Jill Kerby

MORAL DUTY…AN INHERITANCE HAZARD THE STATE INTENDS TO REMOVE

Irish people have very liberal, generous views of inheritance.  Nearly every older person I meet wants to leave something to their children or grandchildren when the die.

In many ways this is commendable, but perhaps not as realistic as it once was when people didn’t live as long and extended families meant that elder care was frequently provided within the family and not in institutions like public or private nursing homes.

Whatever about the short-term availability of the ‘Fair Deal’ nursing home assistance scheme, in which the applicant only pays a portion of the cost of expensive institutional elder care along with the state, the growing cost of this care to the state as the population ages means that pressure will continue to be put on people (and their families) to pay more and more of the cost from their own assets.

It is this state funding liability issue that the inheritance laws need to be reformed, claims the government. The Law Reform Commission has proposed that section 117 of the Succession Act 1965 should be amended so that parents no longer have a ‘moral duty’ to make financial provision in their wills to their adult, non-dependent children.  

The reformed Act will still require them make some provision for children over 18-23 who are still in full-time education or for an adult child who is already dependent due to a health or disability issue or where an item from the parent’s estate may have a particular sentimental value or attachment. This is not expected to include fixed assets like a house, land or family farm, say legal experts, but more likely be items of sentimental (and perhaps monetary value)  like a piece of furniture, art, jewellery, or even a coin or stamp collection that, say had always been promised to a particular child.

The notion that a parent has an automatic moral obligation to leave a part of their estate - cash, land, property - to any or all of their adult children, regardless of their financial position or the nature of their relationship, will no longer apply.

The most contentious wills I have ever come across have been ones that didn’t so much as disinherit the adult children, but favoured one or two over the others.

Such settlements often come as a surprise when the will is read - the parent(s) having never discussed their intentions with their children – and it can sew seeds of dissent among the siblings where there were none before.

However brusque this reform proposal may appear, it will be at least be a formal warning that no matter how ‘unfair’ the parents’ decision, there will probably be no point in contesting it since, ultimately, the only beneficiaries will be the solicitors.

Making a will should be a pretty straightforward process where the estate is transparent and uncomplicated.  You die owning, say, a bank/post office/credit union deposit account, a family home; some life insurance and maybe even a private pension fund like an ARF (approved retirement fund) which can be passed on. 

If there is no surviving spouse to inherit (and who can never be legally disinherited) and no medically dependent children, once your debts are paid you most probably will leave your estate to your adult children, grandchildren and whoever else you want to enjoy a windfall.  Good tax planning can reduce the share that the government will collect.

However, up to now under Section 117 of the Succession Act 1965, you needed to be careful about acknowledging the ‘moral duty’ clause, even if you felt you already had a strong moral argument to favour one child over another, or leave nothing to any of them, instead leaving your estate to friends or charities.

(Uncommonly, a wealthy friend of mine, a father of five adult children told me once that he always felt that his ‘moral’ obligation to his children was to love them unconditionally, make sure they had a good education and perfect teeth.  Once the latter two were achieved, as independent adults “their financial situation is their own business.”)

Where no will is made, the 1965 Act is perfectly clear.  Intestacy could end up as the favoured response by some families if the Dail passes the new proposals, since the Act requires a surviving spouse to automatically receive two thirds of the estate and children (or grandchildren if the child is deceased) to share equally the remaining one third. This won’t change.

Bereavement is stressful enough for any family, and family life in Ireland is getting more complicated.  A full and frank discussion between parents and adult children about inheritances and the huge potential cost of elder care is something that shouldn’t be put off indefinitely.

Perhaps you could tactfully begin by raising those sentimental bequests:  it’s never going to be worth falling out over who gets the ‘good’ china set. 

Please send your queries to Jill c/o this paper or by email: jill@jillkerby.ie

 (The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)  

HIGH COURT MORTGAGE DEBT CASE OPENS A FORBEARANCE CAN OF WORMS

The fact that personal insolvencies and bankruptcies are up sharply in the first quarter of 2017, compared to the same time last year, will be greeted differently depending on whether you are a ‘glass-half-empty’, or ‘glass-half-full’ sort of person.

I think this is great news. It shows how once the Insolvency Service of Ireland service was modified - last year - to reflect the reality of the on-going debt problem in this country (something government simply refused to consider when it was first set up in 2011) debtors and personal insolvency practitioners could construct debt repayment agreements that were realistic, sustainable and fair.

Last week, the High Court set an important precedent in also supporting this new  reality when High Court Justice Marie Baker supported an earlier Circuit Court judgement concerning a personal insolvency arrangement that wrote off a large portion of a mortgage debt. The bank which appealed this earlier finding, had wanted a smaller debt write-off and the setting up of a ‘split-mortgage’ for the remaining debt.  Ms Justice Baker described – quite rightly – the split mortgage arrangement as nothing more than the ‘kicking the can down the road’.

This High Court appearance is part of the restructuring of the way the ISI and its officers now do its business as part of the Abhaile progamme introduced a year ago that aimed to facilitate sustainable personal insolvency arrangements that also involved the family home.

