Jill Kerby

APRIL HEALTHCARE LEVY WILL MEAN HIGHER INSURANCE COSTS

Anyone who is either renewing their health insurance or finds themselves in a public hospital bed soon, is in for a Spring money shock.

First, the public hospital bed.

Slipped in when no one was noticing on New Year’s Eve, the HSE announced that from January 1, 2017, the cost of a public hospital bed would go up to €80 a night from €75 for a maximum of 10 nights, unless the patient is a full medical card holder. (Infants up to six weeks old are not charged; women receiving maternity services and people with infectious conditions or children suffering from certain disabilities or disorders are also exempt.)

The hospital will either present you with this maximum €800 bill as they discharge you or they will send you the bill by post. If you have private health insurance but have been treated as a public patient, your insurer will refund you this cost. If you don’t have VHI, Laya or Irish Life Health insurance or a cash plan from the likes of HSF.ie, which will partly cover this expense depending on your policy, you will have to stump up for the overnight rate yourself.

Meanwhile, if you have private health insurance and are entitled to a private room in a public hospital, the overnight charge now ranges from €659 to €1,000 a night depending on the type of public hospital you’re attending and whether you are in a semi-private or private single room. 

However, there is no guarantee of such private accommodation, and many insured patients are also ending up on A&E trolleys or in public wards. Should you unwittingly admit to being a private insurance customer, the public hospital will bill your insurer for the full overnight private rate (which is averaging at €813 per night) even if you don’t get a private/semi-private room.

The blatant overcharging is one of the reason’s why private health insurance premiums have been soaring in recent years.  But from April, there will be another reason – yet another increase in the Health Insurance Levy which is to rise from the current rate of €403 to €444 for every adult policy that costs €1,000 or more and from €134 to €148 for a child’s policy. 

This levy, a ‘risk equalisation’ measure, is collected by every insurance company and paid to the State to effectively subsidise the VHI, the government’s own health insurer for its disproportionately larger group of older customers.  The levy was introduced in 2009 at a rate of €285 and €95 respectively.

Under our lifetime community rating system, everyone pays the same premium for the same product, regardless of age or state of health. In other words, older, sicker insurance holders are not penalised with higher premiums; instead they are subsidised by younger insurance holders who make fewer, less expensive claims.

However the legacy of so many older members at the VHI – which was a monopoly for 30 years until the mid-1990s, means that all c2.1 million private health insurance members subsidise the state company for their higher costs.

I’ve argued in this column many times that such high transfer payments could have been avoided or mitigated if the VHI had been broken up into a number of smaller companies and privatised. This was never done and it remains in the full ownership of the Department of Health.

What has happened – inevitably as the population ages and treatment costs increase – is that the risk equalisation charge just keeps going up and many younger people drop down to cheaper, lower benefit plans.

With nearly three quarters of all private health insurance customers renewing their policies in the first three months of a new year, you need to keep these still rising charges and levies in mind when shopping around for the most affordable policy. The cheapest plans do not provide the best value. Talk to a good broker.

For people on very tight budgets, and especially families who cannot afford health insurance, a cash health plan like www.HSF.ie may be a good option. These single premium plans (there are seven to choose from) cover every member of the family and provide a tax-free cash payment for medical expenses like hospital overnight and day cases, GP and consultants, prescriptions, dental, optical, physio, chiropractic and osteopathy and other alternative treatments, osteopathy, medical tests, surgical appliances, accident cover and even adoption and maternity grants.  Monthly premiums range from €11.28 to €65.45  (€135.36 to €785.40 per annum.)

Mid range HSF plans – at €369.60 and €508.20 per annum – will pretty much cover the overnight charge of €80 for a public hospital stay, up to 40 nights in any calendar year.  HSF membership won’t allow you to jump long waiting lists to get hospital treatment, but the cash payments will help cover the cost of some private diagnostic visits and treatments and if you do end up in hospital, the inevitable travel and parking costs once you get there.  jill@jillkerby.ie

HOW MUCH WOULD YOU – A LANDLORD - PAY FOR PEACE OF MIND?

Finding an affordable place to rent in Ireland – especially in the main cities and all of the greater Dublin area - has become such a political hot potato that most politicians I know prefer conversations about the state of the health service or Brexit.

With the average Dublin rent now rising by 15%, and between 10%-13% in the four other main cities. On February 1, 2017, there were just 4000 homes available to rent across the entire county, reports Daft.ie and while this is a 10% increase on the same date last year, it isn’t much better than in April 2007 when there were only 4,400 places to rent but a far lower number of people seeking rental accommodation.

