Jill Kerby

 

EVEN SCOTTISH EUROMILLION WINNERS HAVE FINANCIAL WORRIES

 

The couple from Scotland who won last week’s €185 million EuroMillions draw now have an entirely new set of personal finance issues to deal with.

No longer do Colin (64) and Chris (56) Weir, they have to worry about the usual problems of generating income, paying bills, educating children, making provision for their retirement.

Their worries now have to do with the management of, dare I say it, too much money:  €185 million is the sort of windfall that requires far more care and attention than an earned salary. 

When you have €185 million in the bank, rather than say, even, €185,000, your expenses and costs don’t get smaller, they soar: aside from now needing to engage and pay for accountants, tax, and financial advisors, you also need full-time private security.  Forever.

I know that most people reading this believe that they would happily put up with the ‘inconvenience’ of a lottery win that is greater than the gross domestic product of some developing nations.

 But the Weirs, who have lived an ordinary, prudent, middle class existence up to now and say what they are most interested in doing is to travel and ‘securing the future’ of their two children (who are in their early 20s) have lost their anonymity.

 That said, the rest of us have to get on with the more mundane task of coping with the reality of our lives right now and that means coping with not just lower incomes (or no incomes) and higher taxes, but the fact that the country itself is bankrupt and part of a wider economic eurozone that is also in serious trouble.

We Irish are responding in a number of ways.  The government is doing what it has been told to do by the EU/ECB/IMF by repaying the insolvent bank debts and tightening the spending screws.  By December, another austerity budget worth probably €4 billion worth of cuts and taxes will be introduced. 

Because public sector pay/pensions and existing social welfare payments will not be touched – together, these two alone account for more than all tax revenue raised – we all need to be prepared for the public spending cuts that have already been flagged regarding hospitals, schools, other contract employment, the widening of income tax bands and tax credits, and numerous social welfare benefits that will be simply cut or the terms under which one can qualify, tightened.

The reaction of the citizenry to our increasingly difficult economic circumstances is pretty much on course as well:  those people whose lives are going to be impacted by the cuts – communities whose hospitals are being closed; parents of children losing teaching assistants or affordable bus transport; nurses who see the effect of cutbacks on their wards and even judges who are unhappy about their pay (finally) being cut – are protesting.

Those who still have some disposable income are saving it.

Everyone is sincere in their protest, and genuinely feel let down by politicians and by the state.  But they fail to see the wider picture when it applies to their little individual position: the state is bust and the only way funding is going to be re-instated for them (or their hospital, or school or roadworks) is if it is taken away from somewhere/someone else.

For example: there are nearly 100,000 homeowners, deep in arrears. Many of them are unlikely to ever repay their huge mortgage debts, even if economy recovers.  But they are still living in their homes for one simple reason:  if they all lost their homes because they were deemed personally insolvent, the Irish banks would fail.  Instead, money from the European Central Bank continues to backstop these debts (via the Code of Conduct on Mortgage Arrears) and behind them, ultimately, is the taxpayer who will be presented with this bill as well.

Would these ECB millions be redirected to pay for Roscommon hospital or to Special Needs Assistants if they weren’t going to the banks and mortgage borrowers? Probably not. But every decision the government takes to re-distribute differently what little money is available to them must come from somewhere else.

As for our savings – they’re up again.  One in every €7 worth of disposable income is now being saved for one very good reason:  we’re all worried – quite rightly - about the future.

I think there are three top financial priorities you should be focussing on, especially in light of last week’s European bank stress tests, which have, frankly, just upped the eurozone’s stress levels.  They are, 1) the security of your money and savings, 2) health care provision as the cutbacks intensify and 3) can you afford to retire?

We’ll start next week with savings.

You might not have be the lucky winner of  €185 million but you certainly have one worry in common with the Scottish jackpot winners: the security of your savings.

In the 36 hours that the Weir’s took to claim their winnings, they lost over Stg£20,000 in interest. 

If they leave all their winnings in sterling – all £161,653,000 worth – they will watch a large chunk of it bleed away due to inflation and the devaluation of their currency, which is now underway as the Bank of England tries to inflate away the UK’s catastrophic debts.

It could happen to you…albeit on a smaller scale. 

 

 

 

 

 

 

 

Tweet

Who is liable when joint asset is at risk?

 

CD writes from Dublin: My sister and her husband jointly own an apartment in the south of France that was bought with her family inheritance. However at the moment her husband has a number of other large property loans worth about €1.5 million to pay back that he bought with two other men and he is negotiating with the bank to alter and reduce the repayments. He is self employed and the repayments are unsustainable for him and he has knowingly begun to skip payments. There is a possibility that the husband and wife's foreign property may be at risk of going to the bank in the future as they do not know how things are going to work out.

Should my sister put the property in her own name to protect it from the bank seizing it if things were to reach that point?   

John Hogan of Leman Solicitors in Dublin has suggested that any attempt by the husband to shift his portion of the French property to his wife in order to prevent it from being part of his assets that are taken into account for the settling of debts is unlikely to be successful. Such an action contravenes, he suggested, Section 74 of the 2009 Land & Conveyancing Reform Act which sets out to prevent any action that could be considered a way to defraud a “sub-purchaser or creditor” from the kind of transfer you describe.  