In this case, the borrowers, a young couple from Drogheda with young children had borrowed nearly €286,000 for a three bedroom, semi detached house but then both lost their jobs.  They fell into serious arrears of capital, interest and penalties, but secured the services of a PIP from Co Donegal. His proposal, which was accepted by the Circuit Court involved writing off €242,000 worth of total debt; their new mortgage would be €120,000, which is now worth €105,000.

The Bank appealed this decision to the High Court. Instead it wanted a final mortgage debt value set at €270,000, with half of it, €135,000 to be repaid as capital and interest by the couple and the other half ‘parked’ for an indefinite period, with no interest accruing and only paid off later, including if the house was sold or from their estate.

By siding with this couple, the High Court has fired a shot across other mortgage lenders’ bows that split mortgages that will chain a family to mortgage debt long after the normal lifespan of a home loan, may no longer be considered an acceptable personal insolvency arrangement.

According to the Central Bank, as of the end of last year (Q4) there were still 95,000 mortgages worth €10.6 billion in arrears of more than 90 days. 

Nearly 336,500 mortgages have already been restructured since the crash, with over 27,000 of them now ‘split’ mortgages, with the parked amount expected to be paid at some time in the future.  The value of those split mortgages at the end of the year, according to the Central Bank, was over €2.7 billion.

With the courts now an integral part of the insolvency process since last year, and judged mediating on personal insolvency arrangement disputes between debtors and their personal insolvency practitioners and their lenders, the big rise in total insolvency applications from January 2016 and January 2017 (+128%) and PIA arrangements (+19%) should be heartening for anyone in serious debt.

From January to March of this year alone, PIAs arrangements were up 10% compared to the last quarter of 2016 and in a sample of 100 PIAs that involved the family home, 90% of them were settled with the debtor remaining in their home. Where part of the solution was the writing off of mortgage debt, the average amount was €93,338.  (In the case of the Drogheda couple before Ms Justice Baker, the amount of mortgage debt written off was €242,000.)

Of course every personal insolvency arrangement has to take the unique circumstances of the debtor and creditors into consideration including the original market price, the size of the loan, the borrower’s ability to pay it back then, and now.

But the success or failure of any mortgage forbearance deal also has to consider, as impartially as possible, whether there is any chance that the property at the centre of the insolvency will realistically be worth what it was bought for before the crash within a reasonable time span.

The case that went before the High Court, aside from giving more hope of a more just solution to people currently pursuing a mortgage-related insolvency arrangements, will undoubtedly also prompt other people with existing PIA’s to wonder whether their split mortgage (and mortgage debt write-off) was really such a good best arrangement after all.  

Anyone who is in such a situation and wants their debt settlement reviewed should consider contacting their PIP or the Insolvency Service of Ireland. (www.isi.gov.ie)

PORTFOLIOMETRIX IRELAND…a new era of personalized investment portfolios

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THERESA MAY TAKES ON PENSIONERS, IRISH ONES TOO

With the UK election just a week away, it might be worth examining how the outcome could affect Irish people with UK financial interests.

A very long history of emigration and employment means that tens of thousands of us have on-going financial ties with the UK that could get more complicated in the following months, especially if the Conservatives achieve another majority and if Theresa May’s Brexit team doesn’t achieve the liberal trade concessions they’re seeking during their negotiations with the European Commission.

Over 330,000 Irish citizens live and work in the UK and a few million claim Irish ancestry.  Another 121,200 Britons live here. The respective financial interests of the over 65s include everything from being holders of private pensions, life assurance and property and an entitlement to each other’s state pensions.

What is apparent from the cost saving changes that Mrs May and her Chancellor Philip Hammond intend to introduce after the election are going to have an impact on many of their devoted voters (and Brexit supporters) - older people.

The first change they’ve announced, to considerably dismay, is the end of the triple lock pension increase that was introduced by David Cameron in 2010 and which allowed for the UK old age pension to increase every year by either an automatic 2.5%, by wage inflation or by retail price inflation (their equivalent of our consumer price index, or CPI), whichever proved to be the higher.

Inflation has only recently been pushing 2.5%+, mainly due to the fall in Sterling after the Brexit vote last June, whereas until this year the seven years of the triple lock rise of 2.5% was proving to be extremely expensive, and according to Mrs May, a fiscal conservative, unsustainable in a rapidly ageing population.

Her manifesto has dropped the idea of any guaranteed increase and has been condemned by the opposition and by pensioner support and lobby groups who say that pensioners are among some of the most vulnerable people in the UK.

Their automatic winter fuel allowance will also be means-tested (as it is here in Ireland) if the Conservatives are returned to office.

This pension increase change may, of course, affect UK pensioners who have retired here as well as Irish ones who returned to Ireland with a UK state pension. This cohort will have already seen a drop in the Sterling value of their pensions since last June (and any private pensions) of between 12% and 16%. Unfortunately, the currency exchange volatility is likely to continue as the Brexit negotiations ebb and flow.