The surging rental values have been clipped for existing tenants by the 4% rent increase cap that applies from January 2017 in the list of Rent Pressure Zones in Dublin and around the country.

The new regulations mean that fewer people will have ended up homeless after being unable to pay large increases once their two year rent freeze was up, but it’s done nothing to help others find an affordable home:  only a surge in affordable high rise accommodation in the cities can do that, and this is still some way off as are the implementation of other proposals to build more social and private houses and apartments; to renovate empty spaces above shops and businesses; force local authorities to renovate and repair (more quickly) the thousands of their own idle, vacant properties and to impose levies or surcharges and taxes on similar empty, abandoned and derelict private properties.

And while this is a very tough time to be an aspiring or existing tenant, especially for those in the latter category with limited budgets and the risk of evictions when their property is sold to vulture funds, the property nightmare continues for many of the 300,000 amateur landlords in this country.

Negative equity, mortgage arrears, high property-related taxes and charges have taken their toll, though rising capital values have provided an exit route for increasing numbers.

Nevertheless, stories still abound of tenants who have stopped paying their rent, have caused expensive damage, lost their jobs and have nowhere else to go, etc.  Such is the pressure at the Rental Tenancies Board that disputes can take up to five months to be resolved.

Both sides have their champions – the RTB as well as private agencies like the Residential Landlords Association and Threshold - but now a new commercial service has become available to landlords to help cover the costs of disputes and rental income default.

RentAssured.ie is an on-line insurance provider for private landlords with annual rental income of between €6,000 and €48,000.  The policy covers tenant rental defaults worth up to 11 months worth of rent; it offers rent dispute legal assistance worth up to €5,000 plus VAT; and compensation worth one month’s rent for malicious damages. It also offers two annual, free, pre-rental tenant checks by the credit service, Stubbs Gazette. The policy costs the equivalent of 2% of the annual rent. (For an €18,000 rental stream, that is, €1,500 x 12 months, the premium would be €360 per year.)

Here’s an example of how it works:  You own a three bedroom suburban house that you have been renting to a tenant for €1,500 a month. The tenant stopped paying his rent three months ago over a row about some malicious damage to the property- broken doors and windows that cost €500 to repair/replace.

The dispute went before the RTB, but just as it was to be heard – two months later – the tenant disappeared.  You have lost five months rent, less the one month deposit, plus the €500 for repairs and the €1,000 you spent taking the case to the RTB.

According to Robert Kelly of RentAssured.ie, assuming that this landlord met their policy qualifications – they had sought references, (in the case of a new tenant, Stubbs would do the check); provided a lease; took a one month deposit; reported the damage to the Gardai and followed the RTB landlord dispute protocols – the RentAssured policy would have paid out four of the five months lost rent, the €500 malicious damages and the €1,000 plus VAT dispute/legal costs (also done in association with Stubbs.)

With rental property is such tight supply, not every landlord will need a service like this, since there is a 60 day delay before claims can be made (as part of the initial RTB dispute period) but “it does provide a degree of comfort for landlords from a potential financial loss from rent default or damages” that they would otherwise not have had, says Kelly. 

But ‘once burned, twice shy’. Amateur landlords who haven’t been able to unload their property, but have had poor tenant experiences might want to carefully weigh up this insurance premium against potential future losses.

GETTING CHARGES DOWN BOOSTS INVESTMENT RETURNS

Investment funds that are sold in Ireland come with fees, charges and commissions, charges that will impact on the on-going and final value of your investment, especially a long term one, like a pension fund.

It is only in the past two decades that investment fund providers have been required to disclose all these charges in writing, yet anecdotal conversations that I have had over most of those years with readers, too often resulted in either the person telling me that they have no recollection of any discussion about charges or no recollection of the charges even if they did have such a discussion.

The reason why it is important to have a full grip on product and fund charges is to make it easier to shop around for the most suitable product and to compare how different charges can affect the value of your investment. The lower the charges, the better the long term financial outcome.

Since this can be time-consuming and complex, it’s always a good idea to use a good, independent, impartial broker or adviser. Otherwise you might be tempted just to settle with the best advertised product from a well know life assurance or investment company that, naturally, will only sell you their product.

The problem is that the vast majority of financial intermediaries in this country are paid by sales commission – that is, a small percentage of your investment contribution either upfront when the money is paid over to the investment company or as a ‘trail’ commission, usually over a period of years.