 

That said, your sister’s portion of the French property could not be claimed by the bank though she might have to buy out her husband’s share of the value that he owes the bank if she wants to keep the property.

 

There have been some very high profile cases of developers transferring property to their wives in the last few years. Your sister may wish to consult a solicitor to establish exactly what her property rights are in this case.

 

Right or wrong?

 

TB writes from Cavan: I was wondering what your thoughts were on the forthcoming rights issue from Bank of Ireland. Do you think taking up the rights is throwing good money after bad or do you think that in the long term Bank of Ireland will survive? I know you will probably recommend talking to a advisor but any help would be gratefully appreciated.

 

I wouldn’t recommend that you seek the advice of a stockbroker about this rights issue – they will be keen for you to buy the shares so they can collect their commission.  They are hardly impartial.

 

As I have written before, unlike so many stockbrokers who make endless, usually incorrect predictions about stock movements, I don’t have a crystal ball on my desk, so I have no idea if Bank of Ireland will survive as one of the ‘pillar’ banks the government is so keen to see established.  However, I think it’s a good guess that if it does survive, it could be some time before the bank rewards its shareholders with attractive, sustainable profits. That will only happen when the Irish economy recovers and that will only happen when the Irish state is taken off EU/ECB/IMF fiscal life support. Even without a crystal ball that doesn’t look very imminent either.

 

Since you have spare money to invest, you might want to first secure its integrity by not leaving it all in euro, let alone using it to buy more Bank of Ireland shares.  You might want to consider converting some of it into gold and silver which is finally being acknowledged as a store of value in these uncertain times. A proper, fee-based advisor can also help identify other defensive options like index-linked bonds, and strong, income yielding shares and funds that are undervalued right now. 

 

Many genuine speculators (as opposed to gamblers) have bought bank shares that have been propped up by governments or central banks on the grounds that it makes sense to follow the money, but even they usually do so on the condition that the government or central bank involved isn’t about to go bust. That’s the additional risk you take putting your money in this latest rights issue.

 

Pension fears

AOC writes from Dublin: I have approx €700,000 in my company defined contribution scheme. I am aged 55 and can retire at any time. Three questions: 1) In the event of Ireland defaulting, leaving the euro, returning to the punt and the resulting inevitable devaluation, will pension funds retain their euro value or be devalued pro rata to the national currency. Will my €700,000 become €350,000 if the new punt is devalued by 50%?


2) In the event of the above, would funds held in Ireland, in foreign owned/guaranteed accounts also be devalued and 3) If I convert my DC fund to an ARF, at what stage must I draw down the annual 5%?

 

Let me answer question 3 first. The 5% annual, taxed, ‘imputed distribution’ from an approved retirement fund (ARF), only begins at age 60. Nor does it attract the 0.6% pension levy, which is why taking early retirement, 25% of your fund tax-free and ARFing the balance might be an attractive option for you.

 

As for questions 1 and 2, no one knows for sure what exactly would happen if Ireland were to leave the euro, including whether euro held in non-Irish banks would be devalued. To be on the safe side, you might want to assume that it would be and act accordingly.  

 

Meanwhile, assets in pension funds that are not held in euro – say, American shares, British property, Canadian government bonds, even Perth Mint gold certificates which qualify for Irish pension and ARF investments, would presumably remain outside the euro until retirement when they would be liquidated in order to purchase an annuity in the new currency or be transferred into a new Irish currency denominated ARF. 

 

If your entire pension fund was invested only in Irish shares, bonds, property or (Irish) euro, and we went off the euro, then the devaluation of your pension assets would immediately coincide with the devalued new currency.

For this reason, you may wish to have your pension fund assets reviewed sooner rather than later.

 

 

 

Tweet

Private health insurance viewed as luxury abroad

AMcC writes from Dublin: Like many parents of 24 year olds, our daughter has gone to work in England and we are wondering about private health insurance for her. She has been insured in Ireland since birth. We have been advised if you spend more than 180 days outside of Ireland you are not covered by Irish health insurance and if you stop paying here there is a waiting period for re-entry, but this may only be relevant if the person already has a medical condition and needs immediate treatment. With so many young people moving abroad at the moment, who were previously insured in private health insurance by their parents in Ireland, I am surprised there has never been a discussion on the subject.

 

The Irish middle classes – all two million of us, nearly half the population - have become so accustomed to private health insurance membership and the way it facilitates the jumping of long waiting times for both urgent and elective medical treatment, that it has become a ‘necessity’ and not a luxury as it is in the UK.

Your healthy (I presume) 24 year old daughter, however, is moving to a country with far more comprehensive and free access to medical care and treatment, including general practitioner services once she registers with one. Yes, waiting lists can be quite long in the NHS, but it appears to deliver most of its promised services to the vast majority of UK residents. 

