Jill Kerby

MAKE HASTE SLOWLY IN PROTECTING YOUR WEALTH…BUT NOT TOO SLOWLY

 

I recently received a long letter from a reader who had inherited a portfolio of shares from her husband who died a couple of years ago.  I later spoke to her.

 

Last summer, when the markets fell sharply, she quite sensibly consulted an investment advisor – not her broker - who looked over the portfolio and gave his opinion about her holdings.

 

Up to last March, the overall portfolio, mainly invested in a mixture of blue chip Irish and European shares, had made a modest c2.5% gross return, about the rate she would have earned had the money been in a good bank deposit.

 

By late August the share values were down at least 10% she said, though the dividends (about €5,000 a year’s worth) were still being paid.

 

She was now wondering if she should have taken the advisor’s advice when he gave it: “Is it too late to act now?” she wrote.

 

It seems the authorised advisor she consulted (who charged her for his time), suggested that this was mostly a good selection of stocks and funds.

 

He determined that many of the shares had either kept their dividends steady, or had increased them over the last several years. There was a good mixture of bonds and cash funds in the portfolio. A couple of actively managed funds had not done as well and in his opinion, there had been too many trades, but that is the nature of stock broking business.

 

In essence, he said that while the overall return on this portfolio wasn’t earth shattering, the dividends were steady and none of the companies under investment were likely to disappear.  

 

“What he did say to me though, was that owning shares requires commitment and nerve.  My husband understood this. If I was going to worry about them, at my age, he said, that maybe I should reconsider holding onto them.  He said he believed the markets would remain very volatile.

“I told the advisor that I would probably need more of this money as I got older. I’m very worried about the cost of nursing home care and my house is not worth as much as it once was. I’d also like to help the children.

 

“He warned me that if the market keeps falling, the face value of even the best, ‘defensive’ shares would go down, though they kept paying the dividend. He said the problem for me is that there may not be sufficient time for the price of the shares to recover if I really did need to sell them.”

 

My friend’s mother was quite right to get an objective opinion.  The advisor laid out her options:  either keep the shares for the dividends (assuming the top companies remain profitable) or, liquidate some or all of them – accepting that she would have to pay 25% capital gains tax on any that were worth more than when they were purchased – and then find a ‘safer’ home for the cash.  But he also warned her that nothing is entirely safe these days.

 

“’A perfect storm’ is how he described it,” she recalled.

 

Good yielding bank accounts, some bonds, including inflation linked ones, defensive shares with strong yields and even some gold were among the asset options he recommended. He also suggested that she speak to her children about her worries about her future and discuss with them what she would prefer happen in the event that should could no longer live in her own home. 

 

It sounds to me like this lady was given good advice. An older person, living mostly on a fixed income, part of which (her husband’s private pension) has reduced as a result of his death, is more vulnerable to a collapse in the stock market than a younger, employed person who has many years before retirement in which to make up any losses.

 

She is also more vulnerable to price rises (the elderly spend proportionately more of their income on food, fuel and healthcare) than younger, employed people and price inflation in these sectors is unlikely to drop dramatically.

 

Her goal has to be to maximise both income and secure her capital, not an easy thing to do in the best of times, let alone during a great (and deepening) recession. It requires very careful calibration.

 

There isn’t any great lesson to take away from this story, except that financial reviews should be done sooner, not later and if you trust the advice, act on it.  There are no easy solutions to a global debt and banking solvency problem, not just an Irish one, and to which we have no control anymore.

 

This lady is going to speak to this advisor again, in light of how the euro-crisis has intensified and her portfolio value has fallen even further.

 

This time she understands that while it normally usually pays to make haste slowly…there are times when doing nothing at all is the worst thing you could do. 

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Still no relief to restore confidence in our pensions

 

I am worried about my retirement.

 

Stock markets are behaving like roller-coasters these days as they react negatively to the global slowdown in demand for goods and service and to the slow motion train wreck that is the eurozone.

 

The ride is especially wild in the pension fund markets of so-called ‘developed’ economies, where too much debt has finally caught up with the falling spending capacity of consumers.  With no consumer demand, there is no corporate growth; with no growth, there are no profits and no earnings for pension fund holders.

 

Here in Ireland, 0.6% of the value of private pension savings will be confiscated for the next four years by the government, but there is still a big question mark about whether the tax incentives that encouraged workers to defer a portion of their income for up to 40 years, will be clawed back starting next year.

