Jill Kerby

MG writes from Cork:  I met you briefly at the recent Over 50s Show in Cork and mentioned I was retiring from the HSE and that I had an AVC with Cornmarket. I am meeting them to discuss what to do with the AVC and was wondering if you have any particular questions you think I should ask.

 

 

Most advisors suggest that you take the maximum tax free amount from your pension/AVC in order to clear your remaining debts and to provide a cash fund to keep on hand especially for incidental expenses or emergencies. If Cornmarket had been earning their high commissions and fees, they would have recommended over the past decade that you shift a predominantly equity based AVC into safer, fixed interest and bond assets in order to safeguard your savings the closer you got to retirement age. You don’t say if you are aware of the current value of your AVC but chances are it has experienced a significant fall in value if it was mainly invested in equities. Once you take your lump sum, you can cash in the balance of the AVC (subject to your highest rate of income tax), use it to purchase a pension annuity or transfer it to an ARF (approved retirement fund) that allows your money to remain under investment and from which you can then draw down an annual return.  This option might suit you if you don’t need access to the entire fund right now.  Before you do anything, make sure you get Cornmarket’s recommendations in writing and then seek a second opinion, ideally from a fee-based financial advisor. Do not be pressured into making a quick decision. 

 

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MH writes from Dublin: My query is as a small private Waterford Wedgewood shareholder. I am completely in the dark ... what is my position with the company as it stands?  In fact where does it stand right now?  Or, do I simply write them off as a loss?

 

I’m afraid that you have little option but to write off your Waterford Wedgwood shares as a loss.  Technically, the shares are still listed on the Irish Stock Exchange but have been suspended from trading since the group was placed into administration on January 5th. Since then the assets of the group have been sold to the venture capital group KPS. Depending on the price you paid for the shares and the consequent capital loss, you might be able to offset the loss against a capital gain. Regarding your being completely in the dark, I’m surprised that the administrators, Deloitte, haven’t communicated over the past six months to tell you what has been going on, but that’s a matter you’ll have to take up with them directly.  

 

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WW writes from Co Louth:  In March my mother’s only brother died. There were only two beneficiaries, me (his godchild) to whom he left cash and savings certificates and his best friend, to whom he left his small house which is on three quarters of an acre. (I am also the executor.) Unfortunately, the cottage is in poor repair and was valued, with the land, at less than €100,000. My uncle’s friend is in dire need of cash but is facing an inheritance tax bill that he cannot afford unless the house is sold, which doesn’t look very likely. If he cannot pay the inheritance tax, which I think is about €16,000, what happens to the property?  Is it automatically put up for sale?  What if it can’t be sold?  Dothe Revenue charge interest on the tax they are owed?  I might consider buying it from him, but not for anything like €100,000.  What are the tax implications if I buy it at a lower price?

 

First, the capital acquisition tax rate payable on inheritances is the one that applies when the benefactor dies, or in this case, at 22%. The Finance Act 2009 increased the rate of CAT to 25%, but this new rate only applies to inheritances where the benefactor dies on or after April 8th, 2009. According to the Revenue, your uncle’s friend “is deemed to have acquired the house and land for its market value on the date the deceased died”, that is, in March 2009.  For CGT purposes ‘market value’ generally means “the price which an asset might reasonably be expected to fetch on a sale in the open market. If the friend sells the property, the chargeable gain/allowance loss will be computed on the difference between the sale price (net of any legal and auctioneer's fees) and the market value at the date of death.”  In other words, if the house is sold for less than its original market value back in March, his CGT may very well be reduced. However, states the Revenue, “if…the sale is not at ‘arms length’, then the actual sale price is replaced by the market value of the property [the original March market value] at the time of sale.”   If you were to buy the property at less than the market value, “this would be treated as a gift …and the value of the gift would be the difference between the market value of the property and the amount actually paid". The tax-free threshold between strangers since April is just €21,700 so you may have a CAT liability but since the property is worth less than €127,000 you would not have any Stamp Duty liability.  Finally, if your uncle’s friend cannot raise the CAT he owes, he could end up with a tax charge on the property at a daily rate of 0.0219% from July 1st.  Deborah Kearney of Lehman Solicitors in Dublin says he could apply to his Tax Inspector for a moratorium on the interest accrual, perhaps even until the property is sold,or he could try and raise an equity release mortgage to pay the €16,000 tax.  This money would only have to be paid by his estate after his death.  Finally, your uncle’s friend “who should take legal advice” says Kearney, could renounce his inheritance in favourof someone else (who would be liable for the CAT) or revert it back to the estate.  In that case, as his remaining heir, you would inherit the property.  

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There has been a significant deterioration in the solvency of defined benefit schemes; over 200 construction firms that haven’t forwarded their worker’s contributions to their industry pension scheme are being investigated and some serious investment mistakes have been made by too many scheme trustee, the Pensions Board reported last week.  

 

Oh, and the Pensions Green Paper – which has been gestating now for four years – is still languishing somewhere at the bottom of the Cabinet’s in-tray. 

 

The Green Paper should have turned into legislation long before now:  and numerous deadlines have come and gone. But there is now growing concern that one of the most crucial, driving factors in the pension system – the €2.9 billion tax relief on annual pension contributions and/or the tax free element of matured pension funds, will be targeted by the Commission on Taxation in its upcoming report. 

 

Get the tax relief element wrong, say pension experts, and it is probably fair to say that the entire review procedure, which began at the instigation of the late Seamus Brennan in 2005 when he was Minister, may have to begin afresh. 

