Jill Kerby

COULD YOU MAKE A PROFIT FROM SWINE FLU?

 

However goulish it may sound, if you look hard enough, you’re likely to find a silver lining inside whatever cloud happens to be hanging over your head. 

In the case of swine flu, the silver lining, say stock market analysts could be in the form of three giant pharmaceutical companies:  GlaxoSmithKline (GSK), Roche (ROG-VX) and Sonofi-Aventis (SNY), all of which, reported the Financial Times last week, “are reaping billions of dollars in extra revenue amid global concerns” about the spread of the flu. 

According to the FT, these companies’ sales are being lifted by government contracts for flu vaccines and antiviral medicines like Tamiflu and Relenza, the latter of which are said to be effective treatments and are already being prescribed by Irish GPs. 

Most shares have been on the rise since March, when stock markets began  rallying after the huge collapse in share prices last year, but the picture for the big pharma companies has been particularly bright anyway:  from its 52 week high last summer, to a low of $27.15 in March ’09, GlaxoSmithKline, for example, was trading at $37.87 a share (at time of writing) on a strong upward trend.   The charts are looking very favourable right now for Roche and Sonofi-Aventis as well.  (You can check the daily price at www.yahoofinance.com)

That isn’t to say that these shares will keep rising indefinitely, simply that they have very favourable conditions for increased earnings if this pandemic continues in the winter, as is expected. to, into the winter.   

But financial advisors and analysts have been suggesting anyway that pharmaceutical stocks are certainly worth adding to a long term value investment or pension portfolio during this recession for the same reasons that it makes sense to add food manufacturers and distributors and other consumer durable shares that produce essential goods that people need, no matter the state of the economy or their personal circumstances:  we all need energy/fuel, we need to eat, to drink clean water, to wash ourselves.  It’s no wonder that giant companies like BP, Shell and Exxon, Brazil’s state owned oil company, Petrobras, Walmart and Tesco, McDonalds and Coca Cola, Proctor & Gamble and Microsoft have weathered the great recession firestorm better than many other companies that don’t enjoy their massive reserves of cash and relatively low debt.  

The other sectors that are worth including in a basket of shares, say investment advisors, are certain commodities that will be in demand by developing economies like China and India over the foreseeable future:  oil and gas and alternate energy sources; foodstuffs like wheat, rice, edible oils, sugar and meat; water treatment and distribution companies (that make de-salination equipment, pipes, etc); iron and steel and base and precious metals, the latter to satisfy not just the demand in these countries for jewellery, but to fill their national treasuries as concerns about the long term viability of the US dollar grow. 

The amount of money you invest in defensive, global stocks should depend entirely on how old you are and how much risk you can live with.   Be aware that there are significant costs involved – life assurance investment funds are hugely expensive compared to ETFs for example. You will also have to pay tax on dividends and on capital gains.   (The older you are, the less time you have to make up losses so you need to make sure you have sufficient ‘safe’ assets in your pension fund like bonds and cash.) 

I always suggest that if you have money to save or invest and you are not an informed, experienced investor, you should not just seek expert, fee-based advice from an experienced advisor, but you should do your own research as well.  One you know exactly what shares and investments you already have, free financial information sites like www.fool.co.uk or even YahooFinance.com are a good place to start and provide a huge source of data (on the movement of share prices, for example) on individual companies, funds and ETFs.  

The swine flu pandemic isn’t going to help the world economy recover – if anything, traders are getting rid of those shares and investment funds that are going to be even worse hit if even more people stop flying, take holidays, eat out or go shopping in crowded high streets. But even that kind of short selling could eventually be someone else’s opportunity to buy the survivors at rock bottom prices. 

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PP writes from Cavan: Your article in last week’s Sunday Times re endowment mortgages has left me worried. We have cleared our mortgage but kept on the savings part which we pay monthly. My question is this, does our endowment mortgage, which matures in 2013 become liable for CGT?  Also is the surrender value if we availed of it also liable for CGT?

Your endowment policy will be subject to an exit tax of 26%, the standard income tax rate of 20% plus an additional 6% surcharge.  The same exit tax rate will apply if you surrender the policy early.  Capital gains tax does not apply in the case of life assurance based investment policies, however, from August 1st year your policy will be subject to an additional 1% premium levy. The earlier article to which you refer referred to the higher tax treatment of matured or encashed endowment policies that were purchased in the UK and kept by their owner even after returning to this tax jurisdiction, not those purchased here. 

 

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OS writes from Dublin: I have been reading your articles on pensions over the past while. I am 55 and returned to work about 12 years ago, so my pension is not as large as I would like it to be. Worse still it has lost €12,000 since August of 2008. I am also about to take voluntary redundancy in September, despite being out on ill health grounds at present. I find the whole area of pensions confusing. I have been paying into the company pension scheme for the past 12 years, including an AVC. What is the very maximum that I can withdraw from my pension fund on a tax free basis, as I need to pay off part of my mortgage. What happens to the rest of the pension fund, my contributions, the AVC and the company contribution? Considering my age, what is the best option? 