 

Last week, at a pensions policy conference held by Irish Life, the minister responsible for pensions, Joan Burton, was unable to confirm if the top rate relief was to go or not, which is very unfortunate given how the tax relief was the only thing to offset a decade’s worth of investment losses for the average Irish managed fund holder.

 

The loss of tax relief, should it happen, is sure to impact on jobs in the pension industry itself where hundreds of Aviva jobs are now at risk.

 

According to data collected for Irish Life by consultants Amarach, the vast majority (85%) of private pension fund holders are people who earn less than €70,000 a year and who are unlikely to have full, 40 year service contributions because they either started saving too late or changed jobs too often. Without a private pension, someone earning €60,000 a year, they said, would face a drop of between 60% and 80% were they to depend only on the state pension at retirement.

 

The potential loss of top rate tax relief, the pensions levy and the uncertainty in investment markets is doing nothing to encourage them to keep saving for their retirement, the conference was told.

 

The Minister at least had the decency to admit that the 0.6% pension levy has ‘caused damage’ to pension savers, and how ‘frustrated’ people are about the uncertainty over tax relief.  But the onus is also on the pensions industry, she said, which needed to cut its own charges, something she will help them do by publishing a comparative study of charges in other jurisdictions that is being prepared.

 

It’s good to know that her officials have time to do such important research, but it would be more helpful if all the pension reforms and proposed changes announced by the previous government and noted in the Programme for Government could be advanced.  I expect this isn’t happening because there is no money to introduce a major reform like the universal mandatory pension and not enough political will to cap taxpayers' subsidies or to restrict pension incomes, especially in the public sector.

 

I’m not losing any sleep yet over my pension because I still have at least a decade of work ahead of me and I’ve been maximizing my pension contributions for many years.  But I know plenty of people whose pension funds have lost thousands of euro just this summer, and they are tossing and turning, wondering how they will ever be able to afford to retire.

 

Nothing anyone said at this latest pension conference will provide them with any relief.

 

Bargain property

 

A very brave friend of mine has bought a very old house. 

 

It also need a great deal of work, but she was able to not only convince her lender to give her a mortgage at a very desirable five year fixed rate, but once the building surveyor made his report, she also convinced the seller to drop the price by another €12,000.

 

There is a lot to be said about executor sales, said my friend. 

 

The elderly bachelor who owned the house died, leaving it to his relatives.  At first, they tried to maximize the price – it is a choice south Dublin location – but once it finally dawned on all the them that the market was still falling, and once their agent was confronted by the surveyor’s report, they sensibly decided not to risk losing the sale over a mere €12,000.

 

Executor sales often produce bargain basement prices – there isn’t much sentiment involved when free money is at stake – but patience is also it’s own reward in a buyer’s market.

 

This house fell in value by about 30% from when it was first put up for sale, far more than other properties in the area. The renovation costs are a fraction of what they were three or four years ago, “and the bank wasn’t reluctant to lend, even though the house needs a lot of work.  They could see it’s a very fine house and someday it will be worth a lot of money again.”

 

More of a case of ‘buyer aware’, than ‘buyer beware’.

 

Smart move 

 

I’m not a huge user of smartphone apps, but I do like National Irish Bank’s new current account one.

 

Not only does it let you access all your accounts and transactions, it lets you transfer money between any account and pay your bills, but will soon allow privide access to NIBs dealing desk.

 

The NIB share dealing facility is one of the biggest attractions of their current account and is a very cheap alternative to conventional stockbrokers and on-line dealing facilities. It’s also extremely easy to operate and provides instant access to your trading record.  The app dealing desk, say NIB should be available early in the new year.

 

You don’t need to be an NIB customer to download the App, though its features will be restricted to a branch and ATM locator and the currency converter. 

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CREDIT UNION RESTRICTIONS MIGHT SPUR THE GROWTH OF FAMILY LENDING

 

 

As anyone who has sought a mortgage over the past couple of years can attest, you need to be able to jump through some very tight, fire-lit hoops to secure a homeloan.  Now it seems, even that precarious hoop has been yanked away…for people who have been turning to their local credit union for financial assistance.

 

 

The decision by the Central Bank to impose new lending rules on nearly 300 (of the 409) credit unions means that perhaps seven out of 10 CU members will have their request for a loan turned down this coming year.

