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Money Times - February 6, 2018

Posted by Jill Kerby on February 06 2018 @ 09:00

PART ONE:  GETTING ON THAT LADDER HAS NEVER SEEMED SO HARD

 

The Taoiseach has been accused of revealing his middle class bias over his recent remarks about how getting a financial dig-out from one’s parents has always been a factor for many first-time buyers in the securing of a mortgage. 

He didn’t need one himself, he later said, but the fact that he secured an extravagant 100%, 40 year mortgage at the peak of the property boom reinforces just how stratified lending is, and continues to be here.

Back then pretty much anyone with a beating pulse could borrow substantial sums for over-valued property. But 40 year, no-downpayment loans on desperately over-priced apartments and houses were largely reserved for the professional rentier class, those with an apparently safe claim on steady, taxpayer-backed incomes and careers in areas like medicine, the law, accountancy (the State is a most welcome and steady customer for consultancy contracts) and in the higher civil and public service.  A well-paid high tech professional working for a foreign multi-national might also have been unfortunate to have snagged such a mortgage.

As a few of us pointed out at the time, these were dynamite-laden contracts, sure to blow up some day, even if they were variable rate trackers, like Leo’s. 

The ECB base rate, we noted ad nauseum back then, wasn’t going to remain at 3% for the next 40 years. It didn’t. It went up briefly to 3.25% in October 2008 and then dropped all the way to 0% by October 2016, where it remains today. 

Ten years down, 30 to go. But who would dare bet that the ECB rate (and Leo’s variable tracker repayment) won’t go up and down a few times over the next three decades? The US and Canadian base rates have both recently gone up by 0.25% to 1.5% and 1.25% respectively. Commentators say it is due to improved economic indicators like employment and wage growth, something the ECB says is finally happening in Europe.

Where US interest rates go, so do ECB ones…eventually. 

Forty year, 100% tracker loans no longer exist, yet the banks have some wriggle room beyond the strict 10% down, 3.5 times salary limits the Central Bank has set, but only for those borrowers with high paid, secured jobs, who probably also have access to parental cash gifts.

I have no idea when the borrowing environment is going to ease up for everyone else who is looking to get onto the affordable property ladder, or if the stream of new builds that the government is promising over the next few years will help ease price inflation for prospective owners and tenant-savers.

The reality is that so many factors are causing the housing shortage and price inflation. These are only a few: 

-       The mortgage debt legacy from 2008 and restricted lending;

-       The resilience of the land banks;

-       Government building costs and planning regulations;

-       Local authority bureaucracy and incompetency;

-       Massive imbalance of demand in Dublin and other cities;

-       Insufficient job security and income growth among this generation of prospective buyers.  

 

Endless politically motivated government intervention isn’t helping either, like the latest scheme to provide a limited number of 30 year fixed rate, 2.25% interest loans to 1,000 lower earners who have already been turned down by at least two lenders. As one market commentator put it, “this is just another way for people who should be renting, to get themselves into serious long-term debt by buying over-priced property.”

Is housing overpriced? Are prices in a bubble that’s just waiting for its pin? 

Probably not outside Dublin and other major cities. But rural Ireland is not where the jobs are or where younger people want to live.  And houses and apartments continue to be snapped up in the capital, even at what appear to be exorbitant prices.

The reality – unfortunately – is that there are no quick solutions here and in other high demand places – nearly all capital cities and other high growth urban locations around Europe, the US and Canada, Australia and New Zealand, where young people are being priced out of home ownership. Here the situation appears so much worse because of total collapse of the building market for over five years after the crash.

The Taoiseach, rather insensitively suggested temporary, tax free employment in the tax-free Gulf States as a way for an ambitious young couple to raise the €30-€40,000 needed to buy a city starter home. Or that they move back in with their parents for three or four years and save the rent they’ve avoided paying.

Good luck with that, murmur mums and dads around the country.

Next week: We look at other capital raising options and solutions. And we revisit an idea that should be every family’s priority:  How to build a Financial Ark.

The 2018 TAB Guide to Money Pensions & Tax is on sale in all good bookshops and on-line. See www.tab.ie for ebook edition.

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Money Times - January 30, 2018

Posted by Jill Kerby on January 30 2018 @ 09:00

READERS STILL LOOKING FOR INVESTMENT, PENSION ADVICE…

Your questions are always welcome. Here’s a selection from my postbag:

 

Mr and Mrs F:  We are a professional couple looking for financial advice and hope you can tell us how to find such a person?

This is one of the most common questions I receive, for good reason:  independent, impartial and fee-based advice is not easy to find in Ireland as most brokers and advisers accept sales commission for the products that they sell, whether for protection purposes (like life or health insurance) or investments, including pensions.  Since the new year, a broker or adviser cannot call themselves independent if they accept sales commission. I suggest you check out the interactive members map of the Society of Financial Planners of Ireland (www.sfpi.ie) for a fee-based, ‘independent’ planner with their own practice (many SFPI members work for banks, life assurance companies, stock-brokers and do not give impartial advice).  Ask about their professional background and training, how much they charge for an initial financial review and any set up and on-going fees.