Redundancy over the age of 50 allows a person access to their occupational pension fund before the usual retirement age of 65 (or 60 for some pension schemes).  You are also entitled to take the equivalent of one and half times your final salary as a tax-free lump sum from your portion of the pension fund/AVC and the remaining value of the pension must then be used to buy a pension annuity, from which you will receive an income for life. (Emergency measures introduced a few months ago by the government allows you to delay buying the annuity until the middle of 2010.) However, you also have other options.  There isn’t enough space here to describe them all so I suggest you engage a good, fee-based advisor to take you through them before your September deadline.  If, as it sounds, you are a member of a defined contribution (DC) scheme, one option you should ask the advisor about is whether it is in your interest to transfer out of the company occupational scheme and AVC and into a personal retirement savings account (PRSA) and PRSA/AVC. According to actuary Michael Leahy of Global Pension Options, a Dublin pension consultancy, a PRSA combined with a PRSA/AVC allows you to take 25% of the fund tax free, but no obligation to buy an annuity with the remainder.  This is an important distinction because pension income derived from the annuity can result in the loss, on a euro for euro basis, of the means-tested Jobseeker’s Allowance (JA) and other social welfare benefits, like rent or mortgage supplement if you qualify for such assistance, once your initial 12 months of Jobseeker’s Benefit runs out.  If your pension and AVC has been transferred to a PRSA instead, you don’t have to take income from the remainder of the PRSA once you take the tax free lump sum. By age 75 an annuity must be purchased with the remaining value of the PRSA, but not before then.  The decision is yours whether and when to draw down any income from the PRSA.  Also, if you die prematurely, the residue from your PRSA fund goes to your estate for disbursement whereas an annuity reverts to the provider, not to your heirs.  An independent pension consultant is the ideal person to speak to, but you can also contact the Pensions Board, www.pensionsboard.ie , tel 01-613 1900 for more information about your options.

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CD writes from Cork:  I recently heard you on a radio programme speaking about the possibility of Inflation becoming a factor in Ireland over the next few years. I have built up sizeable savings over the last few years [thanks to the advice of my parents when I was very young] and would like to look into possibly diversifying the savings into some possible inflationary proof areas. You spoke on the same programme about investing in gold, specifically in Perth, Australia? Can you please let me know the details of this and how I might be able to make contact?

 

There are a number of ways to buy gold – as coins or bullion from Irish or UK bullion dealers; as Perth Mint Certificates from the Western Australia Mint in Perth, as exchange traded funds (ETFs) that track the daily price of gold or a collection of as gold mining companies or by buying individual mining shares or gold share managed funds (see www.rabodirect.ie). Each carries its own cost and charges and investment risks. Physical gold carries a substantial premium these days, a delivery and insurance charge (depending on the provider) and annual storage charges that can amount to 0.75% of the value of the gold. Gold ETFs including one on the ISEQ (see www.ise. ie)are relatively low cost and involve the stockbroker transaction commission and a low annual fund fee, usually 0.5% or less and are are easily traded like a single share. The Perth Mint certificates, which are also sold by the Irish bullion dealers Goldcore.ie mean that you buy gold (allocated or non-allocated) from the Australia mint where the gold is kept at no additional annual cost or fee.  The purchase price is based on the daily price quoted by the Perth Mint plus a 2%-4% commission, depending on the amount you buy. There is an encashment fee, typically 1% for minimum purchase amounts of $10,000.

 

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It’s a common enough question in these worrisome financial times:  how safe are the Irish credit unions?  

 

Rather like with the banks, it all depends of course on which one you happen to have joined. According to Brendan Logue, the Registrar for Credit Unions in his separate report in the Financial Regulator’s annual report for 2008 (see financialregulator.ie), all is not well in the credit union movement. 

 

Of the 419 credit unions operating in 2008, just under a third of them – 133 - had high enough levels of arrears or rescheduled loans to trigger investigations by the registrar, a process that is on-going.  Ninety of them, nearly one in four, “were instructed to stop advancing any new loans for periods in excess of five years until they return to compliance with the limits set out in the [Credit Union] Act.” 

 

 

The growing level of bad debts among many unions has resulted in the registrar warning all of them “that lending for commercial property, project finance or main line business activity is not the business of credit unions and this type of lending should not be undertaken.”

 

 

Meanwhile, 76 of 101 credit unions that informed the registrar they were planning on paying a dividend in 2008 were subsequently told to reduce the size of the dividend after their books were examined.  The registrar doesn’t say how many credit unions paid dividends in 2008 but it has already been estimated that only about half did so.  This in turn has put pressure on credit unions, struggling with bad debts, as more and more members move their money to other deposit takers offering not just better returns, but any return. 

 

The registrar doesn’t name any of the 90 credit unions his office told to stop lending, despite the fact that they have serious bad debt or liquidity problems, so you will have to ask for a set of your individual credit union’s most recent accounts to get that information.   

 

But when you do, you might try to see the other elephants in the room that the regulator doesn’t mention in his report but could result in serious damage to individual unions as the recession progresses.  One in particular is the amount of unofficial residential mortgage lending that was done in the form of loans that were used as down payments for home loans at the height of the boom.  How many of those borrowers are now in negative equity or have lost their jobs?

 

The impact of the housing bust on lenders will be felt by more lenders than just the high street banks. 

 

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Health insurance is one of those consumer services that certainly hasn’t enjoyed (sic) a place in the -5.6% fall of the consumer price index rate for the year to June, as recorded by the CSO.  

 

The cost of “Health”, says the CSO, has gone up by +3.4%.   

 

If only. The cost of “health” for my family is up over 20% - the annual increase in our health insurance policy this year. And while our family’s income is down, like so many others employed in the private sector, our GP, dentist or medical consultants haven’t reduced their charges in line with the CPI.  

 

That said, the loss-making Vhi, has just announced that they’ve brought down the price of covering a child member on their three most popular Plan Bs by another €20, lowering the child member’s cost by as much as €140 since April. 