 

Unlike here, private ‘medical’ insurance  or PMI as it is known in the UK, is not community rated, so the price of premiums is based on age and health and the choice of benefits. Plans include exclusions as well as no-claims bonus and excess payments that will also influence the price you pay. As a result it isn’t very easy to establish how much a similar plan to the one your daughter may have here. Bupa UK, for example, told me that “we do not have any set or rough prices” and “the individual would need to contact us directly as the quotations are tailor made, so we would need to know things like her address, weight, height, occupation, lifestyle and past medical history going back at least 7 years.”

 

When your daughter gets to London she should contact a number of providers or specialist health insurance brokers for quotes for the sort of coverage she wants.  There are dozens of providers ranging from big insurance firms to smaller, specialist insurers as well as providers of simple, cash-based plans.

 

To get started, she should download Are you buying private medical insurance?’- a 2008 guide produced by the Association of British Insurers, which you can find on their website www.abi.org.uk.

 

 

Transfer Loss

 

JD from Galway: On Tuesday 5th July I sent €55,000 to my 90 year old mother’s account in Lloyds TSB in the UK via electronic money transfer, from my account in Ulster Bank.
 
The sterling/euro market rate on the computer that day was 90.35 cent and I paid €44.44 for a quick transfer before the rate dropped. On Wednesday 6th July my mother rang to say that her account was only credited with £48,192 approximately £1,500 less than the rate before bank charges, which raises the question of "how much do the banks actually charge"?
 
What is the cheapest way to transfer money besides carrying it on the plane, which in my case, would have saved over £1,000?

 

 

 

There is no simple answer to your query, which is frequently discussed on websites like www.askaboutmoney.com and www.boards.ie .  Most of these suggest electronic transfer with some banks charging less than others; using private currency exchange dealers, especially for larger sums, though you must also shop around for a best price since they too vary their charges; converting the money by way of simple bank drafts and then using a courier or registered post to deliver the money to the end recipient.

 

I spoke to Ulster Bank on your behalf and they told me that the best value way to transfer euro into sterling, which automatically costs more than transferring money inside the eurozone, is to ….     The cost of sending the money, once converted, via a simple bank draft in your mother’s name is ….

 

Growing Concern

 

CL writes from Dublin: I invested in the 2nd Irish Forestry Fund in 2001 and every year received their positive investment statements and new investment opportunities.

 

In December 2010 I received an end of year report valuing the shares at €1,250. This June I was informed that the Second Irish Forestry Fund had been sold, with a per share maturity value of €1,027, an 18% drop in value.  I was subsequently told by one of the directors that ‘the price they received was the price they received’ when they tendered the company.  The Second Forestry Fund was sold to their sister companies.

 

I understand from their 2010 report that Forestry Investment experienced slightly lower prices in 2010 based on both land values and sales values due to lower construction activity, but that this would have been captured in the 2010 share value I received last December. I am still awaiting an explanation as to what caused such a dramatic fall in the share value in the five months from when I received the dividend.

 

Trevor McHugh, a Forestry Investment director, who said that last December’s statement was only a projection of the share value, not its actual market value of your shares.

The formulas used to determine a projected share value and an actual market value, which is what buyers use to determine the price they will bid when the Fund term matures and it is put up for sale, are not the same, he said. The market value takes into account real-time factors on that particular day, and these can – as with any commodity or asset – affect the sale price.

The Forestry Funds are not regulated investment products like life assurance investment or private pension funds and so can make share value projections that would not be permitted for the likes of life assurance funds.

This is only the second of the Forestry Funds to be sold, but my understanding is that the First Fund, which matured in 2010, did not deliver earlier share projections either, though it did achieve an 8.3% annual return for its investors.

All Forestry Fund investors are invited to contact the company, at any time, to discuss their shareholdings, or any investment statements they receive, Mr McHugh said.

You should arrange a meeting with the directors to discuss your disappointment in the return you received.

 

 

 

Tweet

The eurozone car crash encourages us to go for gold

 

A car crash in slow motion is as good a description as any for how the European debt crisis is unfolding. The number of casualties there will be in the end is still unknown, but it’s not looking too good.

 From a personal financial position the best thing to do is not to linger at the scene for too long. You don’t want to find yourself on the wrong side of a sovereign debt default, whether in Greece, here, Portugal or any of the other peripheral countries that are being systematically shut out of the borrowing markets. 

In the same way that the credit bureau assesses an already indebted individual’s capacity to take on more loans, so do international credit agencies decide whether a country has hit its borrowing limit and is unlikely to be able to repay any more loans.

Realistically, we Irish – and that goes for the government as well - should be considering what happens if the EU, ECB and IMF are unable to work out a new monetary, fiscal and political union for the eurozoneto replace the chaotic efforts that have so far clearly failed.

 

It looks now that events are overtaking the politicians and central bankers and it might be better to ignore what they are doing – or rather, not doing – and come up with a plan of your own.

 

If you have a sizeable amount of cash that you do not need for day-to-day living purposes, you may want to move it now to protect it from the worst case scenario of sovereign default or a euro-wide banking crisis. You can do this by opening a deposit account in a solvent bank in a non-eurozone country. Northern Bank, in Northern Ireland which is part of the non-eurozone Danske Bank and sister bank to National Irish Bank, is probably the most convenient destination.

