etc, just like people in the private sector. But the taxes, PRSI, USC, etc they pay all comes out of the income that is generated by private sector workers and companies.  From that great body of private sector activity, earnings and taxes, comes the money (ie tax, levies, etc) that funds the state, the ultimate consumer. 

Unfortunately for the bulk of private sector workers, their own incomes are not large enough to compulsorily fund (via their taxes) the states’ pay rates (up to 40% more in some cases) or the guaranteed and unsustainable pensions it awards. (In 2013 the way new PS entrants pensions were calculated was changed, based on lifetime earnings, not final salary. Only 15% of the PS is affected. The vast majority of state workers also enjoy retirement income that is grade-indexed, not indexed to the Consumer Price Index. Most private pensions have neither.)

I’m guessing that the upcoming pay negotiations – Lansdowne Road 2.0 – will, in the greater scheme of the on-going pension crisis in this country, only tweak public service pensions. Meanwhile, eventually (4-5 years?) we might see some form of much needed auto-enrolment for the private sector. 

Until then, public servants should count their blessings. A 50%, indexed, DB pension is a retirement gold mine. 

Private sector workers, Ireland’s milch cows, should be joining their company scheme if there is one, or take out a low cost PRSA. Both sides should reduce debt, spend prudently and carefully invest surplus income.

Counting on well-padded politicians to do the right thing, and in a timely manner, so that you can rest easier regarding your old age…is not an option. It is madness.

PORTFOLIOMETRIX IRELAND…a new era of personalized investment portfolios

14 Fitzwilliam Square Dublin 2  +353 1 539 7244   info@portfoliometrix.ie

Fermat Point Limited, trading as PortfolioMetrix Ireland, is regulated by the Central Bank of Ireland.

HOW PREPARED IS THE BANK OF MUM & DAD FOR COMPULSORY STUDENT LOANS?

Secondary students are hard at their books this month, preparing for their Junior and Leaving Cert exams in June. Third levels students started writing their exams last week, as I know from personal experience.

(I can’t wait to get the kitchen and breakfast ‘study’ room back, a much preferred option to the college library due to the presence here of a large fridge/freezer and coffee machine.)

It is also a time of year when parents start to ponder how to pay for next year’s college fees. Many are living in hope that they’ll avoid any new funding scheme under debate in the committee rooms of Dail Eireann. If reports are correct, it could be a loan scheme that could result in all Irish graduates typically repaying at least €150 a month for 10 years once they start working.

The Irish third level system has been remarkably generous for decades.  Three nephews of my husband avoided paying fees; my own son’s ‘registration charge’ has gone from €2,250 to €3,000 over the past fours, a fraction of what we would have paid if he was studying science in the United States or even England and Wales where the lowest entry fees are £9,000 a year. (Quebec, where I went to college also heavily subsidises undergraduate fees and charges about the same as Ireland.)

The ‘study now pay later’ loan scheme (one option from last year’s Cassells report) that the Oireachtas Committee on the funding of higher education is considering, is similar to the model used in Australia.

Described as ‘income contingent’, the €4,000 - €5 per year for four years loan, if introduced, would only start being repaid once the graduate found full-time employment with a salary of at least €26,000 and on average, would be repaid by age 33, according to the report. The more you earn, the higher the repayment, but there would also be repayment flexibility that would take into account periods of unemployment, illness or loss of income.

The Oireachtas is under pressure from the Universities (and the Department of Finance) to find them more money – at least €600bn more between now and 2021 and then another €1 billion a year until 2030, according to Cassells.

The introduction of fees for all students will go some way to meet this funding requirement, say the experts, but if the idea is to maintain access to third level education for everyone, regardless of income, then a loan scheme has to be introduced that eliminates the current grants subsidy that 50% of college going students currently enjoy, and is properly designed to ensure the money borrowed is repaid to the state, the banks or a combination of both.

With emigration part and parcel of the Irish graduate experience, the Union of Students of Ireland (USI), who oppose any loan scheme, say even writing off just 10% of income contingent loans is “hopelessly optimistic”. (Cassells predicted €10 billion over 20 years.) Certainly, more conventional loan schemes, no matter how low the interest, like the ones that operate in the US, can result in huge defaults. The US student debt bill (federal and private) has now breached $1.4 trillion with an estimated seven million defaulters.

Well-off students and parents already borrow money from Irish banks to pay for third level education. A four year loan from AIB worth €20,000 means monthly repayments of about €500 a month, repayable immediately, at interest of 8.5%. The total amount repaid will be about €23,500. This is certainly a better arrangement than dragging out capital and interest repayments for 10 years or more after graduation, but is clearly unaffordable for many students.

With some new student loan arrangement looking more likely, the next group of Irish third level graduates could very well end up paying considerably more than €16,000-€20,000 worth of fees (not including interest) – an amount which will probably only keep going up as the years progress.