 

Mrs CF writes: My daughter is 29, a chemical engineer who works for a US company and the major earner, though her partner is also working. has started working with a company.  She is the only EU employee and has to arrange her own pension. Any suggestions? 

Well done to your daughter for tackling this, though she should check to see if her US-based company is aware that they are obliged to provide access to a company Standard PRSA (Personal Retirement Savings Account) option for their employees if they don’t provide an occupational scheme. She should certainly get some independent advice about the kind of assets she should invest in, how much of her salary she contributes (15% at the moment, 20% from age 30-39) and the value of the tax relief.  A good adviser will also discuss with her income protection, life and health insurance if her company does not offer these benefits.

 

Mr PR writes: I have a pension pot of about €40,000 with Irish Life. When I turn 60 in February I’d like to take it and invest it myself. I don’t need the pension as I have a property rental portfolio and stock market investments. I know I can take 25% of the fund tax-free but I want to get my hands on the whole amount.  Leaving it there will cost me annual fees and low returns, whereas I know I can make an annual return of 20%.

 

Unfortunately there is no cost-free ‘take the pension money and run with it’ option when you hit 60. Your options are to take the 25% tax-free lump sum of €10,000 (or not); to encash the balance but pay top rate tax, USC and PRSI; to invest the balance in an approved minimum retirement fund (AMRF) unless you have a separate minimum pension income of €12,700. In that case you can invest the balance in an Approved Retirement Fund from which you can encash both capital and growth. You could also leave your pension fund where it is to continue growing until age 75 when you could then convert it into an ARF. 

“Your reader says he doesn’t need a pension,” commented the independent financial planner Marc Westlake of Global Wealth Management, “so why not leave it to grow tax free for another 15 years rather than pay over 50% tax and PRSI on it if he encashes it now? Yes, there are fees and charges, but it could also act as a whole of life insurance policy: if he dies before age 75 the fund value could go entirely tax-free to a spouse. If he dies after age 75 when it’s been ARF’d, it goes to his estate, where again it can be inherited tax-free by a spouse.”

 

Mr FB writes: My brother who lives in the USA and is very comfortable financially is going to give my wife and I some financial help over the next few years. Can you tell me what the tax implications are for this or is there a limit to what we can receive? We are both in the high tax bracket. 

 

Under our current Capital Acquisition Tax regulations you can receive tax free gifts or an inheritance up to €32,500 over your lifetime from your brother; your wife, because she is not a relative, can only receive €16,250. Each of your children (if you have any), as nieces or nephews, can also receive €32,500 from their uncle over their lifetime.  Once those limits are breached any further money, even if left in his will, is subject to 33% CAT tax. That is the only tax liability you face so your income tax rate is irrelevant. A way around these limits is for your brother to also give each of you a €3,000 annual gift. CAT rules allow anyone to give individual tax-free gifts up to €3,000 to anyone they wish, regardless of the relationship.

 

The 2018 TAB Guide to Money Pensions & Tax is on sale in all good bookshops and on-line. See www.tab.ie for ebook edition.

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Money Times - January 23, 2018

Posted by Jill Kerby on January 23 2018 @ 09:00

WE’RE ON OUR OWN WHEN IT COMES TO INVESTING IN A STATE OF GOOD PERSONAL HEALTH

 

“Good health!” seems to be the default New Year greeting this year – and for good reason.  The health service continues to fail to provide what anyone with a beating pulse would describe as a consistently efficient and commendable service for the approximately €15.3 billion the state expends.

If good health is what you aspire to, you better be working hard to make it happen yourself.

It’s easy to blame the system.  The HSE is administration-heavy and light on essentials like sufficient hospital beds and front line staff to cope with rising demand from a rising and ageing population. It’s also deficient in well-funded and resourced preventative, community-based services.

A hospital-based service, mainly in cities (where most people now live) is always going to throw up seasonal and geographic anomalies; the inevitable result is that outlying patients will have poor access to even the most basic services, like GPs and non-critical A&E treatment. Seasonal demand (winter flu outbreaks) turns up the pressure to boiling point.

But that’s not the whole story.

As individuals, we’re sleepwalking ourselves into a toxic nightmare of future ill health that is only going to accelerate the rising costs and inefficiency of our already dysfunctional health service. And here’s how:

-       Our level of alcohol consumption remains higher than EU averages with c25% of drinkers, binge-drinking;

-       Despite 76% of the adult population claiming to exercise regularly, only 45% meet physical activity guidelines;

-       18% of the adult population are already obese, which is higher than the EU average. By 2027 this figure is expected to rise to 37%;

-       27% of all disease is related to behavioural risk factors (too much food, alcohol, tobacco use (just 19% today) and too little exercise);

-       Chronic illnesses now account for 80% of all GP visits 40% of hospital admissions and 75% of hospital bed days.

Compiled by the private health insurance company, Irish Life Health and part of its recent annual review presentation to financial journalists, the bad news didn’t end there. 

Looking ahead at the health and fitness prospects of the younger generation (15-24 year olds) it found that 30% of this age group are already overweight (19% of that number are 15 year olds) and 57% will likely be by the time they are age 35.