The irony of dropping the 2.5% “lock” is that the UK retail price index could go higher and mitigate against the loss of the lock, or average pay rises could exceed that amount (though that is much less likely). If this happens, some commentators are already predicting the pension locks could be thrown away altogether once the election is over and a Tory majority (as expected) is secured.

The other big spending cutback that involves pensioners is how the value of a family home will be calculated for the purposes of determining how much the older person will have to contribute to their long term care. This will also have an impact on inheritance plans.

At the moment, someone who needs social care in most UK local authorities (though this can vary considerably) must fund it with their own resources unless their annual income – from pensions, savings/investments, rents, etc – is worth less than £23,250 (c€26,937). The value of the family home isn’t included.

This means-tested ceiling will be raised if the Conservatives are re-elected, from £23,250 to £100,000 (c€116,000), but this time that cap will include the value of the family home.

There’s no question that anyone have to sell up and leave their home if their net worth exceeds £100,000; a partner will be able to continue to live in the home if they remain behind. But the cost of care of one or both partners will be collected from their estate by the local council once the person (or both partners) have died, leaving just £100,000 untouched.

The hue and cry in the UK is that even and individual or couple with a very valuable house, who lives many years with expensive care benefits, could end up only leaving an inheritance of £100,000. The cost of care, especially nursing home residence already varies considerably between local authorities in the UK.

This proposal is very different from the centralized Fair Deal scheme here which currently includes a higher asset exemption of €36,000 for an individual and €72,000 for a couple and aside from an annual contribution of 80% of annual income, only looks for 7.5% of the value of the person’s assets for just three years, regardless of the market value of your home. That cumulative payment can also be deferred and paid for the deceased person’s estate.

A hard Brexit is going to throw up an entirely different set of residence issues for Irish and UK people – young and old - in 2020. These pension income and elder care financial issues need attending to much sooner.  Consult a good adviser.

Please send your queries to Jill c/o this paper or by email: jill@jillkerby.ie

 (The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)  

HOW AWARE ARE YOU OF FINANCIAL RISK?  FOREWARNED IS FOREARMED

Behavioural economists have argued that for most people, the risk of losing money far outweighs the upside potential from a stock market investment. It’s also one of the reasons why soon after a crash, the stock market is shunned by ordinary savers or investors, despite the low valuations: they are transfixed by the losses that have occurred instead of seeing the terrific bargains that have appeared.

The fear of risking their money  – sometimes only based on what happened to other people’s money, not their own – can cause them to only save their money in a post office, bank or credit union.   They then rejoice that they weren’t caught up in the carnage that resulted from a crash. It’s certainly a common excuse since 2008 for many people to abandon or avoid taking out a private pension plan.

What they don’t take into account is the ‘lost opportunity costs’ of such behaviour.

Markets inevitably rebound from big falls. Over the long term – say, the duration of a pension fund, investing your tax deductible contributions is always better than just leaving your money in a deposit account where the capital is guaranteed to be eroded by DIRT tax, inflation and increasingly, the presence of nil to negative interest rates.  

Not only is this a major financial risk, but so is not taking the time to understand not just the importance of asset selection but also how costs and charges will impact on the value of your investment. The biggest risk of all to your future financial security is to not start investing as early as possible in order to let the magic of time and compound interest do its magic.

But financial risks come in many different guises. And includes lots of smaller events than not just setting up a proper, long-term pension fund.

You put your money and finances at risk if you don’t install proper anti-virus security on your computer but do your banking on-line or use unsecure retail websites. You open yourself up to cyberware blackmail that way too.  If your bank or credit union is hit by a cyber attack or its employees embezzle money from your account, their insurance will cover your loss.)

Still on the banks, anyone who leaves more than €100,000 in any single bank risks being “bailed in” – that is, losing a percentage of your savings over that Bank Guarantee Scheme deposit amount – should an Irish bank ever go bust in the future. (Cypriot depositors with over €100k in their account lost up to 40% of the balance back in 2011.) 

New EU rules mean that the next time a bank goes bust in the Eurozone, their depositors will also have to bail it out, along with shareholders and bondholders.

There are two other extremely commonplace ways that we put our hard-won earnings at serious risk.

The first is not bothering to read a legal contract, whether an insurance policy, a bank loan - both big-ticket items - or even something as commonplace as a utility or mobile/broadband contract, a gym membership or on-line subscription.

The small print of such contracts is where the financial loss may loom, especially around deductions and exclusions, or the consequences of missed repayments.  You could be putting your own or your family’s financial security at risk by not being clear about what you are buying (like a mortgage) or committing to. 

Yet surveys keep showing that people spend less time arranging expensive financial contracts or loans, than they do in buying a new mobile phone or for holiday plans.

The other big financial risk that people take all the time is to spend their future income, today. 

The widespread use of credit in the form of expensive overdrafts, credit card loans and personal loans to fund lifestyle purchases they could otherwise not afford – that is, stuff they don’t actually need, paid for with money they don’t have -  is still relatively ingrained here, though borrowing rates are (to our credit) much lower than there were in 2007.