 

A euro currency account in an ‘offshore’ non-eurozone bank means you avoid currency exchange risks and costs if we stay in the eurozone and you want to transfer money back here. By also opening a non euro currency accounts – the Swiss franc and Norwegian krone are often cited as two of the world’s safest currencies – means that you hedge the growing risk of Ireland no longer remaining in the euro or even the collapse of the eurozone.

 

The soaring price of gold, priced in euro, dollars and sterling, is a sign that more people and even countries like China and India in particular are losing faith in paper currencies backed by nothing but the promises of the indebted countries behind them.

 

Precious metals cannot be devalued or printed at the whim of politicians and central bankers and if any eurozone country defaults or is forced to leave the euro, you will be happy to have a portion of your savings or pension fund in gold.

 

Meanwhile Eddie Hobbs, the financial advisor recommends that pension fund holders urgently discuss the security of their pension savings – and especially the cash and bond holdings within their fund - with their pension fund advisor, administrator or trustee.

 

The cash holdings in the fund should not be held exclusively in Irish banks, he says, or entirely in euro, or the spending value of your retirement income could also be at risk.

 

Finally, ignore the people or politicians who suggest that the above is an overreaction and that our leaders in Brussels and Frankfurt will come up with a solution – in time - that will satisfy everyone.

 

That may very well happen. But this is not their hard earned money or life savings at stake. It is yours.

 

Unhealthy Interest

 

 

Pensions are on the mind of one reader, a fan of RTE’s The Week in Politics programme.

 He noted that some Dail deputies are now claiming that the private pensions levy is a ‘crock of gold’ that can be tapped to offset government cutbacks, such as the closure of hospital services.

 

The Limerick Fianna Fail deputy Niall Collins, appeared recently on the programme suggesting to an incredulous Sean O'Rourke that "there is no need to close hospitals, now that the Minister for Finance has a new stream of revenue, the pension levy".

 

The €1.8 billion confiscation of pension savings over the next four years has been earmarked for the Job initiative scheme’ not to finance struggling hospitals, but our reader thinks “It can only be a matter of time before the spokesmen for every pressure group is calculating on the airwaves about how their interest could be served if, say the pension levy was increased to 2% for ten years. We could raise whatever you're having yourself…"

 

Hardly a cheerful thought for anyone wondering about whether there’s any point in continuing to pay into a pension plan.

 

 

Protection racket

 

I wonder if anyone was surprised to read that the largest proportion of the nearly €21 billion social welfare budget is paid to older people, followed then by payments to job seekers.

 

In her department’s annual report that was published last week, the Minister for Social Protection noted that more than one in every five euro in her budget or 22.1% is made up of payments to older people, in the form of state pensions and other benefits, some of which, like electricity and fuel allowances are to be clawed back in the next budget.

 

The next 19.6% of the budget goes to the unemployed, but just 12.7% of payments are child related, the bulk of which is paid in the form of monthly child benefit payments to 1,124,003 children from 591,432 families that are neither taxed nor means tested.

 

By flagging cuts in the household package of benefits to pensioners last week, the Minister is confirming that while actual welfare rates may be left untouched in December’s  Budget, the bells and whistles that adorned the various payments are likely to disappear.

 

 

Tweet

 

PROPERTY MARKET IN THE NEWS – JUST NOT FOR ALL THE GOOD REASONS

 

You just can’t keep the property market out of the headlines:  last week about 600,000 mortgage holders braced themselves for a 0.25% rise in their mortgage repayments this month when the ECB raised its base rate. 

Then the latest Daft.ie survey was published, suggesting that property prices – in Dublin at least – could fall by at least another 25% from their 2007 high, while also in Dublin, hundreds of mainly cash-rich buyers successfully bid for 78 properties around the country, indifferent to either the risk of negative equity or falling rental yields once property tax and water charges are introduced.

Let’s start with the auction.  Is the fact that nearly all the properties were sold – just five were withdrawn – with sale prices above their guide prices, a sign that the moribund Irish property market has finally turned a corner? 

Or is it that or the auctioneers, Allsop/Space, are finally guide-pricing them more accurately, in light of the earlier failed event in Cork where just two out of 64 properties were sold?

Most commentators believe the latter:  the previously priced €10m mansion on Aylesbury Road in Dublin went for €2.325 million, €975,000 less than the guide price and certainly reflects how mad Dublin prices had become by 2007, the peak year for cheap credit.

But the fact that a very ordinary three bed semi in Naas sold for just €144,000, a small increase on its guide price, suggests that market reality is return.

Many of the buyers at the Dublin auction were investors with cash in their pockets and no need for to mortgage finance – which is just as well. They would have been seeking at least 7%-8% annual rental yields which also gel with many of the asking and selling prices that were achieved. 

For example, the two bed maisonette apartment in Glasnevin which sold for €55,000 only has to be rented out at €321 per month to achieve a 7% yield; another, that sold for €120,000 can command a rent of €700 a month and produce a decent profit for the mortgage-free landlord who would otherwise struggle to find that kind of steady(ish) investment return from deposits or shares.