Irish girls in particular are less physically active than boys of the same age and that 90% of all secondary schools provide on two hours or less of PE a week, versus the recommended seven hours. (The good news is that compulsory PE could be added to the secondary school programme.)

Given the poor government response to all these long-recognised issues, it’s no wonder that all the private health insurance companies are spending millions on preventative health and wellness programmes for their customers:  Laya Health, the state-owned VHI and Irish Life Health have all been promoting fitness programmes in schools and community sports clubs; health screenings and incentives like wellness programmes, initially for their corporate clients but now rolled out for individuals (Laya’s HealthCoach and Irish Life Health’s BeneFit plan with its cashback benefit) and fitness and health social media blogs and member messages.

There is a clear financial correlation between customers – or taxpayers – remaining as healthy as possible or seeking early intervention when a health problem arises and long term profitability, admitted Laya’s Managing Director Donal Clancy. He thinks the private health providers should be working with the state to extend their positive health programmes within the HSE.

As this column has noted many times, in a country where 685,000 people sit on HSE treatment waiting lists (up from 459,000 in 2015); where even children are now lying on trolleys in A&E departments of the of the hildren’s hospitals and medical outcomes fall below the EU average (despite Ireland being the 4th highest spender on health) we need to take more personal responsibility for our health and that of our children.

It’s still January, resolution month. Many of us need to eat less, drink less, smoke less and get more exercise. Losing weight (don’t I know it!) could be the most rewarding thing you do for the next decade health-wise, let alone in 2018.

Consider getting a full medical check-up. Nearly 2.2 million of us have private health insurance. All three providers offer health checks, (Laya’s new 30 minute HealthCoach fitness check is free), in private clinics and hospitals and now, even on-line.  Depending on your plan and the type of check-up you receive you may be able to claim all or part of the cost.

And finally, if you don’t have private health insurance, reconsider that decision.

Contact a good health insurance broker to do the hard work of finding the best and most affordable policy. If your existing plan costs more than €1,800 and you haven’t reviewed it for the last couple of years, says Dermot Goode of totalhealthcover.ie, then you are overpaying.

The 2018 TAB Guide to Money Pensions & Tax is on sale in all good bookshops and on-line. See www.tab.ie for ebook edition.

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Money Times - January 16, 2018

Posted by Jill Kerby on January 16 2018 @ 09:00

PENSION AUTO-ENROLMENT SHOULD NOT BE LONG-FINGERED

 

If there was a single piece of money advice you’d like to pass onto your children, grandchildren or just a young friend, what would it be?  To avoid debt? To earn your money before you spend it? To spend wisely by buying assets, not liabilities?

These are all terrific, timeless recommendations. But in this month of January, in this New Year of 2018, in this Ireland where the reality of our rapidly ageing population can no longer be dismissed (“we still have one of the youngest populations…”) there actually is a singular message that needs driving home: 

Start a pension today or end up working forever.

Every January, Irish Life, the country’s largest life assurance and pension provider gathers its chief department heads together holds a wide ranging media briefing for business journalists. I’ve been attending for more years than I care to admit.

The event is a PR opportunity – especially in ‘good’ years, as 2017 was for investment fund performance and growth – but it’s also an opportunity to raise some more warning flags about the state of the nation’s financial wealth and health, especially about pension coverage and contributions:

-       Private pension coverage has fallen to 47% in 2017 from 51% in 2009;

-       In the last five years the number of over 65’s has grown by 100,000 compared to just 44,000 people aged 15-65. In 20 years they will increase in number by 70% to make up over 20% of the population. This rate of increase is twice that of the EU average.

-       Four out of 5 working adults say they are not saving enough for retirement. Only 1 in 4 have a specific target income (and only one in three of them are over 45.)

-       The state pension is the number one source of income for 39% of women surveyed and 31% of men, but it only represents about a third of the average industrial wage.

-       84% of adults would welcome the introduction of an auto-enrollment private pension scheme with only 1 in 10 leaving it up to the government to choose the pension fund manager.

-       75% would like to have some emergency access to their money, especially, said 62% if some of the fund could be used to help with a deposit on a house.

-       Meanwhile, about 50% of those with a private pension are ‘confident’ they are ‘on track’ for a retirement income while, perversely, 1 out of 6 who have no pension ‘are confident’ they too ‘are on track’.

There are delusional people everywhere. Thinking you’ll have a comfortable retirement if you have no private pension confirms this, though some people do already (or will) own other assets that may provide income and capital at retirement or may even be certain of a substantial inheritance that may see them through their non-working years.

For most of us, retirement will have to be funded by deferred income in the form of voluntary tax-efficient pension contributions into an occupational or personal pension; market growth on those contributions (which hopefully include those of their employer); their obligatory PRSI contributions into the state pension system and hopefully, some other personal savings and assets accumulated over their working life.

Which is why Irish Life, which reported last week that their average customer’s contributory pension fund value is worth just c€120,000, fully supports the idea of the auto-enrolment system that would involve both workers and employers. 