The risk we take in living beyond our means is that without substantial savings (ideally 3-6 months of net income) even a minor illness, a temporary job loss, or even the cost of having a new baby can tip a person into a chronic, or even catastrophic financial decline.

The best way to reduce this risk is

-       to know the difference between needs and wants,

-       to save early and regularly in your working career and

-       to aim to borrow only to buy or invest in assets, like a home, education or training and not in liabilities, such as expensive cars, holidays, rooms full of new furniture, etc.)

The financial world is a risky enough place these days and there is more institutional and sovereign debt in play globally than there was back in 2007.

You don’t need to make it worse by taking unnecessary risks with your own hard earned money and income.

PORTFOLIOMETRIX IRELAND…a new era of personalized investment portfolios

14 Fitzwilliam Square Dublin 2  +353 1 539 7244   info@portfoliometrix.ie

Fermat Point Limited, trading as PortfolioMetrix Ireland, is regulated by the Central Bank of Ireland.

DON’T EXPECT MUCH PENSION CHANGE FROM UPCOMING PAY TALKS

Try as the general population might, you just can’t get away from pension news these days. Unless you are in your late 40s or 50s, and feeling the jet stream of time behind you, pensions are never a priority. 

They should be, especially for every young person starting their first job, but they are not. The life assurance company or financial planner that can crack that nut is going to be the next Apple Inc. You can then buy the stock and enjoy an early retirement.

So in spite of our ongoing apathy and inertia, at the start of this month, there was widespread coverage of the Minister for Social Protection Mr Varadkar’s comments that he favours the introduction of an SSIA-type contributory pension product, into which every new private sector worker, and those without an occupational or private pension, would be automatically enrolled. Employers too would have to make contributions and the state would provide some form of tax-related, regular contribution.

Then, last week, public sector pensions hit the news. The independent Public Service Pay Commission recommended that the underlying value of guaranteed, pay and service related public service pensions be front and centre of the next round of pay negotiations with the state’s employees.

The PSPC stated that any new public service pay deal take into account how valuable are those guaranteed pensions that c350,000 public servants receive.

Chances are that any new remuneration deal will convert the hated pension levy, which averages out at about c5% after tax relief and is paid by most state workers earning over €28,000, into a permanent pension contribution. At worst, public servants might even have to pay a little more, depending on their income grade.

All this interest in how to slow down the ticking of the public and private sector pension time bombs is very welcome, though I’ve heard all these proposals many times. But they also looks remarkably like the blueprint that created Dublin’s original Luas tram service with its Green and Red Lines…that never met. (Anyone who lives, works or visits the city these days knows just how expensive, time-consuming and disruptive correcting that decade old design mistake has been.)

Pension membership is already at 100% in the public service. The changes that are likely to be proposed in the private sector will be much more wide-ranging, and if the SSIA style plan is adopted, it will be sewn onto a soft-mandatory, auto-enrolment pension from which probably no more than 10% of workers will opt out. (Opting out isn’t an option in the public service.)

The only point at which these two very different pension public and private systems might come into sync is how the yawning coverage gap, currently 100%/40% respectively will likely close once auto-enrolment happens.  Other than that, I can’t see much change: poorly pensioned private sector workers will continue to fund and subsidise the more generous, unsustainable pensions of their co-workers in the public sector.

Before my public sector readers bristle with outrage and fire off an angry email (my address is below and I welcome even your angry feedback), it is a fact that public and civil service pay is funded by taxation, or in the case of semi-state companies, subsidies, generated by the private sector.

Of course public servants earn their incomes and pay income tax and PRSI, USC, etc, just like people in the private sector. But the taxes, PRSI, USC, etc they pay all comes out of the income that is generated by private sector workers and companies.  From that great body of private sector activity, earnings and taxes, comes the money (ie tax, levies, etc) that funds the state, the ultimate consumer. 

Unfortunately for the bulk of private sector workers, their own incomes are not large enough to compulsorily fund (via their taxes) the states’ pay rates (up to 40% more in some cases) or the guaranteed and unsustainable pensions it awards. (In 2013 the way new PS entrants pensions were calculated was changed, based on lifetime earnings, not final salary. Only 15% of the PS is affected. The vast majority of state workers also enjoy retirement income that is grade-indexed, not indexed to the Consumer Price Index. Most private pensions have neither.)

I’m guessing that the upcoming pay negotiations – Lansdowne Road 2.0 – will, in the greater scheme of the on-going pension crisis in this country, only tweak public service pensions. Meanwhile, eventually (4-5 years?) we might see some form of much needed auto-enrolment for the private sector. 

Until then, public servants should count their blessings. A 50%, indexed, DB pension is a retirement gold mine. 

Private sector workers, Ireland’s milch cows, should be joining their company scheme if there is one, or take out a low cost PRSA. Both sides should reduce debt, spend prudently and carefully invest surplus income.