The commissions they receive will usually differ – some will be higher or lower.  It is in their personal financial interest, or that of their brokerage to sell product that carry the highest sales return.  And since not every prospective client who walks into their office will actually buy an income protection policy or a pension, or an investment fund for their children’s third level education, the commission they do collect from every third or fourth potential client needs to be sufficient to cover the salaries and overheads.

A fortnight ago, Aviva Life and Pensions announced that as part of a major review and streamlining of their products, that they were eliminating all policy fees and charges for new customers on their list of 23 different fund. These include old monthly policy administration fees that could amount to as much as €4.50 a month (another life company charges as much as €5.24 per month) and fund switching fees of c€20. There is now only a single management fee per fund, amounting to no more than 1% of the fund value. Over the course of a long term investment, like a pension, the savings could amount to as much as 8% of the fund value, I was told. (For a fund worth €500,000 that is the equivalent savings of €40,000.)

Meanwhile, last week the Central Bank announced that it is now reviewing the hundreds of submissions it received as part of its inquiry into commission payments to financial intermediaries. It will publish its recommendations later this year. 

Many of the industry submissions – from fund providers as well as brokers – favour maintaining the existing commission system on the grounds that fee-based advice would be too costly for the majority of Irish investors. Many added that in the UK, where commission has been abolished since 2012, there are now fewer intermediaries. If buyers do not pay an upfront fee, they must go directly to the manufacturer and lose the opportunity for independent advice.

What most of the supporters of commission always fail to note is that commission payments are paid by the buyer out of the money they hand over to be invested or from premiums collected for the life assurance product.  There is no such thing as “free” advice. You pay overtly – a fee – or covertly – by commission that may not always be properly explained.

Aviva are the first life and pensions company to abolish extraneous and outmoded policy administration fees. They admit that computerisation and technology no longer justifies some of them.  They accept there will be an associated cost to the company, but believe they’ll benefit with more sales and happier customers.

Should sales commissions also be abolished?

So long as an intermediary depends on commission and might be influenced by its size (for example, you get no commission if you recommend a Post Office savings scheme) the adviser’s impartiality has to queried.

Commission isn’t just about the number of euro being paid out; it also leaves the broker open to a charge that their advice is centred on the “product”, not the client.

Replacing it with a fee-based payment from the client that recognises the adviser’s expertise, the time spent on your case, focuses the relationship back where it should be – between the adviser and the client. Not the adviser and investment provider.

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.)  

NO ONE-SIZE-FITS-ALL SOLUTION TO A CASH WINDFALL

“I didn’t win the €88 million in the EuroMillions jackpot,” a reader from the Midlands wrote last week. “But I have recently inherited just over €120,000 from my late father, a former teacher. We were all a little surprised – I have three other siblings – since he and my late mother had lived quite well and we thought they only had their pensions and house which we sold for just over €250,000.

“My husband and I are in our early 50s, our youngest is nearly finished college. The other two live in the UK and Australia and have good jobs. I work part-time and my husband has a good job and pension. (He is also a teacher.)  Our house is paid off and we only have a few small loans, so we’re in no huge need for this money.  Any suggestions on where to invest it? (We have some savings which are paying only a tiny bit of interest.)”

I received quite a few emails and letters like this – and about sums as small as €5,000 - after the lottery win column. Most people only ever benefit from modest windfalls - an inheritance, a redundancy payment, a retirement lump sum or a capital gain after selling an asset like a property or a business they’ve spent a lifetime building.

Most people, in my experience, tend to be pretty conservative when they find themselves with an unexpected sum of money, even a large sum.  It’s size, relative to the person’s existing income and financial position will impact on investment decisions, say investment advisers. As will their immediate and longer term expectations for the money, their capacity to live with market risk and price volatility. Age play a big part too; a free-spending, ‘easy come, easy go’ approach is usually reserved for younger lottery winners or inheritance beneficiaries with few financial responsibilities and liabilities – like a mortgage and other bills, a family to support or chronic indebtedness.

In other words, there are simply no ‘one size fits all’ solutions whether the sum is €10,000, €100,000 or €1,000,000.

My correspondent from last week is also typical of the person who has no immediate money pressures who seeks some help in what to do with their good fortune. In such cases, financial advisers often report that after rewarding themselves and their loved ones with modest purchases, such clients often take a longer term view of the money, say, to pay for a wedding, or for retirement or to pass on to the next generation(s).