 

 

In light of the high rate of repayment arrears throughout the credit union network – at about 14% of outstanding loans – limits as low as €5,000 are being imposed on individual lenders in some CUs, which might be enough to buy a second hand car, or a new bathroom, but isn’t going to go very far if you have a start up business and desperately need some capital to invest in new stock or fund a export drive.

 

 

Even at that rate of loan offer, some credit unions say the new limits will use up their quota within 10 days and “borrowers are going to need to get into the queue quickly,” a CU lending committee member told me. “And I’m not sure that kind of borrowing pressure is particularly helpful:  too many people rushed into unsuitable borrowing during the boom years. Now they might do so because they’ll be afraid there won’t be any money left if they don’t get their application in before everyone else.”

 

 

According to reports last week the Credit Union Managers' Association are seeking meetings with the Regulator in an effort to convince them that the restrictions are going to penalize “good and loyal customers” and force many (especially in the run-up to Christmas) to turn to moneylenders who can charge up to 180% interest rates.

 

 

Unfortunately, the Central Bank does have grounds for imposing what appears to be such draconian limitations on what so many people have been counting on being their only hope for affordable credit.

 

 

The 14% arrears statistic on outstanding loans of nearly €7 billion is concern enough, but the danger is that the assets underpinning many of those loans – property and members’ jobs security – are still falling in value or at risk.

 

 

Poor lending standards during the boom years is, I understand, a problem the Regulator has uncovered in too many CUs, with too many additional loans approved based only on the borrowers’ good track record of repaying existing ones.  The danger is that these loans were taken out in order to repay the older ones.

 

 

The Credit Union movement may be “exasperated” by these new limitations, but so must their members be:  70,000 people joined their neighbourhood credit union last year, with many of them presumably doing so because their CU was still open for business, unlike their high street bank.

 

 

Now, even these people, that is, the ones with sound incomes and no impaired credit record, may have to postpone their borrowings or seek out a new source of credit.  It isn’t unreasonable to imagine more family sources being tapped, which isn’t really such a bad thing given the very low interest returns that many people are getting from their bank, post office or credit union.

 

 

“I think families and friends are going to have to consider inter-familial lending – if they haven’t already done so - if this credit crisis lasts much longer,” my CU source said last week.

 

 

“If we are restricted to only giving out very small loans, and only within a set credit limit every month, I don’t doubt we will see many people withdrawing money for their accounts to lend to their children, grandchildren or friends who need money for education purposes, to replace an old car, to make essential repairs to their homes.”

 

 

It can be very embarrassing or difficult to ask for a loan from a family member, but so long as it is drawn up properly – with appropriate interest and in full understanding of the risks of perhaps not being repaid – is worth exploring.

 

 

A €10,000 sum on deposit in your bank or credit union is probably only returning a net 2%-3% interest or a mere €200-€300. Any increase on this rate – from a family member whom you trust to repay it – is a profit that might be worth considering, especially for the borrower if you are willing to set the loan on a diminishing balance and not on a compound interest basis.  

 

 

A €10,000 ‘family’ loan - officially made as a tax-free gift -  repaid over five years in equal monthly repayments on a flat 5% interest rate, shouldn’t cost more than €175 or €2,100 a year to the borrower, but is still worth €300 more in interest than your typical bank/credit union return. 

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Middle classes strain under burden of financial recovery

 

The government is reveling in all the praise Ireland is getting from our fiscal overlords in the EU, ECB and IMF for the way we’re complying with our receivership; but is anyone asking how far the compliant Irish taxpayer can be pushed around before they start fighting back?

Last week we found out that the cost of bailing out Quinn Insurance was to be a 2% levy on every non-life insurance contract for at least the next five years. This is certainly the high end of the 1% - 2% estimate of last April when it was decided that instead of bankruptcy, Quinn Insurance’s (mainly overseas) losses would be socialized, just like the Irish banks’.

 The €320 million is now our debt, that is anyone who is legally obliged as a driver or mortgage holder to insurer their car or home, along with anyone else who buys travel insurance, payment protection cover and of course all important public liability if you’re a business owner.

Aside from dropping the non-essential insurance contracts – which many are forced to do – there’s not much you can do to register much of a protest about this latest levy.

The government is counting on the middle classes to ‘put up and shut up’ when it comes to levies, which is why they are their favourite way to raise extra revenue without officially raising tax rates.