 

This is a welcome reduction for any parent paying the bill, but health insurance brokers like Jeremy Tucker of  buyhealthinsurance.ie and Dermot Goode of healthinsurancesavings.ie, who review health insurance costs for companies and individuals, describe the latest reduction as a “PR stunt” and “window dressing”. 

 

The claims record for children attending hospital “is tiny in this country”, says Tucker “and the cost to the Vhi or the other insurers is very small in their overall level of claims.”  

 

Dermot Goode says the €20 is a “token” reduction.  If the Vhi “starts reducing the cost of adult premiums”, he says, “that would be significant news.” Both also point out that even with these child premium reductions, a family of four – two parents and two children - are still better off price-wise in the equivalent plans offered by rivals Quinn Healthcare and Hibernian Vivas. 

 

The cost of health insurance is quickly reaching a tipping point, something that was always inevitable given how many people are losing their jobs. They don’t have much choice but to drop their membership, and hope they will find work soon enough in order to rejoin their insurer before the time restrictions for pre-existing conditions kick in. 

 

Anyone who is still employed, but under financial pressure can drop to a cheaper plan or to a cheaper provider – and clearly many are:  Vhi has reportedly lost 40,000 members in the past year, some of them switching to Quinn or Hibernian Vivas.  

 

Are the insurers, especially Vhi doing enough to cut their own costs?  The independent consultants are not convinced.  “If the Vhi, which says it has made a loss this past year, had to operate like any other insurer, which they do not because they are owned by the Department of Health, they’d probably be closing down some of their ancillary offices and introducing other cost cutting measures,” says Dermot Goode.  They may claim to be the most efficient private health insurance operator, “but there is no independent evidence.” 

 

Meanwhile, a professional review of your family’s existing health insurance policy will, at least, let you in on a well kept Vhi (or Quinn or Hibernian Vivas) secret – that there is nothing to stop you accessing any of the three insurer’s equivalent corporate health plans. Not only can the price of the corporate policy be lower than those sold to individuals or families, say the independent advisors, but the benefits might be superior too. 

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MC writes from Limerick.    I have €11,000 remaining in a Bonus Interest Account with Permanent TSB, the result of an SSIA.   It is no longer earning interest in this account and I would be grateful if you could advise what account would be best to lodge it with a view to leaving it there safely.  Also I took out a policy with the Permanent TSB in 1996 which is now worth €4,000 less than I put in.   This was with a view to providing education for my children.   The bank has now informed me that they can give me no information on this account as it is Hibernian Aviva who hold the account.   My monthly repayments are €150.   The current value of policy is approximately €9,000 approx.  Any suggestions for this money? 

 

The collapse of stock markets in 2008 and the first quarter of this year has been a major blow to everyone from parents saving for their children’s education, like you, to your parent’s and their hopes for a comfortable retirement. Of your two sums of cash, the €11,000 is by far the easier to sort out:  the best yielding demand deposit accounts is from Halifax with a 3.75% gross yield. If you are willing to leave your money on 35 day notice, your existing bank, the PTSB offers 3.5% gross. If you are willing to fix your term for at least six months you can achieve a 5% return, but I believe you would be taking a risk leaving any money with Anglo Irish Bank, despite the government’s 100% guarantee of deposits – there are some genuinely solvent banks still operating in this country, they just don’t happen to be Irish ones.  As for the €9,000 in your Hibernian investment the chances of you making up these losses in the near future don’t look very good.  The March to May rally in equity markets appears to be reversing and there is very little good news on the horizon for companies or consumers.  If you need to draw down this money anytime soon for the children’s education, there is no point in leaving it in an investment fund with high annual charges, fees and commissions that must be paid regardless of fund performance.  A safe deposit fund is the obvious option if you don’t want to take any more capital risk, even after the 25% DIRT on the interest.  I do not suggest you purchase any of the latest “tracker bonds” that track (and cap the returns) from different stock market movements and guarantee your capital back over a period – usually four or six years.  These are expensive and non-transparent.  You would probably be just as well off buying €1,000 worth of a solid blue chip stock - say Shell or BP or even Tesco, and the remaining €10,000 on deposit for four or six years.  

 

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DMcG writes from Wexford: Briefly, I bought my house in November 2007. It was a new build and I bought as an owner-occupier and paid no Stamp Duty. As a result of the economic climate I need to go to London to find work and I want to rent my house while I am gone. My solicitor said if I did this I would be liable for stamp duty on the house as it would be classed as an investment, which was never my intention. I need to rent it to cover some of the mortgage and if I am liable for stamp duty, which I was told I would have to pay up front, then there is no point in renting. My question is, am I liable to pay the stamp duty and if so how much, and do I have to pay up front? I fully intend to come back to live in the house. I paid €220k. I would appreciate any help you can give.

 

Your solicitor is correct. As a first time buyer you were entitled to stamp duty relief, but it is subject to clawback provisions.  According to the Revenue, prior to December 5th, 2007, there was a five year period from the date of purchase in which you could not rent your home or face the clawback of a portion of the stamp duty. The exception was to avail of the Rent-a-Room scheme. This five year exclusion period was reduced to just two years if the property was purchased after December 5th, 2007. But even if the property was purchased before this date – as yours was - no stamp duty clawback would apply if was rented out in the third, fourth or fifth years of ownership.  If you can manage not to rent out your property for another year and a half, that is, once you have owned it for three years, you won’t be liable to any clawback of the stamp duty relief you currently enjoy.  However, if you must proceed with renting out your home, the November 2007 rates will apply.  In your case, the first €125,000 of value is exempt and the balance - €95,000 – will be liable at 7%, or €6,650 and will be payable from the day you receive the first rental payment. For more information about Section 92B stamp duty relief and clawbacks see http://www.revenue.ie/en/tax/stamp-duty/leaflets/section-92b.html 

 

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RB writes from Delgany: I transferred to Quinn HealthCare when they acquired Bupa Ireland’s clients in 2007.My understanding was that Quinn would honour the terms and conditions which existed under Bupa membership. I had a 10% existing group discount which applied during the first year under Quinn, but it disappeared last year. I queried this and was told that Quinn were just responding to government recommendations. Only later did I discover that Vhi continues to give group discounts. Can you throw any light on this?