This is why the first step has to be a proper wealth review in order to confirm the status of this money, relative to their expectations and desires.  Has the person factored in the importance of clearing existing high cost credit card and personal loan debt, overdrafts, perhaps even higher variable rate mortgages or the real cost of long term liabilities, like medical and nursing costs in their advanced age?

No matter how large or small the amount at stake, a good adviser will ask you what your expectations are for your inheritance, retirement lump sum, capital gain, etc and plan around your answers.

No one can accurately predict investment growth consistently.  Which is why expecting positive results from a small collection of stocks or funds is also unrealistic.

The high tech stock you heard about – or even a single property fund producing high gross yields today, could still tank tomorrow, at great capital loss or be impacted, yet again by arbitrary government tax policies. The higher return, the higher the arrangement and management fund charges which will also eat into any return.

Only an independent, impartial financial adviser can advise our reader with the €120,000 inheritance where to invest her money, and only after a comprehensive, personal financial review.  It could be in the end that she and her husband simply won’t sleep if this money, which perhaps they ultimately want to leave to their grandchildren, was tied up in the bond or stock markets.

In that case, paying off the last of their debts and finding the safest deposit account might ultimately be where the cash remains. Or they might decide to disperse it as a contribution to higher education, or even seed capital for a grandchild’s business. 

What every beneficiary of an unexpected or earned windfall needs to accept is that genuinely suitable investment solutions are always going to be more bespoke that any popular, advertised ones.

And probably a lot safer too.

BIG LOTTERY WINS COME WITH MORE THAN JUST LOADS OF MONEY

As I write this column – a few days before it appears in your newspaper – rumours are swirling that a consortium of 30 shift workers at a pharmaceutical firm in Cork have won the EuroMillions windfall jackpot of €88,587,275.

Good for them. That works out at a tax-free prize of €2,952,909 each, more than enough money to pay off their bills, to buy a new car and house, and put all their kids through graduate school and probably buy a house for each of them too.

They’ll probably have enough left over to fill up a retirement fund and maybe even quit the day job and follow a few dreams.

A €2.9 million windfall is enough to change your life for the better but is less likely to result in the downside risks that come if just one person had scooped the c€88.6 million, a massive sum to have to navigate, probably for the rest of your life. That is, of course, if you don’t blow it recklessly or give most of it away, perhaps keeping a modest million or two for your own enjoyment.

I’ve only met one lottery winner, about 20 years ago and the sum he won was about £3 million.  By the time I spoke to him, he had about a million left having bought the inevitable new home, car, holidays and had generously given the rest away to his extended family, some friends and charities.  He was now concerned about the implications of his children possibly receiving very large inheritances while still at relatively young ages.

I passed him the names of some good financial and legal advisers, but I remember him saying that the process of giving away a large share of a million and a half pounds to his loved ones hadn’t turned out to be as happy an experience as he thought it would.

This is a common outcome for many lottery winners who nearly always say that you really find out who your friends are when you win millions.

Winning a huge windfall like c€88.6 million means you will certainly need a highly trusted team of financial, tax and legal advisers who might end up on the payroll for a long time. Even working out what do with €3 million, especially if you want to preserve much of the capital (after buying that new house, car, etc) will take time and probably more understanding of money and tax than you have. Too many are tempted to hand over the management to “the professionals”.

Whether it’s a huge jackpot or a diluted one, responsibly investing and divesting yourself of that kind of money requires a measure of faith and trust in the advisers you employ.

But it’s your responsibility in the end. Their respective roles are to help you work out a financial, tax and legal plan of action that reflects what you want to do with the money.

The financial planner should be experienced, trained and fee-based. (They shouldn’t necessarily charge a percentage fee of the winnings. 1% of €88.6 million is an annual payment of €886,000!)  Should the process of selecting a diverse, balanced, mixed portfolio of assets with capital protection and a modest risk/reward income return cost 1,000 times more than it would for a comparative pension fund?

The tax adviser will work with the Financial Planner to explain all the tax implications of your great windfall: there is no capital gains tax on lottery winnings here but all deposit returns (such as they are) is subject to 39% DIRT. Irish investment gains will carry up to a 41% tax bill. Investments in other jurisdictions will carry their own liabilities, including any inheritances that may be generated from the foreign investment. 

Gifts and inheritances in Ireland carry relatively small, life-time tax free thresholds:  just €310k between parents and child; €32,500 between siblings, to nieces/nephews and just €16,250 to non-relatives. Winners who want to set up family trusts for the benefit of future generations – and doing that badly could be catastrophic for your children if it’s not thought through with great care - will need tax and legal advice.