Anyone thinking of buying a property – assuming they are either a cash buyer or have snagged mortgage approval – will find the latest Daft.ie report quite useful in establishing their own guide prices subject to what Daft’s economist Ronan Lyons and guest commentator Dr Constantin Gurdgiev note are average house prices below €200,000 and little prospect of normal lending before 2015.

Outside of Dublin, some of the biggest falls have been in Cork, Galway and Limerick cities, falling between 5% and 6%, while Waterford city saw falls of almost 9% on average. “Outside the main cities, many parts of the country - including Donegal, Cavan, Laois and Offaly - saw even steeper falls of up to 10%. The smallest falls, of less than 2%, were in Kerry and Mayo,” states Daft.

With rental yields in main population centres holding up better than sale prices – the two have been converging since the bubble burst, despite the general overhang of empty properties – investors who choose carefully, and are patient – should be able to achieve modest to decent yields over the longer term even if property taxes and charges are introduced.  A 10% yield is ideal to both cover taxes, costs and provide a 2-3% minimum reward for your investment risk, but most will probably happily settle for a 7%-8% yield, though it is doubtful that very high end properties, even with €2.325 million price tags will possibly achieve rental tags of c€15,500 a month, that is, an 8% annual yield.

Finally, the latest 0.25% hike in ECB rates, while well flagged, is still bad news for variable rate and tracker rate mortgage holders.

AIB and Bank of Ireland, which did not pass on the April 0.25% rise are expected to pass on this one, and some mortgage brokers think they could increase all repayments by 0.5% as they struggle to keep themselves capitalized in light of the steady fall or withdrawal of deposit funds.

Someone with a €300,000 mortgage will see their repayment rise by another €45 a month or €540. So far this year, their repayments are up €1,080 with perhaps another one or two more rate hikes by the end of the year. (In light of the probability of higher interest rates, if you can meet your repayments, you should nevertheless consider whether a fixed rate loan is affordable, despite the higher repayment.)

ECB rate hikes are clearly unsustainable for the estimated 100,000 homeowners who are in arrears and have sought the terms of the new Code of Conduct on Mortgage arrears or were able to secure restructured repayments before the Code was introduced. See www.centralbank.ie

Anyone who thinks they may fall into arrears in the near future should contact their lender immediately – prepare a detailed budget statement first - and ask for a meeting.

A new deal should be arranged for the next year, during which time the bank cannot take any legal action to pursue back payments.  (They can’t do this for at least a year after you fail to comply with the agreed new terms.) You can then at least use this breathing space to work out how feasible your mortgage really is over the long term.

 

Tweet

Think twice before you give up funds tax relief

SK writes from Dublin: I am a public servant with 26 years service. I am due to retire this summer and am wondering about converting my AVC’s Pension Fund into an ARF. My reservation is that over the past 26 years my pension fund hasn’t delivered any real returns. Fearing the same with the ARF (with annual management charges around 1.5% and the annual government tax on a notional 5% of the fund) I wonder can I purchase a basket of ETF’s, with much lower managements charges, as an ARF? If not, after the raid by the government on the pension fund, I am considering cashing the AVC’s in, paying the taxes (which means a loss on my 30 years of pension saving) and investing the net cash myself.

 

 

Data provided by Rubicon Investment Consulting shows that Irish group ‘managed’ pension funds have produced an average 7.2% return over 20 years,  returns that certainly exceed consumer price inflation over the same period.  AVCs – Additional Voluntary Contributions – would have typically been invested in very similar managed assets, usually a combination of equities, bonds, cash and property. 

 

 

You would have been very unlucky for your AVC to make no return over a similarly long period, though high costs and commissions, especially charged by the firm of brokers favoured by public sector unions, would certainly have contributed to the low returns.

 

 

There are strict funding conditions attached to investing your AVC in an Approved Retirement Fund or ARF. You must now have a guaranteed pension income of at least €18,000 a year or set aside €127,000 or the remaining fund if it is less that must then be used to buy you an annuity or in an AMRF, an Approved Management Retirement Fund.

 

 

If you do decide to buy an ARF or AMRF, there is nothing to stop you from buying into low cost exchange traded funds (ETFs), but given that you haven’t been very successful with your AVC choice, make sure you get proper, fee-based advice about suitable assets or funds with good income or growth prospects. Make sure you also fully understand the tax, inflation and capital risk implications of encashing your AVC. Giving up the tax relief you have received seems unwise because with the right advice, you have almost as much investment freedom in an ARF as you would by investing yourself.

 

 

Going global

PW writes from Wexford: As a precaution against an Irish debt default I have thought about either putting €100,000 in an Australian dollar account at 5% with PTSB or with Nationwide International sterling account in the Isle of Man at 3.4%.  Would either of these steps seem reasonable?

 

To earn a decent return, you must be willing to commit large amounts to foreign currency deposits. Permanent TSB does not offer annual interest rates of 5% on any of their deposit accounts; the highest actual earned rate of return or AER is 4.22% gross for sums of €10,000 or more from their two year, ‘Interest First’ fixed account.  This account pays the interest upfront period. However, a bank spokesperson told me that it will pay you this interest whether you save in euros or a foreign currency like Australian dollars, sterling, US dollars, Canadian dollars, Australian dollar and Swiss franc.