 They may want to be careful how far they go before they cause the cash cows to resist any further milking: they already pay 3% worth of insurance levies dating back to the collapse of the PMPA in 1982; a 1% levy on life assurance policies; a 0.6% private pension fund levy that will result in €2.4 billion in losses in the next four years plus the private health insurance levy of €205 per adult and €66 per child to subside the VHI, the Department of Health’s otherwise loss-making sick child.

 You also have to wonder just how tempted the government will be to increase the hated USC by another percentage point or two?  It would be the last staw for many who believe they have already paid enough for the failings of others.

 

Electrical charge

 

The introduction of a new property tax in Greece is the latest austerity measure that is causing unrest there. Calculated at between 50 cent and €10 per every square meter of home floor space depending on the value and location, this tax will set back the owner of a typical, modest 150 square meter home, at €4 per square meter, €600 in the coming year.

The tax will be collected via the homeowner’s electricity bill, on which existing local authority tax and the Greek equivalent of the RTE license fee are already included. 

Tax collection remains a significant problem for the Greek government and now the electricity worker’s union says it will sabotage the collection of the new tax on the grounds that the electricity company should not be turned into a tax collection agency.

No doubt the Irish Minister for the Environment Phil Hogan will be watching how this latest Greek tax farce develops; he has already flagged a new water charge and preliminary property tax that some anti-austerity groups say they will oppose.

At just €100, the temporary property-cum-household charge probably isn’t, by itself, going to drive crowds of protestors onto the streets, but it’s a miserable enough little tax and will put up homeowner’s hackles. There’s a real risk of non-payment unless the Minister tack it onto something like a utility bill that so many of us pay by direct debit. 

I wonder how that would go down with our powerful, well paid state electricity workers, who are already smarting at the suggestion by their own union leader that they’re ‘spoiled’ ?

 

Credit waiting

 

When 70,000 people joined their local credit union in the past year, most of them presumably did so with the idea that it would be a source of borrowing.

Now that the Central Bank has informed seven out of 10 credit unions around the country to curtail their lending, thousands of these new and existing customers will either have to curtail their spending plans or look harder to find a source of credit. 

It also means that economic recovery is even further away than most ordinary people believe it to be, notwithstanding the spin the government keeps putting on how well we are complying with the troika’s austerity terms.

The credit unions do have a huge capital base – about €14 billion in savings, and only about half that amount in outstanding loans -  but with 14% of repayments already in arrears the signs are worrying about future losses.  Also, there is a tradition in too many credit unions for loans to simply be renewed if the borrower’s repayment record was unblemished and now reports abound of how those records were maintained only because the new loans were being used to pay off the old ones.

The Credit Union movement isn’t immune to the great Irish recession. Reduced lending probably means further reduced dividend payments, which could result in CU savers shifting their money to the Irish banks, which they perceive to be ‘safer’ now that that they’ve been recapitalized and that pay artificially high deposit interest rates.

In light of this latest intervention, loyal credit union members who are determined to keep their CU open should be more proactive and ensure that their executive committee is controlling its costs, imposing best lending standards and is doing everything to reward savers, but not at the expense of borrowers.

This country hasn’t got a hope of getting through this recession anytime soon if every lender sits on its capital. 

It would nice to think the credit unions are leading from the front, but that can only happen if they get the all-clear from the Central Bank. 

And that doesn’t look like it’s going to happen anytime soon. 

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Middle classes strain under burden of financial recovery

 

The government is reveling in all the praise Ireland is getting from our fiscal overlords in the EU, ECB and IMF for the way we’re complying with our receivership; but is anyone asking how far the compliant Irish taxpayer can be pushed around before they start fighting back?

Last week we found out that the cost of bailing out Quinn Insurance was to be a 2% levy on every non-life insurance contract for at least the next five years. This is certainly the high end of the 1% - 2% estimate of last April when it was decided that instead of bankruptcy, Quinn Insurance’s (mainly overseas) losses would be socialized, just like the Irish banks’.

 The €320 million is now our debt, that is anyone who is legally obliged as a driver or mortgage holder to insurer their car or home, along with anyone else who buys travel insurance, payment protection cover and of course all important public liability if you’re a business owner.

Aside from dropping the non-essential insurance contracts – which many are forced to do – there’s not much you can do to register much of a protest about this latest levy.

The government is counting on the middle classes to ‘put up and shut up’ when it comes to levies, which is why they are their favourite way to raise extra revenue without officially raising tax rates.