The solicitor you hire will also play an important role in setting up those trusts, completing property deals, preparing complicated wills, (perhaps in more than one country), even pre-nuptial agreements (where possible) and Enduring Powers of Attorney. Your lawyer will come in handy if disputes arise, especially if €88.6 million is at stake.

I’ve heard lots of suggestions about how the big winner (or maybe, the smaller ones) should proceed. “Take your time” and “protect the capital in the short term” sounds about right.

Finally, forget the notion that winning millions (or tens of millions) won’t change your life. It will. But the last thing you want is that your good luck turns into someone else’s misfortune.

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

WOULD YOU WELCOME A UNIVERSAL INCOME FROM THE STATE?

Could the idea of a ‘basic income’ take off here?

A number of countries are experimenting with paying a selected group of citizens in different cities a basic monthly income as part of a wider social programme to address, they say, the profound changes in the nature of work, jobs and social support structures.

The best known pilot projects have begun in Finland, Holland and Canada where thousands of people are being paid monthly amounts in lieu of conventional unemployment or social welfare benefits, or are receiving universal monthly payments that will be subject to some income means tests, that is, some higher income is clawed back in the form of taxation.

The theory behind the basic income payment is that conventional social welfare payments are complicated, expensive to administer and distribute and act as a work disincentive because of the loss of social welfare benefits once you get a job. In Ireland, this disincentive has already fostered a range of supplementary ‘back to work’ benefits and family support payments for the job finder who remains on a low income. These extra schemes require extra bureaucrats to manage them and little or no savings for the state.

In the case of universal payments, rejected by a large majority of voters in Switzerland, the idea is that everyone receives a monthly or annual income from the state that eliminates the convention unemployment and welfare payments with higher earning clawed back by degrees.

In Ireland’s case this bill is over €20 billion, divided between a variety of pensions, unemployment and illness/disability benefits, child focussed benefits (from universal child benefit to school uniform and book allowances) and other family related benefits and supplements.

Basic income and universal payments are catching the attention of both private policy analysts and governments that recognise that the old benefits systems no longer seem very suitable given the changing nature of work and life long careers. (The coming robotics revolution is predicted to result in the loss of even more conventional manufacturing and service jobs.)

The huge cost of running our current social welfare systems is set to rise as western populations age and make increasing demands on pension and health services. In nearly every country these are paid on a ‘pay as you go’ basis direct taxation, not from invested sovereign wealth funds, Norway being the notable exception in Europe.

So how do these pilot projects work?

The most advanced one, but limited one is Finland’s where 2,000 citizens already on unemployment benefits were randomly selected in December to participate in the pilot for the next two years. Their first payment arrived this month.

Minimum unemployment benefit in Finland amounts to €560 a month and for the 2,000 is replaced with the equivalent in a basic income payment.  This time, however, even though the person remains registered with their unemployment office, there is no weekly signing on, though they may still be offered a job placement. Turning it down could result in up to 40% loss of the payment. However, any casual, part-time or full time income earned will not result in any clawback of the payment, though housing benefit, for example, could be affected by the additional income the person earns while receiving the basic income.

The question the Finn’s want answering from this pilot is whether a basic income results in better employment outcomes or job creation among the sample group. Unemployment is 8% in Finland.

While the Swiss have rejected a referendum for introduction of a universal income payment of c€2,330 a month to every adult and c€583 to every child last year (the total cost would exceed their annual welfare bill), in the city of Utrecht, the Dutch authorities have begun a more detailed pilot involving six different basic payment control groups and basic income payments.  One group will receive the benefit with no impact on additional income they earn; some will be paid extra for voluntary work; some will see some of the benefit clawed back depending on higher earnings, etc. The basic monthly payment has been set at €1,000.

The province of Ontario has begun a similar experiment in four centres with a no-strings-attached payment of Can$1,320 a month to selected individuals age18-65 on existing unemployment benefits (of about $700 a month) and $1,820 to people with disabilities(who currently receive $1,130).Their employment, health, education, food security, living arrangements, rates of illness, etc will be monitored and then compared at the end of three years.

This conversation will come here eventually.

So far, polls suggest that a majority of Finns, Dutch and Canadians support the idea of basic or universal payments. But the polls also show that people are not willing to pay higher taxes to embrace any new system. 

Pitching just the right size basic or universal payment will be the ultimate key to the success or failure of this radical proposal.