 

 

As I have written before, no one in the banks seems to know – or is able to categorically say, what will happen to your savings in the even that there is an Irish sovereign debt default or we go off the euro. Putting your money on deposit in the Isle of Man means it is not held in this jurisdiction or in the eurozone.  There is a currency exchange risk if you hold any non-euro currency and there are costs associated with transferring non-euro currency back into euro.

 

 

 

Golden opportunity

 

TT writes from Dublin: I read your column with great interest every Sunday and especially now that I am retired and must take even greater care of the 'few bob' that I have. I have been taking careful note of any advice you have given about investing, especially about not having all one's money in one currency i.e. euro.

 I was recently left a small bequest and I was thinking of putting some money into sterling or dollars. I was also thinking of buying some gold or silver. The price of both is quite high at present so I do wonder about the wisdom of investing in them. I know that you have given the name and address of some reputable sellers of gold and silver but I have misplaced them and I was wondering if you could let me know, whenever you get time, either in your column or by email, the names once again.

 

Gold and silver has doubled in price over the last five years. One cause of this is that the expansion of Americas money supply has shot u in recent years as the American government attempts to repay its massive debts and interest repayments by printing money out of thin air. This lack of confidence in the US dollar, as well as sterling and the euro and the soaring debts in the US in particular means that gold and silver are a safe haven asset that cannot be debased at whim, like paper currencies can be, even if the market price goes up and down. 

 

Precious metals are not as cheap as they were, and the price can be very volatile. For example, on 25 May gold was selling for an all-time high in euro of €1,083.47 an ounce, but at time of writing had fallen back €40 an ounce to €1,043.56 and it will undoubtedly be up or down today. Nevertheless, gold and silver act as a safeguard – a form of insurance - against both outright devaluation of currencies and inflation. You can purchase gold in both physical and certificate from the Dublin gold bullion dealers, Goldcore.com or other international bullion dealers. You can track the live price of gold and silver at www.goldprice.org.

 

Meanwhile, if you decide to also transfer euro into other currencies, be aware that you will take a currency exchange risk and that the US dollar in particular is extremely volatile, but that like sterling is being intentionally devalued by their respective central banks to keep pace with their huge national debt repayments – the US debt expands at the rate of $40,000 per second - and are considered to be amongst the weaker fiat currencies.

 

Tweet

UNSECURED CREDITORS MAY GET SOME RELIEF

 

The Code of Conduct for mortgage arrears means that mortgage holders who have been unable to pay their loans in full, or are in danger of falling into arrears, have a formal process by which their original contract can be adjusted or amended by their lender.  It also means that the lender cannot take legal action against them while the restructuring process is underway.

Do the holders of unsecured debt – like credit card, personal and hire purchase loans also need such formal intervention?

The Irish Brokers Association believe they do, if only based on their view that too many people have fallen into arrears on their home loans because they have bee bullied by the likes of credit card companies and the personal loan side of their banks to repay that unsecured debt first.  They describe it as a case of “who screams loudest gets paid first” but one that could put the debtor’s very home at risk.

With nearly 86,000 home owners in official arrears or already restructured, it isn’t too difficult to assume that a large proportion of these people are also having trouble paying some of their other debts.

The Regulator has already flagged some amendments to existing consumer credit terms covered by the Consumer Credit Directive that came into force last month in light of this growing unsecured debt problem, specifically that his office may impose the same sort of strict debt collection terms that apply to mortgage holders.  This is likely to include limiting the number of unsolicited letters to the debtor to no more than three a month and presumably other contacts.

Whether or the Regulator goes so far as to limit the legal procedures the unsecured lender can take if the borrower falls into arrears – as applies to mortgage borrowers – is less likely.  He is more likely to remind both parties that unsecured debts like credit card balances carry much higher interest rates for exactly that reason – they are not secured, as is a mortgage or a car, which can be repossessed.

Credit card debts appear to be the most problematic.  No surprise there:  there are 2,035,000 personal credit cards in Ireland, though 145,000 fewer than at the height of the boom in May 2007. 

Back then, we owed €2.544.6 billion in outstanding credit; today we owe €2.653 billion, €108 million MORE than we owed in 2007, despite our huge efforts in the past year to repay this debt and take on less.

The problem – as always with credit cards – is the huge interest rate charged and the exponentially negative compounding effect it has on the debt over time. (The reverse is true of course for your savings: time and a high interest rate will see an exponential growth of your money.)

There was a time when financial advisors recommended that you prioritise your debt payments, starting with the most expensive, because of this exponential effect of high interest on the capital. It’s still good advice IF your credit record is not impaired and you are managing to pay your mortgage, the light bill and can put food on the table.

These days, with so many people out of work and living on benefits and unable to do those last three things, if you are finding it hard to pay your credit bills.