 

 

Pensions reform is a complicated, massive undertaking but we are inordinately slow in this country in taking necessary action.  (The previous major pension reform began in the early in the early 1990s took over six years for it to become legislation.) 

 

 

Meanwhile, as a result of the economic crisis of the past year, and the impact this had had on underfunded pension schemes, the Minister for Social and Family Affairs and the Pensions Board have recently introduced piecemeal, emergency changes to the pension funding standard and to the treatment of insolvent pension funds; these too, say pension consultants, could overtake some of the recommendations made in the Green Paper and the subsequent National Pension Review. 

 

 

But it will be the government’s decision about tax relief that holds the key to the long term future of private pensions, say consultants. If it is reduced to the standard rate only, where is the incentive for someone paying the higher, marginal tax rate?  

 

Today, whatever about the poor investment performance of your pension fund, or the funding problems that your employer may have experienced, at least there was only going to be single tax liability – and then, only on the retirement income itself. 

 

 

The nearly three billion euro that the government has foregone from pension contribution relief is money that is now being borrowed just to meet payroll costs and keep the lights burning in Dail Eireann.   

 

 

In light of this, the only pension reform you should count on over the short term is the kind you end up doing yourself. 

 

 

 

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Officials at the two genuinely private health insurance companies here, Quinn- Heathcare and Hibernian Aviva Health, say they are deeply disappointed that the EU Competition Commission has upheld the €160 and €53 levy on all adult and child members in order to subsidise the VHI and its disproportionate number of older members. 

 

This risk equalisation measure-by-stealth, as one official calls it  (last year the Supreme Court threw out risk equalisation payments as defined by the Department of Health), means that the government is off the hook from having to reform the VHI, say its critics.  The wholly owned state insurer continues to operate outside the normal solvency rules that Quinn and Hibernian Aviva must trade under, and the levy is going to further discourage any further competition within the market, they say.  

 

The long and short of it is that so long as the VHI continues to have the legacy costs from the days when it was a monopoly, and that will continue so long as its very first members from the 1960s keep ageing, everyone with health insurance will have to make a sizeable annual contribution to keep the VHI in business.

 

Quinn and Hibernian, who were not consulted over the levy, say there is now no incentive for VHI to manage its costs more efficiently, and as all the health insurers lose members due to the recession, there’s a real risk that the VHI’s legacy costs will keep rising: older members have more incentive to keep their membership than younger ones or families whose state of health is better but whose incomes are under a greater strain. 

 

 

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Having already been the victim of electronic bank fraud I’ve become extra wary about the way I conduct electronic banking transactions or pass on my bank details, especially to on-line retailers.  

 

A year ago last January, over €4,700 was spent, on-line, on my current account debit card in the space of a week.  My debit card account number was generated randomly by a savvy cyberspace gang and then matched – by chance - to my bank’s ID code, which is public information.  Bingo! 

 

The fraud happened because the crooks know how to break through the banks’ electronic bars. Worldwide, a lot more money goes missing now using the new electronic break and entry methods than the old fashioned, real-time, sawn off shotgun and balaclava way.   

 

This is why I don’t have a lot of sympathy for IPSO, the Irish banks’ payment services organization, who have complained in their latest report that we are very slow here in Ireland to embrace electronic payment and transfer and are stubbornly attached to trading with cash. 

 

Also, perhaps they need to have a little chat with a few of the 70,000 Bord Gais customers – me again – whose bank details are now in the hands of the thieves who stole unencrypted Bord Gais laptops. 

 

They may not have been very cost effective, but ‘hard copy’ bank accounts certainly felt a lot safer. 

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IS THE INTEREST RATE WHEEL ABOUT TO TURN?

 

Interest rates are always a zero sum game:  when they go down, mortgage and other debtors can celebrate. When they go up, anyone who is living on a fixed income, or has invested in the stock market, are the ones who will benefit. 

 

After coming down seven times in the past year (from ECB 4.25% to 1%) it now looks as if interest rates that the Irish banks charge us, based on how much they pay each other in the interbank lending market, could be on the way up again. 

 

Last week AIB announced it was slightly increasing the cost of its three, five and ten year fixed rate homeloans. Fixed rates are the product of the banks’ wholesale money markets and they are often considered the canary in the mortgage market coalmine because their movement usually predicts which direction retail mortgage rates are moving. When banks raise fixed rates it usually signals higher rates going forward for most loans; when these key rates fall, we can usually expect to overall cost of money to come down. 

 

The three year and five year AIB rates, which had been amongst the lowest on the market at 3.10% and 3.69% respectively, have gone up to 3.19% and 3.86%. The new 10-year rate rises from 4.41% to 4.65%.  

 

Since every additional 0.25% increase typically adds about €15 to every €100,000 borrowed over a 20 year period, anyone with a typical €250,000 mortgage over a 20 year term who takes out the new 10 year fixed AIB loan can expect to pay an additional €45 a month. (The three and five year fixed rate customers will only pay about another €10-€15 extra).   

 

Is this rise in the fixed rates by a single bank a shot across all mortgage holders bows?  Some commentators think so: the whole point of government and central banks slashing interest rates since the credit crisis began was to try and get businesses and individuals borrowing again and so called ‘growth’ back into our economies. 