Parents of younger children who want to avoid their kids starting their first jobs with substantial debt should consider themselves on notice. They should create a plan now that avoids the risk of having to resort to last minute, expensive personal or credit card loans to pay fees. (Drawing home equity is not an option.) 

They should start by saving the €140 a month (€1,680 pa) child benefit payment in a tax-free State Savings scheme. Even a mere 1.5% average return over 18 years will result in a final balance of nearly €34,700.  Investing the money would be better – so speak to a good, independent adviser - but they need to hope the 40% exit tax is eventually lowered or abolished.

Generous grandparents may also want to consider gifting up to €3,000 entirely tax-free to every grandchild every year to boost those education funds.

The days of free/low third level costs in Ireland are on their way out. Along with jobs for life, defined benefit pensions and, for the next while at least, affordable homes.

The less student debt our kids carry into their uncertain futures, the better.

Please send your queries to Jill c/o this paper or by email: jill@jillkerby.ie

 (The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)  

LEO WANTS AN SSIA-TYPE PENSION PLAN BY 2012. DREAM ON

The Minister for Social Protection, bless him, thinks that 2021 is a realistic deadline for the introduction of a universal private pension scheme, based, perhaps on the successful Special Savings Investment Account model from the early 2000’s.

Readers may recall the five year SSIA scheme that ran until 2006 in which the government matched every four euro put into an approved savings or investment fund with €1. The maximum monthly contribution of €200 meant the account holder would receive a €50 euro top up from the State.  It proved to be hugely successful with over a million adults opened one account; many a new kitchen, let alone the down payment on an investment property was paid for by 2006 with the tax-free proceeds of the SSIA, considered to be one of the most generous savings incentive schemes in the world.

And that wasn’t just because the top-up was so generous. The SSIA was easy to understand and to set up. The savings option was cost-free and there were low-cost investment versions for those willing to look for them. It was transparent and since it was owned personally, account holders had the satisfaction of watching its value – the contribution and interest or growth – grow every month.

The fact that the SSIA’s final value was entirely tax-free was the icing on top: there’s nothing we love more than a tax-free asset.

Fast-forward 11 years and Minister Varadkar, who like every pension minister before him (and since I’ve been writing about personal finance, that is since 1991) acknowledges that ‘something must be done’ about the falling private pension coverage in this state and the fact that among those people who do have a pension, only a small minority are saving enough into their funds.

Mr Varadkar thinks a soft-mandatory (everyone without a pension is signed up, but can opt out), simple, transparent SSIA-like scheme in which the tax relief on current contributions becomes a cash top up is the way to proceed. 

However, he also thinks such a system – not unlike the universal private superannuation schemes in Australia and New Zealand can be introduced here within four years. On this front he is dead wrong: it took the British 12 years to introduce their new NEST soft mandatory universal scheme, with a low entry contribution level. It will be several years before workers and employers reach ideal savings rates.

The SSIA pension idea is worth considering, but the devil, will be in the detail: will employers be required to make contributions? (They don’t have to at the moment and are against compulsory funding.) How much will the State top up be? The 20%/40% tax credit on contributions is currently allowed? 

The Australians pay into the ‘Super’ with already taxed income but get their pensions tax-free. Here, contributions and growth are tax-free and we pay income tax only when the pension is drawn down.

At the moment, with the cost of housing so high and workers taxed at 40% on incomes above €33,800, Varadkar would be committing political suicide if they tried to force even a soft mandatory pension majority (c54%) of private sector workers who do not have a private pension.

Yet another recent survey by Irish Life confirmed that the pension participation rate has hit a near all-time low at about 46%. Of those in a scheme 76% are making contributions, but over half of them haven’t a clue how much their employer contributes. Irish Life reckons that 90% of people might not hit a target of achieving a pension of even a third of their final salary unless they save more. And where workers are members of PRSA group schemes, chances are the employer is contributing nothing.)

Millions have been spent over the past 25 years by the state supervising and regulating and raising awareness of pensions - and the danger of not having one - yet only 54% of the workers surveyed by Irish Life were even aware of the tax benefits of a private pension fund.

Is a universal, auto-enrolment pension the solution? Yes it is. Is there any great new resolve by the government, unions, employers and workers to finally introduce one? Hardly.

If you are a young, private sector worker without an occupational pension, ignore Leo Varadkar’s good intentions.

Time is not only your side.

Speak to your employer and demand at the least that (s)he sets up a low cost PRSA group scheme (a legal requirement for all but the tiniest of firms). Then badger them to also make a contribution. If that doesn’t work take out an individual one yourself and start saving into it.

Or do like Leo. Get a job in the civil or public service where pensions are generous and secure and ultimately funded from taxes generated in the private sector.

Rest assured that the Pensions Minister isn’t losing any sleep over how his retirement is being funded.