 They may want to be careful how far they go before they cause the cash cows to resist any further milking: they already pay 3% worth of insurance levies dating back to the collapse of the PMPA in 1982; a 1% levy on life assurance policies; a 0.6% private pension fund levy that will result in €2.4 billion in losses in the next four years plus the private health insurance levy of €205 per adult and €66 per child to subside the VHI, the Department of Health’s otherwise loss-making sick child.

 You also have to wonder just how tempted the government will be to increase the hated USC by another percentage point or two?  It would be the last staw for many who believe they have already paid enough for the failings of others.

 

Electrical charge

 

The introduction of a new property tax in Greece is the latest austerity measure that is causing unrest there. Calculated at between 50 cent and €10 per every square meter of home floor space depending on the value and location, this tax will set back the owner of a typical, modest 150 square meter home, at €4 per square meter, €600 in the coming year.

The tax will be collected via the homeowner’s electricity bill, on which existing local authority tax and the Greek equivalent of the RTE license fee are already included. 

Tax collection remains a significant problem for the Greek government and now the electricity worker’s union says it will sabotage the collection of the new tax on the grounds that the electricity company should not be turned into a tax collection agency.

No doubt the Irish Minister for the Environment Phil Hogan will be watching how this latest Greek tax farce develops; he has already flagged a new water charge and preliminary property tax that some anti-austerity groups say they will oppose.

At just €100, the temporary property-cum-household charge probably isn’t, by itself, going to drive crowds of protestors onto the streets, but it’s a miserable enough little tax and will put up homeowner’s hackles. There’s a real risk of non-payment unless the Minister tack it onto something like a utility bill that so many of us pay by direct debit. 

I wonder how that would go down with our powerful, well paid state electricity workers, who are already smarting at the suggestion by their own union leader that they’re ‘spoiled’ ?

 

Credit waiting

 

When 70,000 people joined their local credit union in the past year, most of them presumably did so with the idea that it would be a source of borrowing.

Now that the Central Bank has informed seven out of 10 credit unions around the country to curtail their lending, thousands of these new and existing customers will either have to curtail their spending plans or look harder to find a source of credit. 

It also means that economic recovery is even further away than most ordinary people believe it to be, notwithstanding the spin the government keeps putting on how well we are complying with the troika’s austerity terms.

The credit unions do have a huge capital base – about €14 billion in savings, and only about half that amount in outstanding loans -  but with 14% of repayments already in arrears the signs are worrying about future losses.  Also, there is a tradition in too many credit unions for loans to simply be renewed if the borrower’s repayment record was unblemished and now reports abound of how those records were maintained only because the new loans were being used to pay off the old ones.

The Credit Union movement isn’t immune to the great Irish recession. Reduced lending probably means further reduced dividend payments, which could result in CU savers shifting their money to the Irish banks, which they perceive to be ‘safer’ now that that they’ve been recapitalized and that pay artificially high deposit interest rates.

In light of this latest intervention, loyal credit union members who are determined to keep their CU open should be more proactive and ensure that their executive committee is controlling its costs, imposing best lending standards and is doing everything to reward savers, but not at the expense of borrowers.

This country hasn’t got a hope of getting through this recession anytime soon if every lender sits on its capital. 

It would nice to think the credit unions are leading from the front, but that can only happen if they get the all-clear from the Central Bank. 

And that doesn’t look like it’s going to happen anytime soon. 

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ONCE THE REDUNDANCY SHOCK WEARS OFF YOU NEED TO ACT

 

Most of the 575 workers at the TalkTalk call centre in Waterford who were notified that their jobs will disappear in a brutally short 30 days are more than likely indebt.  Such a young workforce will he heavily weighed down with mortgages, credit cards, personal and credit union loans, hire purchase loans, etc that will be falling due as usual next month, along with utility and insurance bills and crèche fees.

 

They are not alone of course.  Unemployment continues to rise with 14.4% of the population out of work as of the end of August, or just under 450,000 people when seasonally adjusted.

 

When so many workers become unemployed on the same day, a surge of claims is inevitable at the local social welfare office. In this high profile however, the Minister for Social Protection has announced that the likes of MABS, the Community Welfare Service and FAS will come together ‘as soon as possible to make an information presentation to staff and conduct Q&A sessions.” This will hopefully expedite the application process for Jobseekers Benefit, the weekly unemployment payment and for payment of redundancy payments.  However, the experience of many other workers is not good:  delays of 6 -12 weeks before any payments are made is not uncommon and sometimes the delay can be much longer (where only statutory redundancy payments are made.)