Counting on well-padded politicians to do the right thing, and in a timely manner, so that you can rest easier regarding your old age…is not an option. It is madness.

PORTFOLIOMETRIX IRELAND…a new era of personalized investment portfolios

14 Fitzwilliam Square Dublin 2  +353 1 539 7244   info@portfoliometrix.ie

Fermat Point Limited, trading as PortfolioMetrix Ireland, is regulated by the Central Bank of Ireland.

HOW PREPARED IS THE BANK OF MUM & DAD FOR COMPULSORY STUDENT LOANS?

Secondary students are hard at their books this month, preparing for their Junior and Leaving Cert exams in June. Third levels students started writing their exams last week, as I know from personal experience.

(I can’t wait to get the kitchen and breakfast ‘study’ room back, a much preferred option to the college library due to the presence here of a large fridge/freezer and coffee machine.)

It is also a time of year when parents start to ponder how to pay for next year’s college fees. Many are living in hope that they’ll avoid any new funding scheme under debate in the committee rooms of Dail Eireann. If reports are correct, it could be a loan scheme that could result in all Irish graduates typically repaying at least €150 a month for 10 years once they start working.

The Irish third level system has been remarkably generous for decades.  Three nephews of my husband avoided paying fees; my own son’s ‘registration charge’ has gone from €2,250 to €3,000 over the past fours, a fraction of what we would have paid if he was studying science in the United States or even England and Wales where the lowest entry fees are £9,000 a year. (Quebec, where I went to college also heavily subsidises undergraduate fees and charges about the same as Ireland.)

The ‘study now pay later’ loan scheme (one option from last year’s Cassells report) that the Oireachtas Committee on the funding of higher education is considering, is similar to the model used in Australia.

Described as ‘income contingent’, the €4,000 - €5 per year for four years loan, if introduced, would only start being repaid once the graduate found full-time employment with a salary of at least €26,000 and on average, would be repaid by age 33, according to the report. The more you earn, the higher the repayment, but there would also be repayment flexibility that would take into account periods of unemployment, illness or loss of income.

The Oireachtas is under pressure from the Universities (and the Department of Finance) to find them more money – at least €600bn more between now and 2021 and then another €1 billion a year until 2030, according to Cassells.

The introduction of fees for all students will go some way to meet this funding requirement, say the experts, but if the idea is to maintain access to third level education for everyone, regardless of income, then a loan scheme has to be introduced that eliminates the current grants subsidy that 50% of college going students currently enjoy, and is properly designed to ensure the money borrowed is repaid to the state, the banks or a combination of both.

With emigration part and parcel of the Irish graduate experience, the Union of Students of Ireland (USI), who oppose any loan scheme, say even writing off just 10% of income contingent loans is “hopelessly optimistic”. (Cassells predicted €10 billion over 20 years.) Certainly, more conventional loan schemes, no matter how low the interest, like the ones that operate in the US, can result in huge defaults. The US student debt bill (federal and private) has now breached $1.4 trillion with an estimated seven million defaulters.

Well-off students and parents already borrow money from Irish banks to pay for third level education. A four year loan from AIB worth €20,000 means monthly repayments of about €500 a month, repayable immediately, at interest of 8.5%. The total amount repaid will be about €23,500. This is certainly a better arrangement than dragging out capital and interest repayments for 10 years or more after graduation, but is clearly unaffordable for many students.

With some new student loan arrangement looking more likely, the next group of Irish third level graduates could very well end up paying considerably more than €16,000-€20,000 worth of fees (not including interest) – an amount which will probably only keep going up as the years progress.

Parents of younger children who want to avoid their kids starting their first jobs with substantial debt should consider themselves on notice. They should create a plan now that avoids the risk of having to resort to last minute, expensive personal or credit card loans to pay fees. (Drawing home equity is not an option.) 

They should start by saving the €140 a month (€1,680 pa) child benefit payment in a tax-free State Savings scheme. Even a mere 1.5% average return over 18 years will result in a final balance of nearly €34,700.  Investing the money would be better – so speak to a good, independent adviser - but they need to hope the 40% exit tax is eventually lowered or abolished.

Generous grandparents may also want to consider gifting up to €3,000 entirely tax-free to every grandchild every year to boost those education funds.

The days of free/low third level costs in Ireland are on their way out. Along with jobs for life, defined benefit pensions and, for the next while at least, affordable homes.

The less student debt our kids carry into their uncertain futures, the better.

Please send your queries to Jill c/o this paper or by email: jill@jillkerby.ie

 (The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)  

LEO WANTS AN SSIA-TYPE PENSION PLAN BY 2012. DREAM ON

The Minister for Social Protection, bless him, thinks that 2021 is a realistic deadline for the introduction of a universal private pension scheme, based, perhaps on the successful Special Savings Investment Account model from the early 2000’s.

Readers may recall the five year SSIA scheme that ran until 2006 in which the government matched every four euro put into an approved savings or investment fund with €1. The maximum monthly contribution of €200 meant the account holder would receive a €50 euro top up from the State.  It proved to be hugely successful with over a million adults opened one account; many a new kitchen, let alone the down payment on an investment property was paid for by 2006 with the tax-free proceeds of the SSIA, considered to be one of the most generous savings incentive schemes in the world.