 

The problem, however, is that this tactic, which is always used when economies fall into recession, hasn’t worked this time.  And that’s because this isn’t a typical recession.  It is the Great Recession of the 21st century and it was caused – ironically – by decades of interest rate manipulation by politicians and central banks whose primary goal was economic growth…even at the cost of regular booms and busts. 

 

The post 2001 recession reaction (after the NasDaq stock market crash and the 9/11 attacks) was overdone: rates fell too low and even more money was created through the dangerous leveraging of the sub-prime mortgage (and other) debts by investment banks and other money dealers.

 

The mad global property and spending bubble had to collapse.  This time the consequences – massive unemployment and a contraction in global growth is not reacting to all the new efforts – the low interest rates, the massive borrowing on global bond markets, the printing of money out of thin air. 

 

The bubble that’s been created in the global bond market by the pumping out of more cheap money is having it’s own effect in forcing up the interest yield on bonds.  These yields ultimately affect the price of borrowing on the high street.  

 

If you have a large mortgage loan, you might want to at least think about how you will pay it every month if the ECB does start putting  up its interest rates again.

Any upward move is likely to be very gradual, but keep in mind that the Irish lenders are within their rights now to increase a variable rate.  As AIB has shown, they don’t have to wait for the ECB to move first. 

 

Variable rate mortgage holders should consider fixing their mortgages now if they believe that ECB rates are on the way up.  Otherwise, they need to occasionally stress test their own finances:  could they cope with a hike of two or three percent interest?  Even the lucky tracker mortgage holder with a €250,000, 0.75% tracker premium (ie. 1.75% at today’s rates) would need to find another €195 a month if the ECB were to bring their own rate back up to 4.25%. 

 

There’s not much a saver can do, but wait.  The return of higher interest rates – when it happens – will certainly result in a better return on your funds:  instead of say, €2,250 gross return on savings of €100,000 a return to ECB 4.25% will nearly double your gross return to €4,250 gross. 

 

How long before the official ECB rate goes up again is anyone’s guess, but I suspect it will happen sooner than later:  an awful lot – trillions, in fact - of borrowed, lent and printed money has been created by the world’s central banks and governments to stop this Great Recession and bail out the banks.  That money has to spill over into our world eventually, pushing up prices.

 

When it does, interest rates will rise.  So will prices. 

 

AIB’s tiny upward rate move last week might just be the little gas leak that starts the mortgage rate canary to begin wobbling on its perch. 

 

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KM writes from Donegal: I recently made a request to Ulster Bank for a two month summer holiday break from paying our mortgage and they turned us down, saying that my husband’s salary is enough to cover our modest mortgage. They went on to say they are only sorting the very needy out at the moment. However, our contract allows for a two month holiday. I am self employed and my cash flow is good from September to May, however apart from a few summer camps for the children, it will be tight enough for us this summer. I am not sure if the Government (that is, we, the tax payers) have bailed them out, but if we have does that mean that they can really turn us down? 

I suggest that you remind your lender, this time in writing if you haven’t already done so, of the terms of your contract. Note exactly which months you intend to defer and request that they acknowledge and facilitate your decision by return post.  You may have to speak to a more senior manager or write a formal letter of complaint to the bank if your letter doesn’t generate a positive response.  If that doesn’t work I suggest you take this breach of contract to the Financial Ombudsman at 1890 882090 or www.financialombudsman.ie 

 

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MG writes from Dublin: In a recent column about PRSA’s, you stated that the Commission on Taxation will likely recommend that a tax of 17.5% be applied to the pension lump sum for employees in occupational schemes. I am one such person and am due to retire from the public service in August 2010. However, the example that you give of a person with a one million pension fund will pay €43,750. This represents 4.375% and not 17.5%. Can you advise me on two matters: my own lump sum will come to approx €120,000. Will I be liable for a 17.5% or 4.375% tax? And in view of the above, I am considering taking early retirement before the end of December 2009. Do you think the Minister would be entitled to backdate any tax to a date before the new tax year kicks in?

First, the 17.5% tax on the pension tax free lump sum is just speculation; hopefully, this matter will be cleared up when the Commission on Taxation reports next month.  The €43,750 tax liability I quoted (on a pension fund worth €1 million) is based on a 17.5% tax on the 25% of the fund that is tax-free – ie €250,000, not €1 million.  If a quarter of your €100,000 defined contribution pension ends up subject to a tax of 17.5% (or €4,350) the balance amount you will get that is tax free will be €20,650.  Finally, every taxpayer should accept that the Minister for Finance can – and in the April emergency budget, did, back date a tax measure. The 1% income tax levy was introduced in the December 2008 budget but was overtaken by the 2% and 4% income levies introduced in the mini budget in April. Yet anyone who received a lump sum bonus or commission payment in addition to their usual PAYE income between January 1st and May 1st (when the higher levies came into effect) was now liable to the higher levies on those payments.  In effect, we are all on notice that the Minister can tax your income, however he likes, whenever he likes. 

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NOR writes from Dublin:  I bought an apartment three years ago and am now in negative equity, my mortgage is €211,000 and the value of the property is about €170,000. I am coming to the end of a two year fixed mortgage and I have been offered an LTV variable rate at 3.15% or a tracker at 3.25%. The fixed rate offers are 5.25% or 5.75% for two and five years respectively. I have tried to change mortgage lenders but they of course are not interested in taking on a negative equity loan. Should I take the tracker mortgage, at a 2% difference from the fixed rate? And if I do, should I overpay my mortgage? I can afford to pay an extra €200 a month.

