The Sunday Times - Money Comment 19/07/09

Posted by Jill Kerby on July 19 2009 @ 21:08

The financial services watchdog wants more teeth.  



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



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



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



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



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




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



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



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





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



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



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



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



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




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


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


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


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

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Money Times - 15/07/09

Posted by Jill Kerby on July 15 2009 @ 23:10


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The Sunday Times - Money Questions 12/07/09

Posted by Jill Kerby on July 12 2009 @ 21:13

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

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





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


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



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

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

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The Sunday Times - Money Comment 12/07/09

Posted by Jill Kerby on July 12 2009 @ 21:12

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


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


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


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


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


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

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


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


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


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


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



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


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


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

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


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




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


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


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


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

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The Sunday Times - Money Questions 05/07/09

Posted by Jill Kerby on July 05 2009 @ 21:15

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


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




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


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




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


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

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The Sunday Times - Money Comment 05/07/09

Posted by Jill Kerby on July 05 2009 @ 21:14


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


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


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


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


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


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


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


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


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


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


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





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

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


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


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




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


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


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


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Money Times - 01/07/09

Posted by Jill Kerby on July 01 2009 @ 23:04



Two money stories caught my attention last week…because they were so unusual. 


The first concerned Setanta Sport which went into administration after a €23 million bail-out to keep their UK operation going fell through.  Setanta had 2.5 million subscribers in the UK, each paying about €15 a month to watch Premier League football games, rugby matches, cricket and PGA golf matches.   They aren’t likely to see any refund of the cost of their annual contract. 

However, the Disney sports station ESPN quickly snapped up the really lucrative Premier League fixtures and other broadcasters will be fighting over the other sports that Setanta broadcast. Meanwhile, it is hoped (by my husband and others) that the Irish operation, which has been put up for sale, will continue as a going concern. 

Two potential buyers emerged within hours: Liberty Global, the parent company of the Irish cable providers, NTL and Chorus and part owner of Dublin’s City Channel, and Mr Denis Desmond, a music promoter who already owns 20% of Setanta Ireland.  By the time you read this, the sale may have been secured. 

The second story was also about a company going bust: Laragan Developments, a property firm with two unfinished apartment sites in north and south country and accumulated debts of €147 million.  In this case the story was that €1.5 million in deposits (typically €15,000-€20,000) that Laragan had taken from prospective buyers who had purchased their apartments off plans back in 2006-07, had effectively been lost.  The prospective buyers – about 100 of them would be lucky to get back between €150 and €200 of their money once the claims were dealt with by the examiner, Paul McCann of Grant Thornton. 

What I found so interesting – and encouraging – about these two stories in the same week that the OECD and IMF noted that we are now the basket case economies of the developed world, is the efficiency with which the market itself has operated in dealing with these two collapses. 


Within a day of Setanta not being able to secure the €23 million it needed to keep it UK premiership games broadcasting, and the company having to go into administration, a new buyer was found for at least that part of the business.  Others are now bidding for its other fixtures.  Setanta’s shareholders will not lose all their €500 million investment.  And while there will be job losses, some of the skilled workers may be taken on by other broadcasters and the Irish ones will hopefully keep their jobs. 

In the case of Laragan Developments, the people who foolishly bought these apartments off the plans at the height of the property bubble have lost their €15,000 and €20,000 down payments, but they should count their blessings that it was only that much.  Had they actually purchased these apartments then they would today be facing much bigger paper losses and would be in negative equity. 

By going into examinership and allowing the market to determine how much these sites are really worth, the price of the unfinished units has already been cut in half according to news reports.  The original buyers also now have a chance to buy finished but unsold units in the developments (at reduced prices) and their previous deposits will be put against the purchase price. 

So what’s the moral of these two tales?  

How about that the creative destruction that accompanies a recession is not actually such a bad thing?  And that in these cases at least, the taxpayer has not been compelled to prop up the mistakes that have been made by the principals and their customers.  

The people who ran these companies undoubtedly did their best to make them a success, but they got themselves caught in a credit bubble that was always going to end up in tears once customers could no longer afford to buy the product, whether with their own money, or someone else’s. 

All over the indebted western world, the Setanta and Laragan experience is being repeated and it needs to happen for our hugely damaged economies to move on.  Yet governments and central banks are unwilling to allow this creative destructive process, as the Austrian economic school describes it (see www.mises.org). 

Instead, in the case of banks and the auto and construction sectors they are transferring their private debts onto the taxpayer’s balance sheet, thus prolonging the mistakes that were caused by borrowing more money than could be repaid.  

Precious capital – the money these governments borrow on the bond markets, or worse still, print out of thin air – only prop up the insolvent and the bankrupt instead of being better used by genuine solvent, entrepreneurs and individuals. 


The consequences of this (and the inflating of the global money supply) is likely to be a longer, deeper recession and very possibly, hyper inflation. 


The question now is, will the lessons of these two companies in examinership - that the natural process of growth, decay and rebirth is both painful but necessary, be heeded by government, politicians, trade union leaders?


We can only hope so. 


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The Sunday Times - Money Questions 27/06/09

Posted by Jill Kerby on June 27 2009 @ 21:24

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



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





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


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






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


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

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The Sunday Times - Money Comment 27/06/09

Posted by Jill Kerby on June 26 2009 @ 21:18

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


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


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


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



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



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



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


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



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



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




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


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


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


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



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


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


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


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


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


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

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Money Times - 24/06/09

Posted by Jill Kerby on June 24 2009 @ 23:06



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


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


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


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


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


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


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


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


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


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


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

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


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


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


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


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


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


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