Interesting, the survey found that the new pension may have to be called something else –the word ‘pension’ doesn’t inspire interest or enthusiasm, but they point to the successful introduction of unconventional auto-enrolment models in Australia (‘The Super’), New Zealand (‘Kiwi Saver’) and the UK (‘Nest’) as the models we too should be adopting here.

There’s never a good time to start a pension – there’s always a more pressing financial priority, like paying off student debt, putting together a down-payment for rented accommodation, let alone a first home. But every year that a young worker avoids paying into a pension scheme is another year of lost investment opportunity.

Pension funds work best when compound interest – the effect of time on money - is allowed to do its magic. Consistently contributing a percentage of your annual income into a well diversified, well-managed and lowest cost pension scheme, growing even at a relatively modest rate, but ideally from the moment you start working, means never having to worry about being able to retire.

Auto-enrolment can’t happen soon enough, though, being Ireland its roll-out will take longer than it should. The people surveyed by Irish Life in 2017 are overwhelmingly – 84% - in favour of it. The company claims that employer organisations they’ve met, are too.

 All that’s missing is the political will.

The 2018 TAB Guide to Money Pensions & Tax is on sale in all good bookshops and on-line. See www.tab.ie for ebook edition.

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Money Times - January 9, 2018

Posted by Jill Kerby on January 09 2018 @ 09:00

WINTER WONDERLAND? IF ONLY…

 

It’s double whammy month:  the height of the storm and flu season. And if you haven’t battened down both these hatches, it could prove to be a very expensive one too.

So let’s start with the first significant storm of the new year - Storm Eleanor.

Here in Dublin we got off light:  the huge winds caused plenty of branches to sheer off the big sycamore trees outside my office on the South Circular Road, slates were loosened and outdoor Christmas lights were left hanging rather precariously.

The devastation in Galway, Mayo and Limerick was a very different matter, with people and businesses who have never been flooded before, facing weeks of expensive cleaning-up and repairs.

According to a specialist home insurance brokers, www.insuremyhouse.ie, their company was inundated before Storm Ophelia back in October with calls for last minute insurance cover; there would have been little or no warning for what arrived last week.

“The level of calls [then] corroborated something we already knew,” said Deirdre McCarthy of the company. “That there are very likely thousands of homeowners throughout the country who let their home insurance cover lapse at renewal date.

“While some people might go a long period of time without cover, anecdotal evidence suggests most “lapsers” go without coverage for an average of 3 – 4 weeks. While this might not seem like a long time, the crux of the matter is that if their property were to be damaged or burgled during this period, they would simply not be covered, and would have to foot the entirety of the repair or replacement bill themselves.”

Storm Eleanor – and the huge weather bomb that also hit the east and north east of America and Canada – that severe, record-breaking winter storms are no longer just a 50 year event.

“For some people it’s really just an “oops I didn’t realise” situation and for others it’s an “I don’t have the funds” issue,” says Ms McCarthy. “If it’s the latter we would advise that people should consider using a direct debit option for payment. We’ve also found that if people go without cover inadvertently and subsequently realise their error, they are sometimes likely to just continue as is without cover – and put the renewal on the long finger.”

Having proper insurance is all very well, but knowing what to do if you have to make a claim is also important.

Always call an experienced insurance assessor to act on your behalf with the insurance company’s agent, the claims adjustor. For a modest cut of the final settlement, the assessor will prepare a damage report, get you an independent repair quote and negotiate a fair, speedy and inevitably higher settlement than your insurer’s first offer. (Check out www.proinsuranceclaims.ie, with offices nationwide or ask your broker to recommend one.)

The other people who might be regretting not having made proper insurance provision – this time for their health – are those who have been waiting days on trolleys to be seen by exhausted accident and emergency personnel.

The A & E departments in private hospitals and the private minor illness and injury clinics are certainly busier at this time of year and have limited hours of operation – usually c9am-6pm and do not take ambulance cases. 

But if you suspect you’ve broken your wrist (my husband this past summer), or have appendicitis, not food poisoning (my son) or are worried that a worsening fever and cough might be turning into pneumonia (an elderly neighbour), then the last place you want your GP to send you this week is the local emergency department in a busy public hospital.

Some hospitals are under far more bed and trolley pressure than others but having the option of getting yourself or a loved one who is not critically ill to a private A & E requires having health insurance.

About a million private health insurance renewals happen in the first three months of the New Year, according to the specialist broker, Dermot Goode of www.totalhealthcover.ie.  The over-50s make the greatest number of claims and have highest health insurance cover, but are also more likely to be overpaying for cover.

Goode’s recommendation is that anyone who has remained on the oldest once popular VHI, Laya and Irish Life Health plans should prioritise a review “as they have been hit by multiple price hikes over the years.”  Switching to a similar but cheaper plan, even with their own provider that includes a small excess payment, says Goode can result in savings “of between €500 - €1,250 per adult. Remember, the older the plan held, the higher the likely savings.”

Winter will end sooner or later. The trick, as always is to get through with the least damage and expense by taking preventative measures. Call a good broker. Start 2018 as you intend to finish – saving money.

The 2018 TAB Guide to Money Pensions & Tax is on sale in all good bookshops and on-line. See www.tab.ie for ebook edition.