And that wasn’t just because the top-up was so generous. The SSIA was easy to understand and to set up. The savings option was cost-free and there were low-cost investment versions for those willing to look for them. It was transparent and since it was owned personally, account holders had the satisfaction of watching its value – the contribution and interest or growth – grow every month.

The fact that the SSIA’s final value was entirely tax-free was the icing on top: there’s nothing we love more than a tax-free asset.

Fast-forward 11 years and Minister Varadkar, who like every pension minister before him (and since I’ve been writing about personal finance, that is since 1991) acknowledges that ‘something must be done’ about the falling private pension coverage in this state and the fact that among those people who do have a pension, only a small minority are saving enough into their funds.

Mr Varadkar thinks a soft-mandatory (everyone without a pension is signed up, but can opt out), simple, transparent SSIA-like scheme in which the tax relief on current contributions becomes a cash top up is the way to proceed. 

However, he also thinks such a system – not unlike the universal private superannuation schemes in Australia and New Zealand can be introduced here within four years. On this front he is dead wrong: it took the British 12 years to introduce their new NEST soft mandatory universal scheme, with a low entry contribution level. It will be several years before workers and employers reach ideal savings rates.

The SSIA pension idea is worth considering, but the devil, will be in the detail: will employers be required to make contributions? (They don’t have to at the moment and are against compulsory funding.) How much will the State top up be? The 20%/40% tax credit on contributions is currently allowed? 

The Australians pay into the ‘Super’ with already taxed income but get their pensions tax-free. Here, contributions and growth are tax-free and we pay income tax only when the pension is drawn down.

At the moment, with the cost of housing so high and workers taxed at 40% on incomes above €33,800, Varadkar would be committing political suicide if they tried to force even a soft mandatory pension majority (c54%) of private sector workers who do not have a private pension.

Yet another recent survey by Irish Life confirmed that the pension participation rate has hit a near all-time low at about 46%. Of those in a scheme 76% are making contributions, but over half of them haven’t a clue how much their employer contributes. Irish Life reckons that 90% of people might not hit a target of achieving a pension of even a third of their final salary unless they save more. And where workers are members of PRSA group schemes, chances are the employer is contributing nothing.)

Millions have been spent over the past 25 years by the state supervising and regulating and raising awareness of pensions - and the danger of not having one - yet only 54% of the workers surveyed by Irish Life were even aware of the tax benefits of a private pension fund.

Is a universal, auto-enrolment pension the solution? Yes it is. Is there any great new resolve by the government, unions, employers and workers to finally introduce one? Hardly.

If you are a young, private sector worker without an occupational pension, ignore Leo Varadkar’s good intentions.

Time is not only your side.

Speak to your employer and demand at the least that (s)he sets up a low cost PRSA group scheme (a legal requirement for all but the tiniest of firms). Then badger them to also make a contribution. If that doesn’t work take out an individual one yourself and start saving into it.

Or do like Leo. Get a job in the civil or public service where pensions are generous and secure and ultimately funded from taxes generated in the private sector.

Rest assured that the Pensions Minister isn’t losing any sleep over how his retirement is being funded.

WHEN A GENERAL FINANCIAL SPRING CLEANING ISN’T ENOUGH…

I have a hugely ambitious younger friend, the mother of three children, who I will call Louise, who is emboldened by the fact not only is her house now out of negative equity, but she and her husband have also finally, voluntarily come off the mortgage forbearance plan they agreed with their bank.

Four years ago, they were in danger of losing their home, a four bedroom semi-detached house they bought in 2005 near Lucan, Co Dublin. They had moved there from a smaller, Dublin city terraced house in Fairview, their first home, which had simply grown too small when baby number three arrived. They made a significant profit on its sale, but still had to take out a €400,000 tracker mortgage on the spacious, modern house in Lucan.

And then the crash happened. And then in 2010, her husband lost his job. (She works for the HSE and became the only breadwinner for nearly two years.)  They eventually fell into serious mortgage arrears, borrowed money from both sets of parents, wracked up serious credit card debt. Eventually, with the assistance of a good financial adviser they came to an agreement with their lender: they’d pay interest and capital on one half of the loan, a small amount of interest only on the other half.

Four years later, they’ve reverted to paying the entire mortgage again. They are both earning good salaries again, and having “taken our finances by the horns” are far on the long road to financial stability.

My friend and her husband are the post-2008 success story that I relate when people ask about whether it’s possible to see the proverbial ‘light at the end of the tunnel’, amidst a personal finance disaster.

For many unfortunate people the crash did mean losing their homes, either voluntarily or involuntarily. But foreclosure figures remain comparatively low in Ireland and even halved in 2016, compared to the previous year, all the while over 33,000 are still in two or more years of payment arrears.

MABs, private financial advisers and the official insolvency service have helped tens of thousands of debtors and their homes. Even the nuclear option – bankruptcy is now discharged in just one year.