First, do a proper financial statement that lays out all your income and outgoings. Cut out discretionary spending and try to secure better prices for food, utilities and insurance.  Take note of all these efforts in the budget statement.

Next, set up a meeting with your bank. If you are already being accommodated under by the Code of Conduct on mortgage arrears, tell them and ask for similar extended repayment terms for your credit card, overdraft or other unsecured personal loans.

If you don’t undertake this process, and continue to miss payments, you will come under pressure by the collection departments and perhaps even outside collection agencies. The bank may very well take you to Court. 

By being proactive you should be able to avoid this outcome, though you will still be left with an impaired credit record and you clearly, will not be able to use credit cards or get a personal loan until you repair your personal credit record. (You can request that record from the Irish Credit Bureau at www.icb.ie for €6.)

If your credit card debt is still under control – but only just – you should consider cutting up the card and paying it off in full, ideally with a local credit union loan which charge far less interest than the typical average 19.3% rate that now applies to the most high street bank-issued credit cards.

Another option to help you pay off your balance sooner – if you insist on keeping the card – is to switch to the three providers who give between six and 10 months zero interest: PTSB Ice card, MBNA platinum card and Tesco. Then stop making purchases.

And finally, if you want to keep using credit cards, and they are extremely useful, ALWAYS pay off the monthly balance by direct debit.  You’ll never pay another penny interest or pay a penalty for missing a repayment date.

 

Tweet

Is switch to earlier flight a case for compensation 

 

 

FM writes from Meath:  I booked flights for myself, my wife and two teenage daughters with Aer Lingus onJune 7th to Lake Garda, arriving in Linate/Milan airport, and returning from Malpensa/Milan airport on June 15th at 9.20pm.  

 

On the 10th of June I received a text from Aer Lingus to say my Malpensa departure flight had been cancelled and we would be re-accommodated on a flight from Linate the same departure day of June 15th, but at 11.25am. Full details were supposed to be in my email inbox which I was unable to access in Italy. We took the amended Linate flight. 

 

We had chosen the later Malpensa return flight on the 15th because it gave us nearly a full day’s extra holiday, even though it cost more, by approximately €70 per person than the earlier Linate departure flight.  

 

My problem is that we lost a day’s holiday and extra day car hire by having to take the earlier flight. Meanwhile, I still have NOT received any e-mail from Aer Lingus with the change of flight details even though they said it had been sent.

 

Where do I go from here? Do I just accept it and put it down to luck or lack thereof?

 

Nowhere in the Rules for Compensation and Assistance (see section IV) does it state that compensation is paid for loss of either car hire or a higher flight charge where an alternative flight is offered on the same departure day as the original scheduled flight or within the number of hours that pertained in your case. (Compensation claims are time sensitive.)

If you wish to pursue this claim for costs against Aer Lingus you need to send the company your complaint in writing. If you are not happy with their response you can refer your complaint to the Commission for Aviation Regulation at Alexander House, Earsfort Terrace, Dublin 2, quoting Regulation EC261/2004.

Finally, before you go to all that trouble, make sure you also check your travel insurance policy to see if it provides any compensation for the loss of the extra day’s car rental charge, or the extra cost of the original flights because you had to return home sooner.

 

 

 

 

Wealth and safety

 

MC writes from Dublin: I have some money on deposit at 3.6% interest in one of the Irish banks. I have been told that it is unsafe there. I have been further advised to invest in German bonds. My query is where can I see German bonds quoted, how can I buy them, what do they cost and what is the advantage in having them?

 

You can buy German government bonds from a stockbroker directly or with the assistance of a financial advisor. The Bloomberg website provides up to date prices for them.

 

German government bonds are considered to be very safe because Germany has the strongest economy in Europe and the least likely to default.

 

The safety of deposits in Irish banks is under question despite the €100,000 deposit guarantee because this guarantee has been made by the Irish state, which is clearly not as good a bet to repay its debts as Germany.  However, like deposits, bonds are also vulnerable to the risk of inflation – that is, the cost of living rising above the interest/coupon that bonds pay. You should ask your advisor or broker about the merits of buying an inflation linked version of German bonds, especially if you aim for more than a short term investment term.

 

 

 

Dollar deals

PH writes from Dublin: You said that financial advisors not recommend exchanging our euro savings into sterling. They suggested other currencies but did not mention the Australian Dollar.

Why was this and how could I go about opening an Australian currency

account?

 

The Australian dollar, like the Canadian dollar are often included in commentary about  ‘safer’ currencies, especially when compared to the US dollar and the UK pound which have been devalued by their governments in recent years against other countries and especially when valued against the price of gold.

 

If there is any concern about the Australian and Canadian dollars it is because they are considered to be commodity backed currencies with huge exposure to the economies of China and the United States and could be affected by negative economic events in both those countries. That said, the fact that Australia and Canada have such vast natural resources to fall back upon is one of the reasons why their currencies and economies have so far weathered the global recession as well as they have.

 

Your Irish retail bank should be able to offer you an Australian currency account (or other convertible currencies). Australia allows non-residents to open deposit accounts, but there is a 10% withholding tax on any return.