 

Quinn Healthcare maintained a price freeze for 2007, the year after it took over Bupa Ireland but from January 2008 it abolished group discounts and introduced a 3% surcharge for instalment payments. This change attracted a lot less attention than I imagined it would at the time – probably because Quinn Healthcare rates were quite a bit lower than conquerable VHI rates, but consumers are increasingly conscious of the escalating cost of health insurance this year, and will be even more so when the full effect of the €260 and €53 surcharges for every adult and child member are implemented by Quinn and Hibernian and are paid over by the government to the VHI.  If you haven’t already done so, you should review your health insurance to make sure you are both in the appropriate plan and are not over-paying for your cover. You can do this yourself by checking out the Health Insurance Authority comparison charts are www.hia.ie or engage a fee-based advisor (see www.healthinsurancesavings.ie).

 

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The financial services watchdog wants more teeth.  

 

 

In cases where he believes it would serve the public good, Joe Meade, the Ombudsman, is looking to be able to name and shame the banks, stockbroking firms, insurance and investment companies that he finds against, a power that he should have had when his office was first put on a statutory basis four years ago. 

 

 

Certainly the cases he’s highlighted from the beginning of this year supports his position, but the occasional naming and shaming of bank  that produces a particularly loathsome case of financial elder abuse (of which the Ombudsman has discovered many in the past four years), perhaps his judgements would carry even more weight in the wider financial services industry if there was some provision to make the individuals who have sold the products – or their managers and higher executives– personally responsible for their actions.  

 

 

This could vary from fines, suspensions, demotions and dismissal to prosecutions instigated by the Financial Regulator on behalf of the Ombudsman.  

 

 

The three cases involving elderly investors that Joe Meade settled in the first half of this year and highlighted in his report last week, are extreme examples of the way elderly bank customers in particular are targeted by the investment side of the banks – who else has hundreds of thousands of euro sitting on deposit?  But Meade clearly thinks they are also only the tip of the iceberg of poor to bad advice this age group may be receiving and he also wants the institutions to be required to review all such cases involving older depositors in particular which can then be examined properly after the new joint regulatory body is created later this year. 

 

 

I hope I’m not doing the Ombudsman a disservice by saying that whenever I talk to him I get the impression that he is genuinely disgusted by the cavalier attitude that the banks and investment firms have, not just to their financially unsophisticated, elderly clients, but to the regulations under which they are obliged to operate.  

 

 

 

The purpose of confirming a customer’s age, risk profile and previous financial history (ie, whether they have ever owned shares, etc.) – all part of the required sales process - is to help guide the advisor against, for example, selling a physically frail couple in their mid-80s, with life savings of €300,000, a six year investment bond that carried stiff early encashment penalties. 

 

 

I have an elderly spaniel with more common sense than that displayed by the advisors being admonished by the Ombudsman.   (Of course, Monty’s rewards for good behaviour don’t include great big juicy commissions.) 

 

 

All the Financial Ombudsman’s quarterly reports and case studies are available on his website:  www.financialombudsman.ie.

 

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Meanwhile, interesting news from the UK:  from 2012, their financial regulator intends that sales commission for independent financial advisors will be scrapped and replaced by a fee only remuneration system.  We inevitably follow the UK lead in this area, but why wait for it to happen there first?

 

 

The merits of paying a fee over commission is that an advisor who is paid directly by his client and not the product provider is more likely do the right thing and recommend the most suitable product, not the one that pays him the highest, often on-going, financial reward.  

 

 

Only a small minority of financial advisors here charge fees, mainly to higher net worth clients who are already accustomed to paying for independent accountancy, tax or legal advice.  It’s only partly due to the commission system; which encourages the quick, lazy solution; it’s also because only a small minority have the training and expertise to provide the level of information and advice that commands a professional fee. 

 

 

Aside from the fact that expensive commissions have disproportionately impacted on the value of common purchases like whole of life assurance policies, education savings plans, AVCs and endowment mortgages over the years, the other, compelling reason we should adopt fee-only remuneration is that easy lure of high commissions are undoubtedly at the heart of the financial horror stories the Financial Ombudsman keeps unearthing that involve elderly investors.

 

 

There’s no such thing as “free” financial advice. Fee-only remuneration here can’t come soon enough.  

 

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As you might expect, nine out of 10 women participating in a Standard Life survey about the recession, say they’ve been affected, with two thirds of them cutting back on day to day spending, more than a quarter having seen their pay cut and nearly 20% having their hours reduced.  

 

Even with their incomes cut, more women are saving than ever before – €282 a month on average with eight of ten Dublin women surveyed saving €320 a month.  

 

This is all very good news for Standard Life and other pension companies keen to hoover up all these extra savings. Gillian Ryan, an account manager at Standard Life even says that she was pleasantly surprised, that it was younger women, the 25 to 34 year olds, who expressed the most interest in investing some of their savings in a pension: “You’d expect older women to be the most favourably inclined towards pensions given their proximity to retirement and the generous tax reliefs available.”