 

Anticipating this will help and anyone who is made redundant can do a few things to move the process forward, such as downloading the Jobseekers Benefit application from the Department’s website, www.welfare.ie and by gathering all the appropriate documents (P45, P60, proof of ID and address, proof of dependent spouse/children, etc.) in advance of your first attendance at the social welfare office.

 

Dealing with Creditors

 

With a long list of bills to pay, the mortgage in particular, the unemployed workers at Talk Talk and all the other companies that have let employees go, need to act proactively once the initial shock of losing their job wears off.

 

If only to lower your own and your family’s stress levels, you should contact your lender as soon as possible to inform them that your job is gone.  (About 80 Talk Talk workers may be transferring to UK operations, but they will have a rake of actions to take too.)

Whether you go in person or make a phone call, from the moment you contact your lenders and creditors you must keep a written log of all communications and ideally, put all inquiries for meetings or debt restructuring in writing. 

 

The banks are coping with varying degrees of efficiency to the huge number of requests for debt restructuring and forbearance under the Revised (and other) Codes of Conduct on arrears and debt.  You are joining a queue and you must keep track of the efforts you make to cope with your reduced resources to pay your debts and bills.

 

According to Michael Dowling, the CEO of the Irish Mortgage Advisors Association which is about to launch a major study of the mortgage crisis, anyone made unemployed should be seeking “at the minimum of a three month repayment moratorium of their mortgage” and other loans. Most banks, he said, will agree.  This, he says, “gives you some breathing space to process all your claims, to review your spending, prepare new budgets” which can then be presented at the end of this period when a new, viable debt repayment schedule can be drawn up until you find a new job. (Don’t accept any debt deals, like handing back a tracker mortgage unless the bank offers a huge capital write-down, says Dowling.)

 

The spending review is a key part of this process and you need to now only adjust your essential spending – shop around for the best utility and insurance contracts – do not instantly cancel life or health insurance, do get them reviewed by a good broker or your life company.

 

However, you will need to cut back on discretionary spending.  A new budget needs to include modest treats for your children, money for Christmas and even an annual holiday, the emphasis being on the word ‘modest’.

 

For workers who receive redundancy payments, they should resist any suggestion to use this money to entirely clear credit card or other unsecured debts. “It’s called ‘redundancy pay’ and not ‘bank debt pay’ for a good reason,” says Dowling.  “This is money you are going to need to live on and help pay all your bills.” 

 

Clearly, the 18.8% interest bearing credit card balance needs to be brought down and new spending avoided, but not at the expense of having sufficient money to pay for groceries, the heating and light bill and to have sufficient money to invest in finding a new job.

 

The new unemployed also need to think outside the box:  if, for example, you are determined to hold onto your home, despite losing your income (it may be in serious negative equity with no chance of a sale) then you could, for example, consider the Rent a Room scheme: you can earn €10,000 a year tax free renting rooms with no adverse impact on your welfare benefits, mortgage interest relief or CGT exemption if it is sold.  

 

Workers who have a chance to emigrate (like the 80 TalkTalk workers who may take up positions in the UK) will also need to clear some bills and either sell their Irish homes or rent them. Where negative equity is not a problem, the banks may be willing to negotiate on a small sale shortfall (especially if a tracker loan is involved) but you may have some tax issues to deal with and you will certainly have to adjust insurance policies and utility contracts.

 

There hasn’t been a tougher time to lose your job, but there’s plenty you can do to ease the stress and cope with the financial fallout. 

 

Just don’t put it off for too long…the sooner you sort out the paperwork and your creditor’s expectations, the sooner you can move forward.

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Volatile markets spell bad news for the retiring types

 

How can an ordinary private sector worker, whose managed pension fund is down nearly 6% in August alone, and has lost over -8.4% so far in 2011, have any confidence in the idea of an affordable retirement?

Only with great difficulty, especially when you consider that the last decade has been a complete write-off too, with an annualised managed fund return of just 0.9% since 2001. 

Adjusted for inflation, the pension contributor might as well have saved themselves the bother of investing in a ‘formal’ pension scheme and instead thrown their bundles of euro onto the nearest bonfire.

As one reader also discovered, leaving his pension money entirely in cash didn’t yield him any greater, or safer return: “I put €10,000 into a cash pension fund only to discover it was worth just €9,600 a year later. I had no idea the charges would be so high.”