 

The LTV you’ve been offered is not as attractive as the tracker rate on the simple grounds that it does not offer the assurance that your rate will next exceed the ECB plus 2.25%. If the ECB rates were to rise to 4% again, you would know that your mortgage rate is 6.25%.  If you chose the variable rate loan, it might be 6.15% (4% ECB plus the current margin of 2.15%), or it could be 7.15% or even higher. There is certainty. The fixed rates you’ve been offered are 2%-2.5% higher than the best rates on the market. However, an increasing number of economists and financial commentators believe that these low central bank rates cannot last; unfortunately no one can pin an exact date on when rates will go up again, by how much, or for how long. If, as you say, you can afford a higher repayment right now, then fixing your loan for three or five years will at least give you the peace of mind of knowing exactly what your repayment will be each month.  But how confident are you that you can maintain a higher repayment? The tracker will be cheaper right now, but all it would take is for the ECB rate to rise from 1% to 3.55% for your mortgage rate to exceed the 5.75% five year fixed rate you have been offered. 

 

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We may be cutting back on overseas holidays this summer, but independent travel is clearly not going to disappear. 

 

Yet according to a survey done by the VHI, one of the biggest sellers of travel insurance in the country, 50% of travellers don’t bother with travel insurance.  For those that do, but opt for the cheapest premium, often from an on-line provider, it could end up as a very expensive mistake if they don’t bother to read all the terms and conditions. 

 

“Those questioned weren’t made aware that if they or a family member were taking prescribed medicine for a condition, that they might not be covered for that illness, and 39% weren’t made aware that if they or a family member had any existing or previous illness that they might not be covered for this.”  

 

More than eight out of ten respondents admitted that they were only interested in the amount of cover they’d receive for unexpected medical emergencies and illnesses.  Only 8% inquired about the breadth of overall cover. 

 

A quick review of the Financial Ombudsman’s reports shows just how badly you can get caught out by not looking out for exclusion clauses. One case the Ombudsman did not uphold last year involved a  €4,000 claim for cash and personal items that were stolen from an Irish traveller in South America.  That contract required the claimant produce receipts or some other proof that the items stolen actually existed.  

 

How many of us know to keep receipts – or even take photographs of the jewellery, cameras, laptops or expensive clothes we might travel with? In the case of another unsuccessful claimant, whose personal effects were subsequently stolen by a woman he’d met and entertained in his hotel room in the far east, the insurer required that the policy holder be vigilant in safekeeping their personal affects.  He obviously didn’t read that part of his contract.

 

The moral of the survey?  Aside from being a bit more particular about who you invite back to your hotel room and always keeping receipts of valuable objects, you should buy your travel policy from a broker or company you know and trust and then perhaps ask them to go through it with you. 

 

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When I read about the small traders in Dublin and other cities who have lost significant business in this recession and are now caught up in upward-only rent reviews that could force them out of business, my sympathies tend to side with the traders against the banks or pension funds that own their premises.  

 

 

These are the same fund managers that didn’t necessarily do a very good job managing their clients money even during the boom years. 

 

 

I’m now left wondering about the tactics they’re employing, demanding massive rent increases when clearly the turnover is not there.  How can driving the merchants out of business enhance my pension fund performance? 

 

Last weekend the owner of Dunne & Crescenzi, one of my favourite Italian restaurants, was given a very sympathetic hearing on the Marian Finucane show. She explained how the rent on one of the units she occupies on South Frederick Street has more than doubled.  The restaurant is just as busy, she said, but customers are spending less and her turnover is down significantly. 

 

 

Bank of Ireland Asset Managers, her landlord, weren’t on the show, but other fund managers are defending themselves against charges that they are heartless, capitalist b*****ds intent on squeezing every last drop of extra rent from plucky little shopkeepers. 

 

 

They say their mandate is to get the best returns for their clients who are often ordinary people saving for their retirements. They say that the UK and Ireland are unusual in that unlike other places (like the USA) where short leases and annual or bi-annual rent reviews are more common, here, long 20 or 30 leases in city centre neighbourhoods mean that there can be significant capital gain for the lease holder.  Fortunes can, and have been made selling them on, but the tradeoff is a five year, upward-only rent review. 

 

 

The problem now is that the economic downturn makes even a 2004 level rent unaffordable, let alone one that is due a sizeable hike. 

 

 

The fund managers say they now have to decide whether it’s in the interest of the actual owners of the property – the pension fund members, for example – to leave a premises as a particular retail unit that might get hammered by the recession, or attract in a new business that can pay the higher rent.  They may even decide to redevelop smaller units into a bigger one or entirely change the use to office or residential accommodation. 

 

I hope it doesn’t come to that with any of the shopkeepers I know in the Grafton Street area who are struggling with these high rent demands. 

 

Who wants to live in a city where all the restaurants and cafes and little shops have been closed down and replaced by soulless office space?  Nor do I, as a pension fund investor fancy being used as the scapegoat for fund managers who haven’t much credibility anyway, and who produced rotten ‘managed’ fund results even when the economy was booming.

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MAKE ENERGY SAVINGS A SUMMER DIY PRIORITY

 

The last thing you may want to have to think about now that the warmer weather has arrived …is your winter heating bill. 

 

But what better time than the summer to finally tackle those draughty windows and floorboards (if you live in a late 19th century house like I do), the attic that hasn’t been properly insulated or your empty cavity walls. 