 

I’m not surprised.  Older women who’ve been investing, for example, in managed pension funds for the last decade, have earned a measly 0.6% per annum average return. Perhaps no one mentioned this to Ms Ryan and those 24 to 34 year olds.

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PRSA’S OFFER MORE RETIREMENT FLEXIBILITY

Last week’s column pointed out how advantageous it can be for people who have lost their jobs and are over 50, to have a PRSA – a personal retirement savings account – instead of a more conventional company defined contribution (DC) pension. 

But the PRSA option is also one that retirees, and early retirees should also be considering, say pension advisors. 

At the moment, when you retire and you have been a member of an occupational pensions scheme you have a number of options: 

You can decide to take a tax-free lump sum from your fund and purchase an annuity with the balance (until 2010 you will have up to two years to buy the annuity) that will then produce an income for life.

If you are 5% director of the company you can take your tax free lump sum and invest the balance in an Approved Retirement Fund;

Or, if you have no more than 15 years membership of your occupational scheme (and it is worth at least €10,000), you can convert your benefits into ‘deferred’ benefits by leaving service just before your retirement date and then transfer your share of the occupational pension (and an AVC – Additional Voluntary Contribution, if you have one) to a PRSA, subject to certain conditions. 

Michael Leahy is an actuary and financial advisor with a company called Global Pensions Options who now provides the required actuarial certificates to accommodate the transfer of occupational benefits to PRSAs, for workers who want to take this last option. 

Leahy explains that transferring to a PRSA just before retirement widens a worker’s options. 

First, the transfer to a PRSA may allows some workers “an uplifted scale of tax-free cash” compared to the usual 3/80’s of final remuneration for every year of service. 

“With a PRSA the maximum tax free cash entitlement is 25% of the fund,” explains Leahy.  “Occupational benefits are revalued in line with the consumer price index (CPI) from the date of leaving service to the date benefits are taken. Where benefits are taken from an occupational scheme before the normal retirement date there are additional restrictions on the amount of tax free cash that can be taken.”

Next, aside from potentially more tax-free cash, the worker who transfers his occupational pension to a PRSA can decide when they actually want to start drawing down their retirement income, says Leahy. (The occupational fund holder must buy the annuity income, and if annuity rates are poor – they are linked to bond markets – your income for life could be disappointing. The annuity income also reverts to the life assurance company, and not to your family at death.)

If you want to keep working at another job, or have other income you can live on for awhile such as  rental income from a property you own, the PRSA option means that your entire pension fund can remain invested in one or several separate PRSA accounts. 

“There is no requirement for the PRSA contracts to be with the same provider, of the same size or to have the same maturity date,” says Leahy.  “They are completely independent of each other and the benefits may be taken from them at different times.”

By transferring to a PRSA, you have the flexibility of taking a tax-free payment, to either buy an annuity or not, and to encash, or leave the rest of your money in PRSA funds.  This money can then be drawn down in stages as you need it, all the while keeping an eye on the tax-free income threshold for retired individuals and couples. If you keep you annual income from the PRSA below this threshold – currently €20,000 for an individual and €40,000 for a married couple – your pension will effectively, be tax-free. 

Not having to buy a pension annuity in retirement and being able to have a staged retirement, is something that has mainly been available to the self-employed and 5% directors.  The PRSA early retirement option is now a possibility for many people who are part of a group pension scheme. 

Before you consider it, however, make sure you understand all the cost implications: there are no fund costs or penalties to pay in tranferring your occupational benefits to a ‘standard’ PRSA, but there is a cost – usually about 1% of the value of your pension fund – in arranging for the mandatory actuarial certificate.  There is also an annual management fee of no more than 1% for a standard PRSA.  There are no legal limits on costs associated with ‘non-standard’ PRSA’s.

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MM writes from Dublin: We were unfortunate enough to have one of those dastardly endowment mortgages when we bought our first home in the late 80's.When we moved back to Ireland we got an ordinary mortgage but kept up the endowment savings plan part of the old mortgage as the redemption value was so poor.  Now that plan has come to its end and we have received its poor return and used it to pay off our mortgage. Is there any tax implication from the money that came in from the plan? 

Unfortunately, offshore investments taken out before September 20th, 1993 are subject to a 40% capital gains tax rate, and neither indexation or your annual CGT annual exemption apply, says the Revenue. (From January 1, 2001, such policies gains are treated as income “provided details of the disposal were correctly included in a person's tax return. Otherwise a charge to capital gains tax arises.”  You might want to consult a tax advisor about the size of your gain, and if there was a taxable charge in the UK, whether your Irish tax can be mitigated by the double taxation agreement with the UK. 

 

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GM writes from Dublin: I have had a tracker mortgage with Ulster Bank since mid-2004. More than a year ago, my employer changed my pay day and instead of getting paid at the end of the month, I now get paid on the sixth of every month. However, Ulster Bank refused to change the day my monthly payment is due and insists it can only take the mortgage from my current account on the first day of every month. Because there is no money in the account on that day my the mortgage goes into arrears and as a result, I have been receiving a letter every month from Ulster Bank imposing an “unpaid outwards charge” of €12.70. I arranged with my local Ulster Bank branch in December to set up a separate current account so that I would have money for my mortgage payment but, despite several phone calls Ulster Bank didn’t start taking money from this account until May. Each time I receive a letter from Ulster Bank House Mortgages, I ring and ask for a manager and explain my problem. Each time they insist they cannot change the direct debit date. Why won’t they accommodate me?