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

IRISH LIFE BRIEFING PULLS NO PUNCHES ON FINANCIAL HEALTH

Every January Irish Life, the state’s largest purveyor of life insurance, investment fund and especially pensions, outside of the state itself, produces an annual report, which it shares with the financial media.

For the company itself, last year was a good year. Investment returns in 2016 were positive with global equities up 10% on average and average eurozone government bond returns up nearly 5%. Irish property funds returned c11% and their popular, diversified MAPS fund of mixed assets was up a respectable 7.7%. 

The company, owned now by Canada’s largest insurer, Great-West LifeCo, also bought out Aviva Health and the remaining interest in GloHealth in 2016. It sensibly kept GloHealth chief executive Jim Dowdall to run the new health provider, now called Irish Life Health who reminded everyone that in 10 years another 42% of public hospital beds will be needed just to keep up with the extra over-65s.

Irish Life is the only company now that provides customers with a menu of essential financial products: life insurance, investment funds, pensions and health insurance.

And while I firmly believe that the best way to furnish yourself with all these products is to carefully investigate the wider marketplace yourself, or, ideally use impartial, independent fee-based advisers to help you, this simply doesn’t happen for the majority of people.

Outside of the public sector, fewer than half the working population have a pension fund and will rely on the state pension for regular retirement income.Ditto for life insurance among working adults with dependents. Those who do have private pensions are failing to invest enough into them.

Health insurance has a higher take up rate because only because the c€15 billion collected from compulsory taxation for the HSE is so badly managed.

But is was Irish Life’s survey of pension provision in 2016 that showed just how under-prepared this country is for the surge of older people – Ireland’s baby boomer generation – that are now joining the ranks of the retired in ever greater numbers:

-       In 2016 the average age at which individual Irish Life customers first purchased a pension was 44 years, almost 10 years older than the average age in 2000. The investment outcome for those ten lost years is devastating and amounts to tens of thousands of euro less in the retirement fund.

-       Only three in 10 (28%) of those not yet retired have a financial plan to help them prepare for retirement.

-       Only half of those under 50 have ever discussed financial retirement plans with their partner. This increases to 75% for those with 10 or less years to retirement.

-       A majority of respondents said they would like at least 53% of their current income on which to retire (excluding the state pension.) They ‘expect’ to have 44% of current income.

-       Irish Life now recommends a realistic pension income target of 1/3 of final salary PLUS the state pension “yet… 90% of people currently on our Defined Contribution plans are not on track.” Instead, most will see a salary replacement of just 18% plus the state pension.

-       Two thirds of retirees (64%) surveyed said they reduced their spending in retirement; 63% of them in hindsight, would have changed the way they prepared for retirement.

-       A positive result is that 69% of adults support automatic pension enrolment at work. A separate initiative Irish Life conducted in 2016 with a client company willing to adopt auto enrolment resulted in pension participation rising to 90% from 58% and maximum contributions rising from 42% to 82%.

The most urgent message from the survey is the one about retirement income expectations.

Even assuming current income is say, €50,000, 53% in retirement will be €26,500. The current state pension is €12,391.60. A c€39,000 income would be very welcome indeed.

But to achieve a pension income of €26,500 in the form of a guaranteed annuity you require a pension fund worth at least €500,000 for a single person with no dependents and over €800,000 if you were funding for a dependent spouse, for example.  Average pension funds are in the region of €100,000 at retirement.

With average income funding of just 18%, the worker earning €50,000 would end up with a pension of €9,000 a year. No wonder most of the working population expects to depend on the state pension, which in this case would help provide total income of €21,391 a year.

It’s a brand new year.

It’s not too late to do something about retirement planning and funding. In finding better returns on savings that are currently returning nil to zero interest or in protecting dependents and your family’s health care costs. Call a good adviser.  Failing that, at least check out the Irish Life website or other life company sites. 

The alternative – doing nothing – gets scarier with every one of these annual briefings.   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.)

WHEN SAVINGS PAY NOTHING…YOU NEED A CONTINGENCY PLAN

The frustration of ordinary savers with historically low returns could turn to horror if negative deposit interest rates ever arrive on these shores.

Already the European Central Bank, charges -0.4% negative interest to discourage commercial and investment banks from leaving deposits with them (the ultimate ‘safe’ deposit taker). Negative rates also apply at the central banks of Switzerland and Denmark and in both countries some commercial banks now charge their customers negative rates. Here, Bank of Ireland charges a negative rate to corporate depositors who leave more than €100,000 overnight.