 

Since January, anyone who wants to rent their home, let alone sell it, must provide the prospective tenant or buyer with a Building Energy Rating (BER) certificate that tells them just how energy (in)efficient the property will be on a scale of A(very good) to G (my house, I suspect).  But this rating will also give you the gauge you need to determine exactly how to make your home cheaper to heat. 

 

Recognising that our housing stock was in desperate need of an energy upgrade, the government has introduced the Home Energy Saving (HES) scheme, operated by Sustainable Energy Ireland (www.sei.ie) which provides grants to homeowners of properties built before 2006, who want to reduce energy use, cut their fuel costs and greenhouse gas emissions. 

 

The HES scheme is open to all homeowners, including landlords or management companies who want to upgrade an entire building and it awards grants towards the cost of roof insulation (up to €250), wall insulation (cavity wall – up to €400, internal dry lining - €2,500 or external - €4,000), installation of a high efficiency gas or oil fired boilers (€700) with heating controls upgrade*, heating controls upgrade (€500) and €200 towards a Building Energy Rating (BER) if one is done before and after the works are completed.

 

 

The grants are fixed amounts but you need to spend at least €500 to qualify and you must get approval before you engage a contractor or buy materials, and you get the grant payment only after you have paid your contractor, who must be on the SEI approved contractors list. (All the application forms and lists are on the SEI website.)

 

The least expensive part of this scheme is getting your BER, say contractors, some of whom are advertising their services for as little as €30 in the case of an apartment, to €120 for a detached house, but this is in addition to getting the €200 BER grant. 

 

 

The actual cost of a major insulation job depends of course on the size of the property, the degree of work needed and the cost of labour and materiel, which, fortunately, is far better value now than a couple of years ago.  Be sure to shop around between the listed contractors and make sure you get written quotations and only pay the work when it is done to your satisfaction. 

 

 

Homeowners with plenty of equity in their homes and a safe income shouldn’t have too much difficulty raising a personal loan or second mortgage (if the work is extensive) to get their insulation standard improved. With fixed rates at less than 4% from some mortgage lenders and higher interest rates inevitable, you might want to fix the rate. 

 

 

If you have savings, you should use them:  many credit unions are paying no dividend this year, while the deposit rates from the banks and building societies are a fraction of personal loan rates, which are typically 9.5%-10% APR including Ulster Bank’s Green Loan offer and cluster schemes like the Greenloan Home Energy scheme that offers significant discounts to groups of homeowners. (See www.greenloan.ie).

 

 

One valid criticism of the Home Energy Savings scheme is that it is aimed at middle class homeowners.  For the estimated 60,000 households that are living in what is known as persistent fuel poverty and receiving a Fuel Allowance Payment, there’s another scheme to consider – the SEI’s Low Income Housing Programme (you can e-mail them at warmerhomes@sei.ie).

 

 

For typically less than €100, with the rest of the cost covered by the Warmer Homes Scheme, households may be directly eligible for attic insulation, draught proofing, lagging jackets, CFL bulbs, cavity wall insulation where available.  No grants apply in this case as the service is delivered through 19 voluntary organizations around the country. 

 

 

Finally, for those of you in the market for a new house, or a new build, you need to take account not just these basic energy saving features but also the option of buying a super energy efficient houses like one that I’m familiar with, a Canadian designed timber frame project in Rosslare by DAC International and Milharbour Construction that was launched last month by the Canadian Ambassador to Ireland, His Excellency Patrick Binns. 

 

 

Houses like these (there are 43 planned for this site are often very reasonably priced, (from just €221,000 in the case of the Rosslare development) and produce BER certificates of A3, the highest rating. They offer not just the most energy efficient houses, but best internal air quality as well, using sustainable materials. 

 

 

Eco-friendly, energy efficient builds exist all over the country now. Contact your local county council or check out the SEI website (www.sei.ie) for one in your area. 

 

 

 

 

 

 

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My wife and I are both veterinary surgeons and intend to set up a clinic in Ireland. Our accountant has advised that we would be better forming a company for tax reasons instead of sole trader. However, our professional body, the veterinary council of Ireland states that as vets we cannot run the clinic as a company. I believe other professions operate the same. Yet, when I looked at the companies web page there are numerous vet practices listed as companies. Have they found some way around the veterinary council rules? Are they operating the company from the UK?

 

I asked Lyn Lawlor, a partner at the Dublin accountants DLS Partners about your situation and she said that the listed companies you noticed may have been set up separate to the actual veterinary practices specifically to operate a pension scheme for the partners or for other investment purposes.  Pension investing is a way to reduce tax liability, at least for now, and you should consult your accountant again about how to best structure the business to be as tax efficient as possible within professional restrictions. 

 

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BK writes from Linconshire: I was employed in the Republic for more than 25 years and retired at 65 in July 2006. I receive the State Pension and an occupational pension that amount to more than €25,000. In August 2006 I moved permanently to Lincoln, England. I informed the Revenue Commissioners and submitted an IC1 form stamped by HMRC. However, the Health Levy has been deducted from my occupational pension.  I have tried unsuccessfully to reclaim this tax despite being in communication with various government departments, including the Department of Family and Social Affairs (DFSA). Apparently, their regulations do not indicate how a UK resident should proceed. There have been suggestions that since I earn more than €20,000, I am not entitled to reclaim this money. If this is correct, am I entitled to Irish dental and optical benefits?