The fall in stock and currency markets, continuing high charges, the impact of inflation and the clawing back of pension tax relief is guaranteed to make it tougher, not easier for private sector workers to save for their long term future.

The picture isn’t much better for public sector workers, the victims of pension promises the state can no longer afford. Nearly every generous defined benefit pension in the western world is being amended or abolished.  How can a state on economic life support, with a €20 billion annual budget deficit, possibly maintain Rolls Royce pension payouts to its public servants?

It can’t, is the simple answer.  With public sector and old age pensions being paid straight from general taxation and private pensions relying on the performance of increasingly rigged stock markets, the government will hopefully acknowledge the pensions crisis, let alone have a programme to repair it, when it presents its three year budget plan later this year.

Until then, time for a little ark building of your own.  Financial advisors, anticipating more market volatility and what might be the last chance to claim top rate tax relief, are all trying to come up with credible, short-term investment positions for their existing clients.

Join them.

 

No key solution

The frustration amongst indebted homeowners is palpable: it’s hard to avoid their grim stories in the media. Growing numbers, many with young families, feel that they are getting nowhere in trying to sort out their mortgage arrears or repayment problems.

Meanwhile, the forbearance measures in place “are not working and the ‘solutions’ are not long term solutions” says Michal Dowling of the Independent Mortgage Brokers Association which is bringing out its own report shortly on the arrears crisis.

For mortgage experts like Dowling the exponential growth in arrears and repossessions means that time is of the essence if the cost of this crisis doesn’t also spiral out of control.  What is needed, he says, is a consistent approach by the all the banks in the way they process applications for restructuring and forbearance measures, let alone providing a wider selection of options that can be offered.

This is not a problem, he says, that was ever going to be dealt with by one-size-fits all approach.

Meanwhile, the idea that there are a growing number of frustrated, hugely indebted homeowners who are resorting to the ‘jingle keys’, nuclear solution “is an urban myth”, says Dowling.

Only about 10% of all repossessions are ‘abandoned’ repossessions, he says and while some owners are undoubtedly non-nationals who’ve gone home, most cases of people ‘walking away’ are actually people with substantial arrears who have agreed to voluntarily leave their homes. In those cases, the banks have been known to write off the shortfall, but only “on a case by case basis.”

 “It is not advisable to ever just hand back the keys and walk away property if you plan to stay in the country,” says Dowling. The banks will, and they have, sought court judgments against such people.  It can impact on your earnings for up to 12 years, “and in cases that I’ve come across that involve buy to let properties that people want to walk away, I know that the banks will look for the courts to attach the shortfall to your to your family home.”

No matter how inadequate the debt forbearance measure or how stressful dealing with the mortgage lenders can be, stick with it, says Dowling.

It buys you time.

 

Paper trails

There is a saying that all fiat currencies eventually turn into wallpaper.

Last week, the Swiss franc joined the global money-as-wallpaper club by abandoning the sound money principals it had clung to for so long.  It de-pegged itself from gold and onto the unstable euro instead.

The Swiss said they had not choice. So much money was pouring into the franc from weak currencies like the dollar, pound and euro that Swiss exporters were in danger of losing their businesses.

The currency wars that started last year have been ratcheted up by the Swiss move but it has left gold as one of the last stores of value. 

With shares falling, commodities and bonds looking very overpriced, and even strong currencies being intentionally debased by their central banks, gold is the only ‘money’ that can’t be printed out of thin air or have its market value set by political dictat.

Unfortunately, ordinary Irish people still don’t see it that way.

Governments in developing countries, and their wealthier citizens are piling into gold, but here, all people see is a price per ounce that has soared. Silver, at c€30 an ounce seems a more manageable price tag, but it travels on an even steeper rollercoaster than gold and is not for the faint of heart.

In the past six months an ounce of gold has gone up (and occasionally slightly down), by over €300 (over $435), a price point that is just too great for people who only see a bubble ready to burst when any asset rises that fast.

I don’t think gold is in a bubble, but I understand why others do, and it’s too bad. 

All paper currencies, backed by nothing but the empty promises of the indebted governments that issue them, turn into wallpaper eventually.  And it will happen to the euro and dollar – and the once-mighty Swiss franc as well – once the central bankers get their instructions to fire up their presses and print away the toxic banking and sovereign debts.

That’s when it’ll be time to invest in wheelbarrows. 