My friends came close to tossing the keys back to the bank, before they finally went for proper, professional help (something, I helped steer them to.)

Anyway that was then, this was now. “Mark and I have decided we’re going to have a really nice holiday – here in Ireland – in August with the kids. We’ve found a fantastic summer rental place in West Cork and my sister and her family are going to share it. But we figure we need €2,500 for the two weeks – our share of the rent, food, surfing classes for the kids, pony rides, eating out, fishing trips, the lot. And we don’t have it.”

I knew I wasn’t being squeezed for a loan; this couple have determined to live within their means (or as close to it) so no more credit cards, no more unnecessary borrowing; no more “unthoughtful” spending:  when they filled out the Standard Financial Statement, the form required by their bank as part of their debt restructuring, they discovered that they’d been spending as least €50 - €60 a week on takeaways and other fast food, “because we’d come home tired from work or a bit later than usual and after picking up the kids, we couldn’t be bothered to cook.” Towards the end, that was another €3,120 going onto their credit cards.

My friends are very careful spenders. They have a budget. They DIY everything they can, from car and home maintenance, gardening, and even haircuts for the kids. They still treat themselves and their children, but they only after they pay all the bills and most important put away regular savings into credit unions accounts and their pensions.

“At first I thought we were being very self-sacrificing,” said my friend. “We were swallowing our pride by admitting that we just couldn’t keep up the pretence of being ‘well off’. But we had huge credit card bills even when we earned €150,000.”

The toughest realisation, she said, “was when we realised it was always a pretence. We were in serious trouble with debt and incredibly stupid lifestyle choices before the crash. It got worse after 2009 – we nearly broke up.”

So what’s up now, I asked? 

“We’ve both decided to spend nothing for 30 days, so we can get up to the €2,500 we need for the holiday. Aside from food and the usual bills. Not. A. Penny.

“You always say you’re looking for good personal finance stories. And that you’re always spending too much.” (I do, but I only spend MY money.)

“I want you do to it with us.”

Stay tuned.

Please send your queries to Jill c/o this paper or by email: jill@jillkerby.ie

 (The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)  

SO YOU THINK WATER CHARGES ARE GONE? THINK AGAIN…

Did you pay your water bill? Are you entitled to a refund?

A million Irish households paid the controversial water charges with some customers paying up to €325 or a total of c€325 million.  According to the Housing Minister, Simon Coveney, the state then paid €89 million to approximately 890,000 households in the form of the €100 annual water conservation grant. 

Now that the politicians have agreed that there will be no future water charges and that water expenditure will come of out of general taxation – and assuming that deal is approved by the EU Commission - the logistics around the refund scheme will be complicated and slow. Not every household paid the same amount (my household didn’t pay the fourth water charge instalment and didn’t apply for the conservation grant). Another c1.3 million households refused to pay any water charge but some received the €100 grant, as this was presented as a universal payment. Will they be required to refund the €100?

The Minister has said that there has to be fair treatment for everyone so you probably shouldn’t count on any refund too soon, even if you could use the money urgently. This isn’t just because of the administration complications or the response of the European Commission but because there still needs to be some clarification about how the government intends to pay for the c€400 million repayment.

Optimists in the Department of Finance are already hoping that tax revenue will pick up again for the rest of the year (after less than stellar returns last month).  If revenues soar in Q2 and Q3 it may be sufficient to not just meet this huge refund but enough to also the usual multi-billion euro HSE over-runs, the Children’s Hospital construction over-run, the cystic fibrosis drug costs and potentially large compensation payments to mother and baby home claimants.

If the current Revenue surplus estimate for this year does not improve, and all the promised Budget ‘17 spending allocations are made, there won’t just be much to give away in Budget ’18 next October and the Government, which is very close to balancing the Budget for the first time in nearly nine years, will be forced to undertake more borrowing than was intended for 2018.

Irish Water has been a fiscal and political disaster from the start with massive staff and cost overruns. Other costs have soared – for security and legal challenges and parliamentary investigations.  Millions more may still have to be paid in fines to the EU.

The political ‘return’ from the Irish Water disaster will only be known in the next election, but someone is going to have to pay for the higher ongoing water costs and the most obvious sources of revenue will be businesses, via higher general rates imposed by local authorities; higher direct income taxes; a new flat percentage levy on higher earners like the Universal Social Charge or even a water levy added to local property tax, which has been frozen until 2019.

Imposing either a new water Social Charge on higher earners and the self-employed earning more than €100,000 is already a successful tax policy or a  water levy on property, paid directly to the Revenue Commissioners with their impressive, wide-ranging powers, in particular the sending of the Sherriff to your business or home, could be very tempting. Property owners are already extremely compliant (as are employers) and would simply have to adjust their respective payments to the Revenue.  