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Money Times - January 2, 2018

Posted by Jill Kerby on January 02 2018 @ 09:00

Instead of a New Year’s resolution – Make small changes every month permanent

 

Are New Year resolutions for the hopelessly optimistic?  Diet clubs and gyms certainly hope so with new membership numbers soaring in January and February only to trail away a few weeks later.

That said, a grey Sunday afternoon in January at the kitchen table with a big pot of tea is the perfect time to face up to those red hot credit card bills that have just arrived in the post and to do something about improving your 2018 money habits. in 2018.

The secret to improving your personal finances – like dieting - is to make small changes, permanent. You do something positive. Then you do it again and again until it becomes a habit, just part of your usual routine.

For example, instead of using the credit card, you put it in a drawer to be used in emergencies only. Instead, you use the debit card or cash, both of which reduces the risk of overspending and doesn’t carry a 20% plus annual interest charge.  The tempting but expensive Visa or Mastercard is now out-of-sight, out-of-mind. Ideally, you cut up the card and avoid the €30 annual stamp fee duty as well.

Last year was, and 2018 will probably continue to be a tough year for anyone grappling with the on-going housing crisis. There isn’t much sign of wage growth to keep up with soaring rents and house prices, though it does look like there will be more supply of property and that the terrible tracker scandal could be coming to an end. 

Each of these financial ‘wellness’ suggestions for 2018 are realistic and practical so tick off as many as you can. They’re also time consuming, so don’t try to do them all at once. But put them all in place and a lifetime of good money and spending habits will be properly bedded down by next January. 

January:  Get the bad news out of the way. Pay off the Christmas debts right away so they don’t act as a drag on the rest of your year’s new spending. If you don’t have sufficient income or savings to clear the credit card bills, make an appointment at the Credit Union or bank (the latter probably on-line) and take out a small personal loan to clear the balance. Then cut up the credit card. It’s a plastic millstone round your neck. (Ditto for even more expensive store cards.)

Now sit down at the kitchen table (with your partner if you have one) and all your financial statements, contracts, weekly grocery and utility bills and work out exactly how much you earn and spend. Cut down on store bought coffee, buns, cigarettes, that extra pint or bottle of wine, takeaways. By cutting your discretionary spending you can now tackle your essential spending.

February:  This is the month you (and your partner) assign another afternoon to shopping around for better prices or tariffs for your other financial commitment you have: electricity, gas, broadband, mobile providers; motor, home, health, travel and pet insurance. Make a note of any contract maturity dates.  On-line comparison web-sites (like Bonkers.ie) or specialist insurance brokers can do much of the work for you. 

March:  You’ve sorted out the bigger ticket utility and insurance commitments and should see some substantial savings which, from this month can be put to good use in setting up a contingency fund or other regular savings accounts to pay for holidays, school costs or college fees, a new car, home renovations, etc. 

This is the month to start looking for an experienced independent, impartial financial adviser or planner. From January 1, under the Mifid 2 Directive, only fee-based financial advisers can call themselves “independent”, that is, give advice unrelated to any commission remuneration from product manufacturers. Once you find this person they will hopefully become a lifetime adviser just like your paid family doctor, lawyer, accountant, mechanic, handyman.  

April:  The meeting with your independent adviser should be the culmination of your months of effort to bring your finances under control and set up good money habits.  Bring your new budget and schedule of contracts, wage and bank statements along. The review should be comprehensive and the adviser will hopefully prepare a realistic financial plan for immediate and long term wealth creation and retirement provision, based on what you want and can achieve, and not on any financial product that would pay them a hefty sales commission. Expect plenty more meetings over the years as your life circumstances evolve. 

May: It’s nearly the summer. Your good money habits are now in place, but don’t forget to make a realistic holiday budget. Take the time to shop around for everything from the cost of getting to the airport to the flights, accommodation, car rental, food, drink, entertainment, travel insurance and souvenirs.

Then enjoy your guilt-free, well-deserved holiday. Your finances are on track…finally.

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Money Times - December 26, 2017

Posted by Jill Kerby on December 26 2017 @ 09:00

2017:  A YEAR OF FINANCIAL SWINGS AND ROUNDABOUTS

Looking a gift horse in the mouth is never recommended, but there’s really no other way to review the personal finance events of 2017. 

In a land where ‘swings and roundabouts’ is the norm, 2017 was no different:  good news about the economy was tempered by bad news on the housing front; jobs growth was strong in the FDI sector, but there was little wage growth in the wider economy.

And yes, a well-diversified stock portfolio rewarded most asset holders, but few ordinary workers have any surplus earnings to invest and pension membership in Ireland continues to fall.

So how was the past year, financially, for you? 

Did your standard of living improve or stand still, as so many people are reporting? Was this the year that your family home came out of negative equity, or were you one of the 30,000 victims of the great tracker mortgage scandal? 

As a first time buyer, did you benefit from the easing of the new borrowing rules and the introduction of the Buy To Help scheme – or did these change overtake you in a market where prices kept rising?