 

According to the DFSA, if you satisfied the PRSI conditions for the Treatment Benefit scheme when you reached age 66, you remain qualified for the scheme and benefits for life even if you move to another EU member state. The Department also told me that if your annual earnings “during 2009 fluctuates above and below €500, but is not more than €26,000, you are entitled to claim a refund of the Health Levy 2% or 4% deduction. Where a person’s weekly earnings/income fluctuates above and below €1,925, from 1 January 2009 to 30 April 2009 and/or above and below €1,443, from 1 May 2009 to 31 December 2009, the person may claim a refund of the 0.5% or 1% Health Contribution deduction, if the amount paid in 2009 is in excess of that due.You should claim your refund from the Department PRSI Refunds office, Oisín House, Pearse St., Dublin 2. Telephone: (01) 673 2586. An application form, PRSIREF1, is available on www.welfare.ie .

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NS writes from Dublin: We bought our house two years ago at the peak of the market. At the time, we were lucky enough to get a tracker mortgage that is 1.1% above the ECB rate. Now, however, we fear that interest rates are just going to start going up and up from next year. We are thinking of fixing but worry that if we fix for two years, rates will be much higher when we get to the end of the term and the tracker will no longer be available. What would you advise?

Tracker rates are very attractive products that have mainly worked in the borrower’s favour in recent years – which is why the banks are very keen to convince their mortgage customers to voluntarily give them up. Most of lenders have five year fixed rates below 4% APR, but this a huge jump from the 2.1% you are paying now. The question is, how long can these low fixed rates last especially if inflation becomes a serious problem again, (as I suspect it may). Will you be able to switch to one in time?  Also, can you afford the higher fixed repayment right now in the hope that it will pay off during an inflationary period? Before you make any decision, compare the cost of the best fixed rates you can find against your existing tracker if it were to rise by another few percentage points. Then get a written breakdown from your lender of exactly how much it would cost you to break a fixed rate contract were interest rates to fall again and you felt compelled to return to a variable or tracker rate. 

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PC writes from Sligo: I believe that CRH is going to benefit from President Barack Obama's building programme in America and I would like to buy shares in the US operation. I have been told that I can buy CRH on the ISEQ but I don't want to. Can I buy shares in CRH as listed on the New York Stock Exchange through fexco.com or sharewatch.com? 

You can, but buying CRH shares on the New York stock exchange, using euro that is exchanged into dollars, exposes you to a foreign exchange risk that is unnecessary given that these shares are listed here in Dublin. If you already had a reserve of US dollars in a US bank account then it would make sense to buy CRH shares through a US broker if you so wished, but no matter on what exchange your CRH shares are listed, if the company’s turnover and profits improve because of the US government stimulus package, (or any other country’s) this will be reflected in the overall CRH share price.  

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All eyes are still on the insolvent banks, but come September, it might be advisable for anyone concerned with the country’s troubled credit unions to shift some attention in their direction. 

 

September is the start of the reporting season for the 508 affiliated members of the League of Credit Unions and there is growing concern at the number – perhaps as many as half – which are not paying any dividends to savers this year. The size of the bad loans the unions may be carrying is also a worry given rising unemployment. According to its 2008 annual report, loans account for 50.7% of the combined €13.9 billion worth of assets held by credit unions. (€11.9 billion is savings). If even 7% of these loans have turned bad – as some sources are suggesting - it would nearly amount to the entire savings protection scheme worth about €100 million the League operates to cover insolvency risks. 

 

Earlier this year about 20 credit unions were told to stop lending by the Regulator but the public has not been told which CU’s are on this list.  Rumours naturally abounded with the inevitable run on deposits and hasty statements of reassurance issued by the union officers. 

 

The risks are threefold:  bad loans, especially the commercial development loans that some larger credit unions unwisely extended; bad investment decisions, some of which have been highlighted by the Financial Ombudsman in his annual report; and, unfortunately, the continuing voluntary nature of the credit union movement.  

 

The lack of expertise is a problem mainly for the smaller unions, but organizations run by members on a voluntary or part-time basis are often vulnerable to social pressure or being hijacked by cliques of activists or the disenchanted. It doesn’t just happen at credit union level; just look at the mess that developed at board level at the nation’s building societies where the members who, theoretically, own the institutions, have hardly covered themselves in glory in the choice of the people they’ve elected to represent their interests. 

 

In their 2008 annual report, the ILCU boasted about how credit growth increased “substantially in excess of market averages” over the year but conceded that “the general economic downturn, which has caused a near universal fall in investment values will have a negative impact on credit union dividends in the year ahead” and at current market values… “will have an impact on individual credit unions.”  

 

The League insists that it is “overall…well constructed and positioned to withstand much of what is currently threatening the stability and viability of the banking sector.”

 

If that is the case, they are the only financial sector in the entire western world to have pulled that off that achievement.   We’ll know for sure come September. 

 

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It annoys me how lenders cheerfully allow consumers to think that somehow payment protection and income protection insurance are somehow interchangeable and equally valid. 

 

The former is a grossly overvalued, expensive, commission-burdened contract that mortgages, car loans and credit cards lenders try to frighten or bully their customers into buying; the latter is a much undervalued protection policy that has saved many a family from penury when a breadwinner has fallen ill and can no longer work to support them. 

 

This week, Irish Life, who mainly shares this market with Friends First, has re-priced and repositioned its income protection product to take into account our falling incomes and higher tax rate:  premiums have been lowered by 5% and 15%, it says. 