 

Ulster Bank told me that the terms and conditions attaching to your mortgage state clearly that mortgage repayments must come out of your (and every other mortgage-holders’) account on the first of the month.  There can be “no flexibility to change this date”. Customers like you who need a different repayment date are advised, as you were, to open a second current account to feed the original account from which the mortgage payment is taken. If you avail of free banking there is no additional charge, says the bank.  Whatever about that charge, you have been penalised several times by the bank for missing your repayment by a few days, and I think you should not only demand a refund for these €12.70 penalties but that you also insist that your credit rating, which has been negatively affected at the Irish Credit Agency, be urgently restored by the bank on your behalf.  Ulster Bank suggests you speak to one of their new MoneySense officials at your branch, but if this still doesn’t sort out your problem I suggest you file an official written complaint with the customer services manager and then, if necessary, with the Financial Ombudsman. Spokespersons for AIB, NIB (and Bank of Ireland) told me they accommodate their mortgage customers who need to set new repayment dates, though the instructions need to be done in writing, with five working days notice. Ulster Bank needs to follow suit. 

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KM writes from Portmarnock: I read your article on identify theft with interest. I once owned Eircom shares, which morphed and shrunk into near worthless Vodafone shares. I received a cheque by post annually. Now Vodafone has decreed one must have dividends paid into one's bank, or building society. The company has requested that I - and presumably other Vodafone shareholders - supply account details, otherwise they will hold the money. I do not supply such details to anyone and I pay bills by cash, or cheque. So, is Vodafone in breach of any data protection rules and have I any redress? In addition, is Vodafone entitled to hold onto someone else's money?

This proposal from Vodaphone to pay your dividend into a nominated bank or building society account cannot happen unless the amendments to the Articles of Association are approved at the company’s AGM on July 28th.  Once approved it will be perfectly lawful for the company to adopt this new payment method and you will be within your rights to decline to participate, but under the new articles, says Vodaphone, “your dividends will be held for you as a non-interest bearing deposit until you send us your completed Direct Credit instructions.”  You do have another option – to have your dividends reinvested in the company’s Dividend Reinvestment Plan (“DRIP”) from February 2010, the date after which one or the other option must have been selected by Vodaphone shareholders. The biggest long term gains from shares are made by re-investing the dividends; since you prefer not to provide any bank details, this might also be your best option. A pdf file of the Vodaphone proposal is available here: http://www.vodafone.com/etc/medialib/agm_09.Par.93293.File.dat/shareholder_letter.pdf

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Now that Professor Morgan Kelly of UCD’s earlier prediction that Irish house prices could fall by 75% - 80% before bottoming out appears to be on course, perhaps we should get the debate started on what should be done for the hundreds of thousands of homeowners with negative equity and increasingly, with negative incomes. 

 

The latest Daft.ie survey shows that property prices (albeit on a tiny number of transfers) has fallen in the first quarter of this year by 8.5%. If this pace keeps prices could drop by in 2009 on top of the approximately 25% fall  Daft say they’ve fallen since the start of 2008.  

 

With billions of euro already borrowed to bail out the insolvent property developers will there going to be any money left over to bail out defaulting, insolvent homeowners?

 

Early this year, when the prospect of mass defaulters didn’t seem very imminent, but some politicians were nevertheless bleating on about how young people who jumped into the red-hot property market were innocent victims of unscrupulous lenders, I wrote that the moral hazard risk of a taxpayer bail-out should be enough to dismiss the very idea. 

 

Why would anyone, (I wrote), struggling with a huge mortgage in a falling market, keep making their repayments if they knew the government was willing to step in to bail out the next door neighbour whose financial position was perhaps only slightly worse than their own?

 

Well, that was long before Nama.  A ‘great recession’ has turned into a full-bodied depression, and anyone who still thinks they see ‘green shoots’ in America or Europe is clearly unaware that California, the 8th largest economy in the world, is now paying its bills with paper IOUs (something the USA is also doing, only with paper known as ‘dollars’.) 

Wages and other asset values are in a downward spiral everywhere in the west –and as jobs keep disappearing, so does the ability of people to not just pay off their existing debts but to take on more debt, the warped cornerstone of modern economic “growth”.  

 

In the Irish context, there isn’t a hope in hell that first-time mortgage holders, with no equity and diminishing earning capacity, are ever going to be able to realistically repay their four or five hundred thousand euro property debts.

 

Like the multi-billion euro debt yoke the country has inherited from the developers, the one that’s weighing down young workers is also going to have to be partly shifted if this economy is to ever recover. 

 

The government has committed generations of taxpayers to the great property bailout and it now looks inevitable that the number of defaulting homeowners is going to get bigger as unemployment benefits run out; we need to consider whether Nama should be expanded to include the insolvent private residential sector. 

 

And as for moral hazard, well, we’re so far down that road already, it hardly bears worrying about anymore. 

 

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Dublin has some way to go before we reach our proper, ‘mean’ position on the table of the world’s most expensive cities.  We’ve dropped from number 16 last year to number 25 today, according to the annual Mercer Consultants survey, but we’re still only a few places behind Dubai, at number 20 and just above Abu Dhabi at number 26. 

 

And just like those two, property-fuelled bubbles in the middle east, where tens of thousands of “investors”  completely lost their reason in their mad scramble to buy overpriced bricks and mortar, we will also no doubt end up at the middling to lower end of this notorious price register in a couple more years.