Nearly all the official government indicators show an economy in recovery, with nearly 5% GDP in 2017, though this is distorted by the foreign multinational sector and the convoluted way it reports its accounts and value of the intellectual property it registers here.

Officially, inflation is still very low at about 0.5%, but the rise in the price of many imported goods – via the UK – is noticeable in grocery line check-outs even as the price of some raw food stuffs, like domestically produced vegetables has never been lower, putting Irish farmers under huge pressure.

Health, transport and education services continued to rise throughout 2017.

The overall tax take rose in 2017, but income tax growth was not as robust as forecasters predicted. Too many of those new jobs in the domestic economy are either so low paid or temporary that there is no income tax to be paid.

Even the relatively small change in the hated Universal Social Charge in Budget 2017 has been sited as a reason for the weaker than expected tax take at one point. Swings and roundabouts indeed…

One of the enduring disappointments of the last year, and of Budget 2018 is the negligible return on savings. Personal debt, including mortgage debt continued to throughout 2017, but the banks, post office and credit unions continued to lower their deposit interest rates and dividends. Bank of Ireland became the first Irish bank to introduce negative interest rates on large deposits while bank and post office closures and credit union mergers continued.

The only good news was that the government finally lowered the DIRT tax on deposit yields from 40% to 39% - it will fall again to 37% in 2018 – but 37% tax on zero is still a zero return.

The lack of reward for savers hasn’t discouraged those who do have some money to squirrel away but a combination of the housing shortage and nil returns on cash have fed the house price and rent bubble with over half of all house sales in 2017 undertaken by cash buyers.

The ECB stuck to its zero base interest rate in 2017, which is good news for euro-zone countries with substantial personal and national debt legacies, like Greece, Spain, Portugal, Ireland and Italy – but by the year end, this long-standing position changed in other countries like the US, UK, Canada. Where they go, we usually follow but perhaps no time soon.

Our debt legacy is one of the most enduring with 50,000 mortgage holders still in serious arrears at year’s end.

The best return of all in 2017 for any surplus earnings in Ireland (aside from reducing expensive debt like credit cards and personal loans) was a pension fund, if only for the 20% or 40% income tax relief on contributions. Underlying assets still grow tax-free and at retirement you can claim a tax free lump sum worth 1.5 times your final salary or 25% of the fund if you are self employed.

Well-diversified, risk-balanced pension funds also performed pretty well in 2017, yet membership continued to fall. The government claimed once again that plans are afoot to introduce a universal (sic) pension scheme (universal to the private sector only) but amid such a great housing crisis it was all talk and no action.

If 2017 proved anything at all – and not just here but in most western societies - it was that job uncertainty, housing uncertainty (and homelessness) and the growing cost, especially of medical services, has grown more acute.

Amidst all the talk about the rising economic tide, what seemed lacking was the sight of lots more little boats sharing the harbour again with the gleaming yachts.

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Money Times - December 19, 2017

Posted by Jill Kerby on December 19 2017 @ 09:00

RUNNING OUT OF TIME FOR THE IMPOSSIBLE-TO-BUY-FOR? READ ON

With just a few days left before Christmas, and readers running out of time and maybe a few ideas for what to get those impossible-to-buy-for loved ones, I have dusted off the MoneyTimes ‘Last Ditch Christmas Present List’ which is long on ideas and short on expense.

Of course, for the giver with no budget restraints there’s always the purchase of a Bitcoin or two. The original virtual currency, it was priced at a giddy €14,421 ($16,465) per virtual coin at time of writing, and a Daddy or Mammy Warbucks can make their purchase entirely on-line and not leave the leave the comfort of their own livingroom and laptop.

The virtual wallet in which Bitcoin resides comes with a unique passcode which you don’t ever want to misplace. Bitcoin, which would have cost about €800 this time last year is completely anonymous and outside the supervision or adjudication of banks and regulators so if it goes missing or is stolen there’s no one to turn to for restitution or compensation.

Compared to the original Bitcoin, (there are now hundreds of imitators) precious metals like gold, at just c€1,060 for a one ounce real coin at time of writing, looks like a bargain.

The price of gold has been moving sideways for about the last five years after slipping c18% from its 2013 all time high, or since the euro crisis in Europe eased after the Greek debt disaster was averted (just about.)  

Now that Bitcoin is heading towards the price stratosphere amid periodic gut-wrenching pullbacks a nice shiny gold coin at the bottom of a Christmas stocking is unlikely to cause quite the same heart palpitations if you’re the sort who can’t resist watching the daily virtual currency price rollercoaster. (My financial adviser’s view of Bitcoin’s price movement, for what it’s worth, is akin to his view of the 16th century tulip mania or the dot.com mania or Irish property price mania: “Crazy prices last only until the get-rich-quick wannabees decide they don’t make sense anymore and stop buying.”

Not quite as exciting or expensive as Bitcoin or gold, this is my tried and tested 2017 MoneyTimes ‘Last Ditch Christmas Present List’ :

-       A gift vouchers from your local neighbourhood shop, whether the butcher, baker or candlestickmaker …or the wineshop, restaurant, hotel, florist, beautician, cinema, electrician, clothing boutique or hardware store.  Just be sure to double-check any expiry date and then remind the beneficiary that they mustn’t forget to use it before the deadline.