 

Meanwhile, someone in the Regulator’s office – again - needs to challenge the way payment protection is marketed, especially the implied suggestion that somehow buying a policy that costs you up to €6 for every €100 worth of your monthly mortgage repayment, is “good” value. 

 

This insurance has already been the subject of some pretty scathing reports by both the Irish and UK regulators, and anyone selling it should be required to prominently display on all advertisements and at point of sale that it only pays off the mortgage, car loan or credit card for a year and only if you’ve been lucky enough to dodge all the restricted clauses and the sneaky, small print. 

 

If you’re worried about becoming unemployed, cut up your credit card now and start filling up a savings account as quickly as you can.  If you’ve got a family to support and substantial overheads, buy a genuine income protection policy – it will cover 75% of your income up to retirement age if needs be and the premiums are still tax deductible.  

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I know that a lot of people are deeply concerned about their investments and in spite of the 12 week stock market rally many (including yours truly) are deeply nervous about its sustainability.  

 

Should you cut your remaining losses now or hold on for a longer recovery?  Should you put all your money in cash?  Or buy into one of the increasing number of capital guaranteed investment funds that are being launched by the banks and life companies?

 

I’m all in favour of protecting what little wealth any of us still have, but why would anyone lock up their savings for nearly four or six years in a stock market tracker bond when there is no sign that unemployment or the house price collapse has ended, that crippling personal debt has been paid off, that corporate earnings are up, or that healthy bank lending has resumed? 

 

All of these features will need to be back in place before anyone should expect a decent return – say, one that beats deposit rates by two or three percent – from a derivative based stock market tracker that must also reward a string of middle men before you see a red cent of profit. 

 

If you really want to safeguard your capital, find a safe deposit home for the bulk of it, and then take a risk with the remaining portion by investing in an asset that you hope will both outperform the tax and inflation drag on the capital.   If you think (like I do) that inflation is the biggest risk coming down the line, buy some gold. 

 

Meanwhile, I’m told that a relatively low cost, inflation-linked bond fund and a gold based one, is soon to be launched by a leading assurance company.  Whatever they come up with, it surely can’t be as tired as the stock market tracker model that’s still being flogged.

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HOME IMPROVEMENT ENTHUSIASTS NEED TO KEEP A CLOSE EYE ON THEIR BUDGET 

 

It’s turning into ‘DIY Summer’ here on my street. One neighbour has booked the roofers to replace the back end of his roof and the gully between his house and his neighbours’ that has been causing a leak in an upstairs hallway. Another is tackling the half-finished attic itself that will be the new home of the young French student who will be lodging with the family in October. 

Bathrooms and garden patios, wall pointing and paint jobs are all being tackled this summer but few are shelling out the twenty, thirty or forty thousand euro that constitutes a new kitchen here. But there is an acknowledgment that labour and materials haven’t been such good value since the 2001 or 2002 when the property bubble sucked in not just mounds of cheap credit, and every tradesman was busy working on building sites from one end of the country to the other. 

Some jobs around the house just have to be done and shouldn’t be put off – plumbing, electrical and structural repairs, such as leaking roofs and foundation cracks.  Others, like installing proper insulation, is probably a bigger job that should be seriously considered if your house, like mine, is part of the country’s older housing stock and positively leak heat out the draughty windows, fireplaces and badly insulated roof and cavity walls.  (That’s the detailed topic of next week’s column.) 

But before you dash off to the local builder’s provider or a DIY superstore to get cracking on that ‘must-do’ project, what do estate agents consider the best home renovation and decoration projects that will not just enhance the quality of living for its owners, but that will also enhance it’s value, even in this recession?

The most recent research I could find was from the UK lender, HSBC of UK estate agents.  (Judging from the number of UK trade exhibitors who show up for the Irish ‘better home’ exhibitions each year we seem to share the same home improvement interests as our British neighbours). 

The HSBC survey showed that a full loft conversion and a room extension add the most extra value to a home – about €15,000 worth, followed by a conservatory (€7,870), new windows, a new kitchen (€5,000) and a new bathroom (€3,000).  After that, a house redecoration (worth just an extra €2,229), a resurfaced driveway (€1,434) and finally, a minor loft conversion (€1,422) are most likely to increase the value of the property. 

What is surprising about the survey is how little benefit this expensive work actually is to the overall value of the property in the UK or here, even when adjusted to our higher material and labour costs and our (still) proportionately higher house prices. 

Given that so many Irish homeowners have spent many times more than the above amounts outfitting their kitchens and bathrooms, and house prices are unlikely to return to pre 2007 prices for some time, a survey like this – even adjusted for Irish DIY price inflation – is a warning to anyone who is actually fixing up their home this summer with an idea to selling it on: don’t overspend. 

With buyers seeking bargains these days, granite worktops could work entirely against you if they intend for the money they save on the purchase price to be used to redecorate according to their own tastes.

Meanwhile, the ideal way to pay for home improvements is with income or savings.  Resist the temptation to put these costs on your credit card. Credit card rates are now creeping upwards and cash withdrawals can be charged at interest rates that are a whopping 10% or more than the purchase rate, you are far better off taking out a small bank or credit union loan (if you have a good credit record at your bank and a secure job. Expect to pay in the region of 10% for your loan, despite lower, headline advertised rates.

Depending on how much equity you have in your home you might be able to get a mortgage extension to pay for a more expensive renovation.  (I’ll be covering the funding details of a home insulation project next week.)  Variable interest rates of c3% are on offer to customers of AIB and Bank of Ireland, for example, but other borrowers, like those with Permanent TSB loans, for example, will pay up to 2% or more for a loan extension and may not be able to switch to a lower cost provider very easily. 