 

It can’t happen soon enough.  There never was any credible reason, except that we’d been caught up in a cheap credit-fuelled bubble, why Dublin should have ever cost as much to live in as Tokyo, New York or London where millions of people compete for scarce living resources in cramped geographic areas.  

Cities go up and down this index like yo-yos,  mainly due to exchange rate volatility against the US dollar, but by any criteria Dublin is not in the same league as New York or Moscow or Beijing and if gauged by the quality of life (and housing, transportation and even entertainment) Dublin doesn’t rank all that well besides the likes of Sydney (at number 66); Toronto (at 85), Montreal (103rd) or even Buenos Aries (112th). 

 

It’s just as well we’ve falling off this particular perch. Over recent years, a depleting number of Canadian friends and family could never understand how Dublin merchants could justify charging them London or Paris prices.  A nice low future ranking is a sure fire way of bringing them back. 

 

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When a charity is spending a million euro a week, you don’t look even a bank gift horse in the mouth. I am told the €18,000 in sponsorship and donations raised by the first annual NIB Irish/Danish soccer tournament last month was much appreciated by the Society of St Vincent de Paul.

 

The V de P is the country’s largest domestic charity and like many others, is struggling to meet the increasing requests for help as unemployment skyrockets and wages fall in households that still have big mortgages and other bills to pay. 

 

Since none of us know when we might need help, if you haven’t done so already and still have an income, now’s the time to discover your charitable gene. 

 

Meanwhile, a nice gesture by all the banks would be to exempt charity direct debits from any bank charges, especially since they’re currently raising their credit card interest rates and penalties.

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NW writes from Dublin:  I read your column regularly and have noticed that for some time you have recommended that savers make sure their bank is safe as well as getting the best interest rate.  I am wondering if you have any views about Investec (I have never seen you mention them before.)  My husband and I took the last of our savings – about €40,000 out of Irish Nationwide (we were hoping to get the windfall) and saw that Investec is now offering between 3.75% and 4% for six and 12 month fixed rate accounts. They only pay 3.1% on their three month fixed account in the UK.  How safe is this bank?  

 

The banking side of Investec is regulated by the UK Financial Services Authority and all deposits up to stg£50,000 come under the UK deposit compensation scheme in the event of insolvency.  The Irish fixed rate accounts all require a minimum €20,000 deposit and allow one or two withdrawals only (depending on the term) without incurring an interest rate penalty. As with Irish depositors who are depending on the Irish government’s bank deposit promise, your money is safe as long as the UK Treasury can afford to guarantee every depositor with €50,000 but according to Investec’s own website (see www.investec.com/en_ie/#home/investor_relations/financials___forcasts/credit_rating.html+uk), Investec Bank UK has an individual rating of C from the ratings agency Fitch, and a C minus Financial strength rating, a Baa1 (negative outlook) Long term deposit rating and a Prime-2 Short term deposit rating from Moody’s.  By comparison, RaboDirect is rated AAA by both Moody’s and Standard and Poors and is the highest rated bank in Ireland but its deposit rates are quite a bit lower because it does not have to pay a risk premium to depositors. 

 

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EB writes from Dublin:  On the advice of a broker, which I accepted at that time, and agreed with them that they were giving me the best advice available, I signed up for a policy from Friends First called Special Savings Account. This was in April 1999 for a nine year policy which matured this year when I was a few months over 70 years and would be needed as a supplement to my state pension. I paid into this policy over €12k. Then due to a lack of funds and on the advice of an actuary friend I stop paying.    In April 2007 the account was worth €17k. The policy has now matured and Friends First has told me it is now worth approximately €8,000. At no stage was I aware that I could cash in this Savings Account. The broker has checked this out with Friends First and assures me this is the correct amount. I am at a loss of €4,000 and can do nothing about it, maybe this letter would be of assistance to other readers.   If you take out a Friends First Special Savings Account or similar, be careful, it may turn out to be a Special Savings LOST Account.

 

The timing of the maturity of this policy was very unfortunate – stock markets everywhere fell by 30%-40% in the year to March ‘09 and here in Ireland, by over 60%. This situation has been repeated across every investment company, so your experience with Friends First is not unique. What is unfortunate is that your broker didn’t do more to advise his customers whose policies were closer to maturity to consider a free switch within the selection of funds at Friends First as the markets started to slide in early 2008. My personal view is that in the case of actual Retirement Annuity Contracts and other personal pensions, it should be mandatory that clients be offered a review as they get closer to retirement age so that they can move their funds out of risky assets like stocks and shares and into ones that protect their capital, like cash funds and ideally, indexed-linked bonds.  Your story does make a good lesson for others: first, always know exactly what you are buying before you sign an investment contracts and then make sure you review your policies every few years, especially as it gets closer to its maturity date or your retirement. 

 

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JM writes from Dublin: I left my employer a few years ago and have an AVC in addition to my occupational pension. The AVC has lost nearly a third of its value since this time last year. I would like to access the tax free part of the pension and AVC (for pressing financial reasons – I am nearly 60) – and have read that transferring my pension and AVC to a PRSA would allow me to do this. But I have been advised not to do so because the transfer costs would be too high.  I thought you could transfer a pension with less than 15 years worth of contributions to a PRSA for no charge? Despite meeting with the company’s pension manager I still don’t fully understand how the charges are determined. 