-        A Gift-for-All card.  Extremely convenient and handy, these plastic cards are sold in your local Post Office and can be used in thousands of retail, outlets and shopping malls (including grocery stores and utility providers) around the country. Hopefully, whomever you give one to will spend it locally.

-        Prize Bonds. I’ve never been a fan of the Prize Bond company – these are not ‘investments’ as they pay no interest or yield.  They are a game of chance, but now that deposit accounts pay no real return either, a gift of Prize Bonds is a perfectly fine last minute gift you can buy at the Post Office and they remain current even if you win a prize.

-        Any coin collectors on your list? Check out the Central Bank’s www.collectorscoins.ie website. The latest issue celebrates the 350th anniversary of the birth of Jonathan Swift. It may not arrive in time if ordered this late, but you can download the page and details and pop that into a gift card. 

-        Theatre, music or art lovers on the list will enjoy getting tickets or becoming a ‘Member’ of their local concert hall or art gallery. Members of the National Gallery enjoy ticket discounts or free entry to exhibitions that charge fees. (Membership to most organisations like these can be done online and the documentation downloaded into a Christmas Card.)

-        Make a donation gift. There’s no shortage of good causes or charities that you could make a financial donation to on behalf of your entire family, or particular members (or even in memory of a loved one who has died in the past year.) 

-        Give a gift of time. You know the drill by now if you’re a regular reader: offer a set number of babysitting or grannysitting hours. Help someone milk their cows or dig their Spring garden. Offer to give music lessons or math grinds or any other kind of expertise you may have – cookery, candlemaking or car maintenance.

Finally, I know someone, a retired bachelor accountant who every Christmas anonymously tips €3,000 – the amount anyone can give anyone entirely tax free in the course of a year -  to a random stranger, usually someone he meets working in the hospitality or retail industry.   

A Happy Christmas indeed.

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Money Times - December 12, 2017

Posted by Jill Kerby on December 12 2017 @ 09:00

PROPERTY IS NOT THE PANACAE TO POOR DEPOSIT RETURNS

House prices are still rising at a rate of about 12% per annum according to Daft.ie; meanwhile, the average rent in Dublin will go up by 5%-6% each year until 2020, according to the property agent Savills.

No one expects much of a let-up in these soaring prices until at least 2020-21 when a big enough stream of new social and private properties will finally be for sale and the market begins to stabilise.

Which makes it all the more important that anyone thinking of making a property investment is extra careful in weighing up the pros and cons of being a landlord and to investigate other destinations for your money before you sign a contract, and especially before you seek a mortgage. 

Cash continues to be king when it comes to property. It is reckoned that at least half of all residential houses and apartments are still being bought by cash buyers, often older people, often new retirees with pension lump sums or a significant balance from the sale of other assets. These buyers typically reveal that they have been unhappy with the miserable nil returns from a safe deposit account.

Yet over the past 20 years, the average net return from residential property, both here and in the UK has hovered between 2% and 3%. The reality in Ireland is that high income taxes and costs like insurance, property tax, rates, on-going maintenance and repairs and refurbishment have take their toll on private property investment yields, despite the fact that rents in cities like Dublin, Cork and have pretty much exceeded pre-crash levels. 

Meanwhile, renters, who now make up 20% of the population, according to the recent Savills report, are horrified to see the relentless surge in rents due to the ongoing shortage of new developments (and social housing), further fuelled by strong employment and the population rise around Dublin and other cities.

A quick survey on Daft.ie of working class Dublin 8 (where I live) shows plenty of small two bed apartments renting for as much as €1,700 a month, the Dublin average, but purchase prices are typically in the €300,000-€350,000 range producing an annual gross yield from that kind of rent of between c6.8% and 5.84% respectively. Deduct all the landlord’s taxes and costs and they’ll be lucky to walk away with a clear profit of 2% or 3%.

What is now tempting some prospective landlords is the far bigger profits available by turning residential properties that may have housed a family into one where individual bedrooms and even a converted dining room are let as single units to two or three occupants who then share the kitchen and bathroom.  Others are buying ex-family homes for short-term tourist accomodation.

A recent PrimeTime Investigates programme highlighted the uglier side of this business – the properties with four, six, eight people per room that are breaking numerous local authority planning by-laws, tenancy and fire regulations. Fortunately the Revenue Commissioners are now understood to be investigating these cash-only rentals. Widespread tax evasion is also suspected.

Turning ordinary apartments and houses into AirBnB tourist accommodation are also proving to be popular with investors, despite being subject to all the same taxes as regular landlords attract.

The downside of cramming in tenants or opting to satisfy demand for short term tourist lets (without breaking the law is being a landlord is not an easy job and your biggest threat will always be the fickle State.

 will a toughaside from you still can’t escape changes in planning or tax legislation that, along with more overall supply, could have a serious impact not only yield, but capital values.