At the end of November 2016, the ECB estimated that the value of negative yielding Government bonds (the biggest form of debt that countries buy and sell to each other) in the world is was $8 trillion and rising. This means that buyers of German 10 year bonds for example, now pay the German government a small rate of interest every year, rather than receive an interest payment from the Germans. 

How crazy is that?

Would you willingly pay your bank for leaving your life savings with them, which they can then lend out at 4% (a mortgage rate) 10% (person loans), 15% (overdrafts)?

What are the safe alternatives? A mattress? A hole in the garden?  Hardly.

Not coincidentally to the negative interest rate phenomena, is the strengthening drive by governments and central banks to keep rolling out cashless banking and cashless purchases.

Denmark, where most financial transactions are now cashless happens to be where negative interest rates are being charged to commercial and individual savers: in a place where practically no one takes cash anymore, and your income and wealth is expressed as digital numbers in on-line accounts and plastic money cards, there is practically no alternative but to accept the power of the central bank or government.

Could an entirely cashless society happen here?

Cash purchase limits already apply in many EU countries, including France (€3,000, €15,000 for non-residents); Italy (€999.99); Denmark (equivalent of €1,340); Spain (€2,500, €15,000 for non-residents); Portugal (€1,000); Greece (€1,500); Belgium (€3,000 and no cash amount for real-estate purchases).  Other countries that limit cash payments are Slovakia, Poland and Bulgaria. The Swedes have no limit, but traders are not legally obliged to accept any cash payment.

What options do any of us with any surplus income or savings have to low to negative deposit yields and the encroaching threat of digital and plastic ‘money’?

-       You can try and find a genuinely solvent bank/institution that still provides a safe, positive yield. Global Finance magazine produces an annual survey of the top 50 ‘safe’ banks every September. (Not a single Irish, UK, Italian, Spanish or Danish bank make the list. The top 10 include 4 German, 1 Swiss, 2 Dutch, one Luxembourg and France bank and Canada’s Toronto Dominion bank (in 10th place). See www.gfmag.com or better still, consult a professional adviser.

-       Use your savings to pay off any interest debt you have, like credit cards, personal loans, mortgages.

-       Buy real assets that pay positive annual yields: an investment property that produces a profit from rent after all charges and tax. Shares that pay a stream of positive yielding dividends.

-       Depending on your age, ability to live with risk, use savings to buy low cost, diversified investment funds. A tax efficient pension is the best long term option.

-       Consider private, but high risk family lending with a portion of your savings or P2P lending.

-       Look into the merits – and downsides – of shifting some cash into real money, physical gold or silver coins or bullion, stored in a safe depository (where you will pay a fee.) Consider it insurance. Precious metal prices are volatile and an ounce of gold pays no yield, but gold always has an intrinsic value and has no third party (ie Central Bank) liability risk once it’s in your possession.

Before you ‘encash’ or withdraw your savings, or buy a potentially higher yielding asset or investment, or substitute some of your cash for ‘real money’, do your own research. Understand and accept the potential risks and rewards of non-deposit asset ownership.

Some stock markets and investments are booming, some are floundering.

Property in Ireland is returning big yields again due to post-crash shortages and feeble lending by still fragile banks. But ongoing costs and taxes remain high and the state remains the biggest price manipulator.

Deposits are simple and easy; getting a positive return on your savings is not.  Always search for the best independent, impartial financial advice from a professional, experienced, fee-based adviser who will model their suggestions to match your profile. 

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

WE CAN’T PREDICT THE FUTURE BUT WE CAN IMPACT OUR OWN OUTCOMES

Was 2016 as bad a year as so many people on my Twitter line seem to be suggesting it was? 

I suppose if you are mildly obsessed with the passing of celebrities, the pro-Brexit vote and Donald J Trump becoming US president, then 2016 may not be your favourite years.

As a pessimistic optimist, who has finally admitted to herself that I’m only as good a forecaster as my decorative, but not very bright King Charles Spaniel, Jet, I’m only willing to predict that 2017 is - again - going to bring with it all sorts of personal finance surprises. 

This might be because of Brexit and its potentially negative impact on prices, and because of Trump’s vague promises to cut the US corporate tax rate in order to lure offshore US companies back home.  That might very well impact on existing and future job growth from this key economic sector.

But for every swing there is a roundabout and if I had a young person about to graduate from secondary school I’d be encouraging them to think about working in IT and finance/banking/insurance:  there is a already of shortage of workers and graduates to service both these industries based especially in the IFSC in Dublin and that’s only going to escalate if we attract foreign and UK banks and re-insurers from a post-Brexit City of London.