 

The calculation of transfer values from defined benefit pensions (the kind you have) to other employer’s schemes, into buy-out bonds or PRSAs has been a bone of contention with fund holders for many years.  The calculation is done by actuaries who must take into account not just the value of your portion of the pooled pension, but its projected value up to retirement, how much it would cost to buy similar benefits on the open market and a consideration of the various fees and charges that are also involved in your portion of the pooled pension. Independent financial advisors I know say they frequently challenge the calculation and have succeeded in having transfer values improved. You are entitled to move your AVC to an AVC PRSA right now, but you cannot access the money in an AVC/PRSA separately to your DB occupational pension before your retirement age.  If this had been a private pension plan – the kind self-employed people own, or those whose companies never operated an occupational scheme - you could have transferred it to a PRSA at no charge (except the cost of the actuarial certificate) and access the funds prior to your retirement age (so long as you were over age 50).  The transfer process, whether it involves your entire pension and AVC or just the AVC, requires an actuarial certificate. If you still want to consider such a move, you should engage a private pension advisor/actuary who can act on your behalf with the company actuary at your former company. In the end, he may very well agree that shifting your DB scheme would be against your financial interests.  As for the AVC he may be able identify a better asset fund within your existing provider’s stable of AVC funds so that it too can remain in place but produce a better or safer return. If there is no suitable fund, then he can also help you shift the AVC alson into a PRSA AVC.  But remember you cannot access the money until you reach your official retirement age. 

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Unlike the households of Ireland, the government believes there is no urgency in cutting its cloth to suit its measure:  according to the Taoiseach, the long awaited An Bord Snip Nua report is only going to be considered by the Cabinet ‘sometime later this month and then debated by the Dail when they get back from their long summer holiday next September.

 

Families everywhere have been slashing their budgets since our economic tsunami hit last autumn.  Now, despite all the uncertainty about unemployment, higher income taxes and the dreaded property tax in the next budget, we’ve been given the entire summer as well over which to fret about what might be in the An Bord Snip Nua report. 

 

One cut that is likely, and will affect every family with children, will be the universal child benefit, currently paid to 600,000 – mainly – mothers at a total cost of €2.5 billion. 

 

The first two children (via the parent) receives €166 a month and the third and subsequent child, €203. The parent with three children therefore receives €535 a month or €6,420 a year, tax-free.  If they earned this money gross and were in the tax net – a possible recommendation -  they’d be paying either €107 a month or €1,284 at the standard 20% rate, or €219.35 a month or €2,633.20 per annum at the marginal, 41% tax rate.  

 

In a tiny country like Ireland, means testing or taxing child benefit should have been in place from the start. But politicians love to be loved, and a universal child benefit is a way to look like you’re doing something for the children of the nation, even if what you are really doing is trying to buy their parent’s vote. (Especially if you increase the benefit by 266% between 2000 and 2009.)  

 

A €6,420 untaxed child benefit for a parent of three is a pretty substantial bribe, whether you’re  living entirely on social welfare benefits or earning a typical middle class income of €50,000 or €60,000.  The only constituency that didn’t benefit at all of course, were the childless, who I expect are watching to see An Bord Snip’s comments about CB with great interest. 

 

If they recommend taxing the benefit at either the standard 20% rate for all, which would return it to 2004 levels, or at the parent’s highest rate (41%), it’s going to be a major administrative headache for the overstretched staff of the DSFA who will have to identify those parents who qualify and those who are exempt and for employers and the Revenue who will have to collect and implement the tax.  

 

Ditto for means testing: at what income does a parent – mother only or both parents – not qualify for the payment? Is it gross or net income?  Does the number of children in the family influence the income threshold?  What about the size of a mortgage or rent and other outgoings?

 

Had the snippers asked me, I would have told them to recommend abolishing CB altogether and redirect the appropriate €2.9 billion to the growing number of parents who are not in a position to properly feed, clothe and educate their children and hand back the rest to everyone on the tax-rolls up to last year and who are in a far better position to spend their refund more wisely than this government (that wants to keep giving billions to insolvent banks and property developers.) 

 

Too simple?  Perhaps.  Brutal?  Yes, that too.  But this is an economic depression we’re caught in, not some typical business-cycle recession that can be tweaked away with a little monetary adjustment here and a bit of token cutting there.  Nor do I believe the vast majority of working parents, who know too well what trouble we are in, would dump their children on the side of the M50 if their universal benefit was abolished. 

 

Dumping the politicians, on the other hand, who still don’t get it, is another matter. 

 

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If last week’s heated debate on RTE’s Liveline about the application of the token €200 second home tax to mobile holiday homes is anything to go by, the battle-lines are already being drawn up over the introduction of the wider property tax next December.

Callers were furious that their modest, impermanent, summer dwellings, on which they already pay fees to the site owners where they are lodged, attract the tax. Many described it as a disproportionate tax for holidaying at home. Given that the airport travel tax is just €10, they have a point. 

 

But what was also upsetting a number of them, is the thought that their mobile homes, if they are lumped in with all holiday homes, will get caught up in the new property tax.

 

Most countries with a property tax don’t differentiate between family homes and holiday homes; both use local services and both attract the marketable rate or tax.  Usually, because it may be smaller and outside the expensive urban area, the holiday home attracts a lower tax rate, but when the starting point is just €200 a year to begin with, these mobile home owners may have very good reason to worry. 

 

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Life insurance sales are up by 20% this year, say Citadel, a financial services network and coverage now averages €300,000.

 

I’m surprised that the amount is that high – so many people underestimate how much money their families would need to replace a bread-winner’s earnings – but the higher sales, says Citadel reflects not just how people become more conservative about their finances during a recession but also how they often use a recession as a reason to review their financial position.  

 

Life insurance is often a benefit that disappears when you lose your job.  Another reason to make sure you have some affordable cover right now. 

 

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