Where amateur landlords continue to go wrong is a) to underestimate how much government’s meddle in property markets and overestimate the possibility of a large capital gain. Working against that possibility is:

-       an increase in supply by c2020-21 that could have a dampening effect on yields;

-       future interest rate increases that will dampen house prices;

-       an upward adjustment in property taxes from 2019, the next rate setting date;

-       new regulations and legislation to provide greater security of tenancy and/or rent controls;

-       the reneging by the government on the restoration of 100% mortgage interest on residential property. (Partial restoration continues. It will be 85% from January 2018. If it stops there more landlords may opt to sell, putting downward pressure on prices.

Property is considered a long term capital investment (only speculators ‘flip’).  But it’s also a physically depreciating asset that carries maintenance costs as the boiler eventually dies, the roof needs replacing and fixtures and appliances wear out.

No matter how attractive Irish investors believe ‘bricks and mortar’ to be compared to volatile stock markets, investing in an single asset class like a single property carries more risk than most people imagine.

Finally, anyone thinking of linking a property to their pension fund needs to just keep in mind that you’re only adding another layer of risk - this time to your retirement plans.

 

The 2018 TAB Guide to Money Pensions & Tax will be appearing in bookshops and on line soon. See www.tab.ie for ebook edition.

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Money Times - December 5, 2017

Posted by Jill Kerby on December 05 2017 @ 09:00

WILL THE BANK OF MUM & DAD BE A HOLIDAY BURDEN OR A JOY?

 

Will the Bank of Mum & Dad be opening its virtual doors for business for the first time this Christmas?

Will it be tapped by teenagers looking not just for some extra cash to pay for a night out with their mates, but also by younger children, eager to take part in the holiday shopping experience? (“Oh, Mammy, can I get that for Grandda? He’ll love it. Pleeeaase?” 

With no money of their own, the elusive BM&D and credit line (“Ah sure, I’ll use the credit card”) is quickly identified by the kids as a source of retail pleasure and success.

I am of two minds about the Bank of Mum & Dad

Properly constructed and operated, even as a ‘virtual’ concepts, the BM&D can be an excellent learning tool for youngsters who see their parents saving money into it (child benefit payments, for example) for the good of the family and into which they can add their own money in their own “account”.  This accumulating money can then be drawn down for worthy purchases – school trips, family holidays, Christmas presents, family donations and eventually small loans that can be repaid. 

Savings rewards that parents mete out – like interest (no longer paid by post offices and credit unions on tiny sums) and even annual saving bonuses -  can act as important savings incentives and can even youngsters understand the downsides of instant gratification.

A child who is given their first piggybank at an early age, into which they ritually saved part of a weekly allowance, payments for special jobs around the house or garden, or birthday money can then graduate to either an account with the BM&D or a conventional post office or credit union account. The BM&D that adds a top up reward  - “For every €10 you save, the BM&D will add 5%, or 50c” – is always going to be more appealing.

Spending some of their savings or earnings on other people – at Christmas, for example – is an experience that young children really enjoy and if all goes well, the properly run Bank of Mum & Dad can also become a source of loans and credit (and yes, gifts) for stuff that matters:  school trips, college fees, weddings and yes, even house down payments because it has accumulated real and emotional/social capital from the chief savers/investors, the parents, as well as a the children.

Unfortunately, a recent conversation with an accountant friend suggests that the Bank of Mum & Dad (even if they don’t call it that) is too often just an endless drag on financial resources by adolescent and adult children who a) can read the guilt signals emanating from exhausted, working parents; b) have been discouraged to work in their spare time to instead devote as much time to the points races c) are already life-long consumers who know no better.

It’s a dangerous combination, she said, especially today’s middle-income parents of “high achiever” children who already live paycheque to paycheque.

“Inevitably, at this time of year [tax deadline] some client will admit to being approached by an adult child for substantial money – say for a downpayment on a house, but also for post-graduate fees or even a wedding.  It could be €20,000-€30,000.

“They often say, ‘we’ll have to take it out of our savings, or retirement lump sum, or borrow it’ for them. They ask if there are any tax deductions. They are often embarrassed to admit that they just can’t say ‘No’”.

For those semi-resigned BM&D parents, my accountant friend suggests they take tax, legal and financial advice. 

Accumulated cash gifts that exceed the annual €3,000 capital acquisition tax (CAT) exemption could eventually carry a CAT liability for the beneficiary if they exceed the €310,000 lifetime tax-free threshold between parents and children and the €32,500 limit for grandchildren. All third level/post graduate education costs are exempt up to age 25. That full time college student under 25 can live rent free (and gift-tax free) in a parent-owned property. So are wedding expenses paid for by the parent, but not the wedding gift that exceeds €3,000…or that house downpayment.

Banks of Mum & Dad work best if founded with the best intentions, like not wanting youngsters to be burdened by student debt upon graduation, or by recognising the big property wealth transfer that has happened in Ireland, by helping your less advantaged children to become first time buyers.

But realistically, unless you have substantial resources, most parents will need to assess the impact that cash gifts might have on your long term financial position. Can outright gifts be turned into zero interest loans? Are there tax implications? To avoid accusations of favouritism should you adjust your wills?

It’s Christmas. Is the Bank of Mum & Dad open or closed?

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