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SAVING AND INVESTING – DEFENSIVELY - SHOULD ENSURE THOSE LONG TERM EDUCATION FEES ARE MET

 

The sight of the new junior infant classes at this time of year lightens all our hearts at this time of year, even if, the background, their (sometimes) tearful parents may be grumbling about the cost of uniforms, books and the ‘voluntary’ contributions they are expected to make to the school.

 

The cost of educating a child from junior infants to a third level degree can amounts to many tens of thousands of euro, especially if you decide to go the private education route and then, depending on whether or not you end up paying third level fees and living away expenses.

 

Primary school parents I know say they factor in about €500 per primary child per year and up to €1,000 a year (mainly in years 1, 3, 5) for all the costs associated with secondary attendance.  Those parents with two primary going and one secondary student will therefore need to find at least €2,000 this new school year.

 

With university registration fees alone costing €2,000 this year, when books, transport, food and entertainment are added (and living costs for students attending colleges away from home), woe-be-tied the parent that hasn’t planned well ahead how they are going to meet the total cost of their children’s third level education.

 

The most popular source of finance for parents of children up to age 18 is the universal, tax-free child benefit payment. (That may change yet.)  For three school going children under 18 this amounts to €447 per month or €5,364 per annum, which should meet the costs of uniforms, books and voluntary contributions. 

 

For parents who can afford to bank the monthly €140 benefit from when their child is born, the three or four years of interest bearing benefits could theoretically produce a fund of €7,130 per child (earning 3% net) by the time their son or daughter starts junior infants.

 

Most financial advisors I’ve spoken to about education costs, who may have once favoured investing lump sums, are currently leaning towards deposits and other very defensive saving options, mainly because of this current period of volatility, currency fluctuation and economic uncertainty in the western world.

 

The well known advisor Eddie Hobbs says he is expecting a pick-up of inflation once the next bout of quantitative easing – money printing by central banks to ease their debt burdens – occurs. Because cash holdings will be vulnerable and spending power diminished, he suggests that parents consider taking some of their education fund lump sum and buy Bank of Ireland’s 5 year inflation deposit bond.  The rest they should continue to save in solvent, highest yielding deposit accounts.

 

Liam Ferguson, of Ferguson Associates favours the high yielding EBS Family Savings Accounts which offers a 5% first year and 4% second year return.  “I am less inclined to recommend investment funds – the charges are still too high in many cases, especially when current 3% inflation in taken into account”, but given the state of wider economic uncertainty, he also recommends that parents who can afford to, consider diversifying even out of cash.

 

“The monthly Goldcore.com  Goldsaver account, which allows you to save as little as €150 a month in gold, is worth looking at,” he says. The money is converted every month for the year into Perth Mint Gold Certificates.

 

Next, where a lender will allow homeowners to draw down accelerated mortgage payments in the future - “KBC certainly allows it” – this means that the parent that is willing to overpay their monthy mortgage repayment is “earning” a guaranteed tax-free, charges-free equivalent return the equivalent of the interest they are paying on the loan.  All the overpayment plus the interest can be drawn down in the future to pay for education fees, in the knowledge, says Ferguson that the mortgage will still be cleared on schedule. (Check with your bank to see if they permit equity drawdown on overpayments.)

 

Impartial.ie advisor Vincent Digby has been a supporter of absolute return funds, but he is also leaning towards very defensive investment options like cash and fixed income for all his clients at the moment. Where investment funds are being consideration he suggests keeping costs as low as possible by using the services of a fee-based advisor only, and with frequent reviews of the asset classes under management.

 

For Michael Kiernan of the on-line advisory, www.myadviser.ie “The savings agenda is still deposit focused as rates are quite high.  That said, my own medium to higher risk appetite is for absolute return funds.  I would also probably only use long-only equity [stocks and shares] funds when I thought the upside potential was worth the risk; this is especially the case once a sizable lump sum had been saved.” (Absolute return strategy funds include the likes of Standard Life’s GARS fund, Aviva’s Blackrock European Fund and the Friends First Insight Currency Fund.)

 

Parents who start saving soon enough, should have enough time to make up for any investment losses they may experience, all the advisors agree. 

 

But external conditions are so uncertain at the moment, with huge swings in returns, that they should be aiming for safety first right now.  The ‘buy and hold’ investment strategy has not proven particularly rewarding over the past decade and deposits, as well as investments need to be carefully and regularly reviewed, both to protect the capital and to squeeze out some growth. 

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