 

 

Picking the strongest or ‘safest’ currency isn’t easy as they are volatile at the best of times. There is a risk that your Australian dollars (or any other currency) may lose value against the euro and there is no guarantee that your Irish non-euro deposit account would be exempt from any dictat of the Irish Central Bank or government in the event that we went off the euro and reverted to a new Irish pound.   The only way you can avoid that risk is to open a deposit account outside Ireland and some say, even outside the eurozone.

 

 

 

Tweet

Why Counting on a state pension just doesn’t add up

 

Politicians do not concern themselves with the long term effects of their decisions.  The here and now and the next election is about as far as they can focus, and nothing exemplifies this short-termism better than the way state pension systems are run.

 

The latest ‘Mind the Gap’ European pension update from the insurer Aviva unfortunately shows, once again, that most people at the receiving end of state and private pension have the same short-term view when it comes to retirement funding.

 

Here in Ireland, 75% of those questioned here in Irelenad, who were a decade away from retirement, are still counting on their state pension to help finance their retirement. They believe they will need at least 50% of their final salary to ensure an appropiate level of comfort.

 

This might be a perfectly reasonable, and even attainable presumption, if two things were also in place – a solvent state and an already substantial individual pension fund.

 

This Irish state cannot afford the existing €12,000 a year pension promise to every qualifying PRSI contributor who turns 65 and is only paying out the cheques because of the financial life support package from the EU/ECB/IMF.

 

Meanwhile, anyone who still thinks they’ll be claiming that €12,000 (or its inflation adjusted equivalent) in 10 years and that it will supplement the 50% of their salary that they told Aviva they will need to live on in retirement, should also think again.

 

If such a person’s final salary is, for argument’s sake, €50,000, and the total pension they want is €25,000, then they will have to have saved over €200,000 into a pension fund in order produce another €13,000 worth of private income to supplement the €12,000 they will get from the state.

 

Unfortunately, judging by today’s experience, the average private Irish worker is more likely to retire with a pension fund worth about €100,000, than over €200,000 and this will produce an income of €6,000 if they are lucky.  This also explains why 59% of the same age group told Aviva they expect to keep working after they reach retirement age.

 

Let us hope some form of state pension is still be around if they are to avoid having to work forever.

 

Meanwhile, as unprepared as pre-retirees are, the Aviva survey revealed that 34% of the 18-34 year olds polled say they will need 100% of their final salaries to have a comfortable retirement.  The remaining 56% admit they’re more concerned about funding today’s bills than any they face in retirement.

 

Both groups are in for the shock of their lives some day. 

 

As for our well-pensioned politicians, well, they lost the plot years ago.  They has their chance 20 years ago to introduced sustainable tax and funding structures for all pensions – private, public service and state – but didn’t bother. 

 

Now we’ve run out of money and time, the two most important retirement factors of all.

 

Follow exit signs

 

I received a note from a reader last week who thought I might be interested to know that his life and pensions broker – a commission paid salesman, really - had written to him to suggest that he shift the money he had in a predominantly equities-based Irish Life savings fund into an all-cash fund. 

The reason for this alert – the broker was of the opinion that his client could lose yet more of his money if he left it in shares.

 

“Wealth protection” is the common mantra of most advisors these days. One cynic of my acquaintance believes this could be nothing more than a ‘churning’ opportunity by a know-nothing life assurance salesman who will pick up a commission if he can shift the reader into another asset.  Perhaps not the first time: most life companies still allow a free switch or two a year between their different funds.

Whatever the motivation, I think the broker was at least doing this reader a favour by alerting him to the level of concern there is about markets in light of the great uncertainty about the indebted eurozone countries and whether we can avoid defaulting on our debts, as well as the impact that the end of quantitative easing by the US Federal Reserve Bank will have on America’s ability to meet their own debt repayments and the support of stock prices.

 

Anyone with an investment fund or private pension should have it reviewed – ideally by an experienced fee-based financial advisor who can determine how exposed you are to either a single asset – like shares – and whether it would be safer to diversify, or exit the market altogether and seek the safety of cash and indexed bond funds and some ‘real’ money like gold.

 

While they’re at it, ask your broker to pitch in by reducing the fees, charges and commissions that weigh down the value of your investments.

 

You can laugh or cry

 

Recent announcements by the Taoiseach and Tanaiste that there would be no increase in income taxes or social welfare cuts in the December budget show what a pair of comedians they are.

 

Last Saturday morning, the Minister for Social Protection got in on the act when she announced the setting up of an Advisory Group on Tax and Social Welfare that will “harness expert opinion and experience to address a number of specific issues around the operation and interaction of the tax and social protection systems, recommend cost-effective solutions as to how employment disincentives can be improved and better poverty outcomes, particularly child poverty outcomes, achieved and to identify the specific practical institutional and administrative improvements to their operation.”

 

Out of the 15 people named as the Minister’s new advisors, 13 of them are public servants, one is a trade unionist and one is a private sector human resources director.

 

I’ve no idea how much these mainly government employees will collect in fees and expenses, but with that torturous mission statement, the meetings are sure to be a barrel of laughs.

 

 

Tweet