What you most certainly want to avoid if you are seeking funding for a major home renovation, is to let your bank convince you to transfer out of an existing ECB tracker rate mortgage with a premium rate of say, 0.5%-1% over the 1% ECB rate. 

Interest rates have only one way to go – up – over the medium term, and you could end up finding that your extension costs much more than you anticipated if the ECB rate rises back up to 4% or 5% again.

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SR writes from Co Louth:  In his will my late husband left me his entire estate – made up of a modest number of acres of farmland (that we leased out for a number of years), our family home and cash savings.  The total value is less than a million euro.  I will be retiring (I am a nurse) next year and will also have a pension income.  My query is regarding the excessive legal bill I have received for the probate – over €17,000.  I have requested a full breakdown of all the fees, costs and charges involved, but the solicitor is being very uncooperative and has offered to reduce the bill by €2,500.  How can I get information re costs of probate and all to do with registration. 

Two years ago, as her executor, my husband processed his late mother’s will with the help of officials in the ‘Personal Representatives’  section of the Probate Office here in Dublin.  It was a bit time consuming – there were copies of the will and death certificate and a tax clearance certificate from the Revenue Commissioners to gather and then he had to notify her bank and the State Pensions office of her death, but in the end the cost was negligible as she left her entire estate – a Dublin property and some savings equally to her three sons.  It was so straightforward, that our own solicitor recommended that he do the probate himself.  Even if my husband had opted to use our solicitor he certainly would not have charged anywhere near the fee you have incurred.  Meanwhile, the Law Society’s consumer booklet on solicitor’s charges states: “When you instruct a solicitor to carry out some work for you, your solicitor is obliged by law to give you information in writing about the legal charges you will incur.”  Did your solicitor provide you with this written fee schedule, which may only be an estimate of the charge? They are also obliged to give you a breakdown of all their fees, expenses and other charges, plus VAT in the actual bill.  Since you did not receive such a breakdown, and your solicitor is not cooperating you should make a written complaint to the Complaints and Client Relations Section of the Law Society, telephone (01) 672 4800. Alternatively, the Law Society suggests that you have your bill taxed by a court official called a Taxing Master. “This means they will look at your bill to assess and decide what charges you should 

pay.” A leaflet is available from the Taxing Master at (01) 888 6321.”   Good luck. 

 

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TM writes from Dublin:  I was the subject of a tax investigation by Revenue in 2002 in relation to a bogus non-resident account during the period 1980 - 1987. At the time I contended I had returned details of the bank accounts in question to Revenue, but in the absence of documentary proof, I was advised by my agent that I was obliged to pay taxes, interest and penalties totalling in excess of €65,000, which I made. At the time the Revenue official noted on his file the argument made by me that I had returned the relevant details in my tax returns. In 2006 I accidently found documentary proof to substantiate the claim I had made in 2002. Revenue repeatedly refused to reopen my file on the basis that it was outside the four year statutory period to submit a claim. However, after enormous effort on my part they conceded (mainly on the grounds that my claim was noted by the original Revenue official) and they have agreed to refund the €65,000.  Am I entitled to interest from Revenue on the monies refunded?  My second question is, is deposit interest subject to the health levies when computing all income liabilities for tax purposes?

You certainly are entitled to interest if you have been incorrectly assessed for income tax, penalties or surcharges; actually collecting this money, say tax advisors, could take some time and effort on your part, however. You will need to make an official appeal “and then doggedly pursue it as it wends its way – inevitably – through different officials and sections in the Revenue” one advisor told me.  I suggest you hire a good tax advisor to assist you.  Meanwhile all weekly income over €500 gross (except for pensioners, medical card holders and other social welfare recipients), including income from deposit accounts, is subject to the health levy which is now 4% on earnings up to €75,036 and 5% on earnings over €75,036.

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GP writes from Greystones: You recently gave good advice to MB from Co Laois who had €5,000 to dabble in shares. (Although, I would respectfully suggest that '"dabbling" in shares - is not to be recommended to anyone - ask Sean Quinn!!!) I am interested in investing further afield, especially, though not only, in the USA. I am interested in ETF's but also in options trading. I have done a little research but my most pressing decision is who to deal with at an economic cost. I have no intention of becoming a day-trader (I am a buy and hold investor at heart) but Charles Schwab has an account that pretty much sums up my position - it's a 'Core & Explore' account. I have my 'Core' investments and now I want to do a little (well-protected and limited) 'Exploring'. What I would like is an on-line, discount broker who doesn't look for too big a deposit, is secure and who doesn't charge the earth. Do you have any suggestions?

 

US and UK based execution only, on-line brokerage houses can offer what appear to be very low set up fees and competitive charges compared to Irish ones like www.sharewatch.com or www.fexcostockbroking.com but if you use a foreign, non-euro denominated brokerage like Charles Schwab, you are taking a currency risk both on the commission you pay as well as on the value of the non-euro denominated shares.  The strong euro at the moment means that the trading cost favours you, but it works against you on the share value side if you currently hold US or UK shares denominated in dollars and pounds. You need to decide if the cheaper transaction charges justify this currency exchange risk. ETFs are a good low cost play, but before you opt for foreign currency denominated ones, check out the ETFs on the ISEQ, (www.ise.ie) and on www.iShares.com.

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