Last year it was estimated that Irish Water would need €5.5 billion or about €1.2 billion a year for operating costs and investment. Only about €700-€750 million would have been raised from household water charges so adding €1.2 billion to annual borrowings for water services isn’t going to happen if the Exchequer’s plan to return to surplus by 2019 stays on track. (The gross national debt is €204.77 billion with interest payments alone expected to be about €8 billion this year.)  A water USC charge or LPT water levy of €1.2 billion is far more feasible.

If you don’t think so, just remember that between 2011-16 the Minister for Finance collected €2.4 billion in cash from the retirement savings of just over 800,000 private pension holders. It was easily collected because the pension companies were threatened with significant cash penalties if they didn’t pay over their customer’s cash to Revenue.

Water services will be paid for one way or another. Not by people whose income comes from welfare payments or who earn less than €17,000, the cut-off for USC. The easiest way to bring in €1.2 billion will be to force employers to deduct it at source or to add it to fearful property owners tax bill.

And if you have a problem with that…you can just take it up with the Revenue.

Please send your queries to Jill c/o this paper or by email: jill@jillkerby.ie

 (The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)  

BANKING SERVICES DISAPPEARING ALONG WITH CASH

It’s hard to imagine a less consumer friendly sector than banking (water utilities perhaps?)

Nine years after the bank collapse, revelations continue about how the retail banks treated their mortgage customers. The Central Bank is now in discussion with the Gardai about the personal culpability of individual bank officials in what is now being alleged to be the outright theft of c10,000 low cost tracker rates from as early as 2006, though few expect any successful charges and convictions.

Meanwhile, bank and post office branches continue to close – Ulster Bank being the latest to announce another 22 branch closures and 40 post offices are slated for closure. This past week another bank cut its savings rates in the relentless downward spiral to zero or even negative returns.   

The bank closure campaign is happening everywhere. On-line and cashless  banking is now the ultimate intention of global financial institutions (perhaps with the exception of Irish credit unions which have always lagged behind technologically) in order to drastically reduce costs and rebuild their shattered balance sheets.

Fighting against the new IT dynamic is probably fruitless, at least so far as private banks are concerned and consumer campaigns should really be directed at keeping post offices open, but with expanded services that ideally would include acting as bank proxies and in encouraging the advancement of credit union services.

Until the credit unions are restructured, with their bad debts and bad lending practices fully purged; re-training and mergers completed, and there is a proper roll-out of essential banking services (current and saving accounts, debit and credit cards, on-line access to accounts, mortgage as well as business and personal lending), bank customers in villages and towns where closures are happening have little choice but become proficient on-line banking customers.  Depending on where they live and the availability of ATM machines or merchants that allow cash top-ups on purchases, most of their purchases will probably also be cashless.

Not everyone is comfortable with cashless banking – but the cost and risks associated with cash-dispensing post offices means that even pensioners and social welfare beneficiaries are going to have to get used to cashless services. (Cashless is already the norm at KBC Bank which doesn’t even accept cash deposits.)

Meanwhile, last Friday (April 7) KBC Bank was the latest bank to cut its demand interest rate, dropping it to 0.05% from 0.15%. 

It is hard to believe that this is still one of the higher deposit rates on offer: Bank of Ireland, AIB and Ulster Bank have reduced their demand rate to zero and 0.01% respectively. You might get a fraction percentage higher if you open an on-line account only, say with RaboDirect that is offering 0.04% but no matter what extra fraction of a rate you get, the automatic 39% DIRT (unless you earn pension incme of less than €18,000 of an individual or €36,000 for a married couple) will leave you with an insignificant return, even on a substantial deposit.

In a recent blog, the excellent bonkers.ie which compares deposit and current account rates, noted that a demand rate of 0.05% means that someone putting €10,000 into such an account will earn interest of just €5 at the end of 12 months. The 39% DIRT tax means you get a net sum of €3.05. At 0.01% interest the person with €10,000 on deposit would earn a laughable €1.

Bonkers.ie suggests that a flexible, strategic approach is the only way to achieve any kind of return. “Despite the continuing cuts, there are still decent returns available, if you know where to look and are willing to adapt to certain restrictions,” it reports. “For example, EBS’s Family Saver Account currently offers a [annual] rate of 3.00%, but it requires you to contribute monthly and has a maximum monthly contribution of €1,000.

“For lump sum savers, the rates aren’t as attractive, unfortunately. At the time of writing, KBC's 12-month fixed rate account is offering a return of 0.80%, which will give an after-DIRT return of €48 on a lump sum of €10,000 locked away for a year. Permanent TSB is offering a 0.75% rate for lump sum savers.”

State Savings products should also be included in your list, but is it worth locking in your money to achieve a slightly higher fraction of a return?  For example, the current tax-free annual return on the 4 year National Solidarity Bond is just 2% or 0.5% per annum. The 10 year Bond pays a cumulative tax free rate of 16%, or just 1.5% per annum.

You may not feel comfortable about voluntarily giving the Irish state the loan of €120,000 for 10 years (the maximum amount an individual can leave in this Solidarity Bond) but the State promises to pay a net return of €2,400 (€600 per annum) plus the €120,000. Something no bank or credit union can match.