With interest rates finally turning – first in the US after the Fed raised its base rate to 0.25% - and the great bond bull-market coming to an end (yields are jumping as the price of bonds fall), 2017 may very well be a watershed year for American savers.

As anyone living on either side of the Atlantic with life savings or surplus income sitting in a deposit account knows, there has been practically no return on their cash once inflation and the cost of living is taken into account. Throw in the cost of banking and the hidden subsidies that savers unwittingly pay to keep borrowing rates low (especially Irish tracker loans) and 2016 was an even worse year than 2015, 2014, 2013, etc.

Will the ECB eventually follow the Fed and finally end its vast programme of ‘quantitative easing’- the purchase of government and corporate debt from private financial institutions in order to supply them with cheap credit to pass on to the market?  QE hasn’t dragged the eurozone out of stagnation but has furred up the ECB’s own balance sheet with what is surely going to become depreciating bond assets. 

When bond market bubbles meets their pin, the outcome, say the experts I read, could be uglier than when the sub-prime mortgage derivatives market met theirs back in 2007-8. At the very least, they think some serious direct money printing in the US will be one consequence and that will feed into higher prices, wage demands and higher interest rates.

Expect some ‘trickle down’ effect on this side of the pond, though the ECB cannot, under its rules, just turn on the printing presses to meet any inevitable price/wage demands.

Outside the realm of speculation – I don’t have a crystal ball and neither does anyone else – there are plenty of things you can do to make 2017 a better financial year than 2016 might have been.  This week we’ll start with spending/savings actions you can take that will make a difference.

-       Work out a family budget – everyone’s income, including pensions, child benefit, teen’s part-time earnings; tax paid, savings, debt, household outgoings and discretionary spending. These are your personal finance building blocks.

-       Price compare all your insurance and utilities as they fall due. Check out www.bonkers.ie. You will save c20% on average, claim Bonkers. Gas/ electricity/phone/broadband; motor, home, health insurance bills of say, €5,000 a year means a €1,000 savings.

-       Price compare the cost of servicing your loans at bonkers.ie. Then arrange a cheaper, consolidated credit union loan. CU interest is not compound, but charged on the diminishing balance of the debt.

-       If you smoke – at €11 a pack – cut back or quit. 20 fags a day is costing you €4,015 a year.

-       Cut out €10 a week worth of junk or processed food from your weekly g4ygrocery bill and you save another €520.

-       Bring that €3.50 daily café latte (x 240 days) with you to work in a thermos cup and you’ll save c€840 in 2017 minus the cost of the coffee from home.

-       Bring a lunch to work and save at least €5 a day or €1,200.

-       Cut up the credit card and replace it with an interest-free debit or top up card. Save a FORTUNE.

Next week, an investment and wealth creation plan for 2017. 

I wish you a very Happy New Year…and so does Jet!

(The new TAB Guide to Money Pensions & Tax 2017 is now out. The first 10 readers who contact me at jill@jillkerby.ie and includes their home address gets a free signed copy.)

POSTBAG PROMISES A HAPPY CHRISTMAS FOR SOME

A recent column warned readers who haven’t claimed tax refunds going back to 2012 that they have only until December 31 to do so.  Our last postbag of the year includes some questions about what exactly you can claim:

Mr JM writes:  I spotted your article about tax refunds. My wife stopped work at the end of 2013 when our second child was born. I work for the County Council but have not seen any deduction for the Home Carer’s grant on my payslip. I was told they do not have anything to do with it. Can I still apply for it on my wife’s behalf or does she have to claim it?

As the single earner in the family, the refund comes to you. If you wish to claim the €1,000 for this past year and €810 for 2015 and 2014 – a total of €2,620 -  either go directly to the Revenue website (www.revenue.ie) and register your details under ‘myAccount’ and then follow the instructions to claim the refund or go to a tax adviser such as the excellent www.taxback.com which just last week produced a nationwide survey that estimated that up to 65% of all single earning families that are entitled to this annual tax credit do not know about it, or don’t bother to collect it.  I hope this makes your Christmas and New Year much happier.

Mr DG writes:  I am receiving a redundancy payment from my employer but there is tax due on the amount. Can I offset tax by diverting the money into an AVC?

You can offset some of the tax on your redundancy payment in a roundabout way, says tax adviser Sandra Gannon of TAB Taxation Services. Before you leave your employment, you can take out or make a contribution to an AVC to boost your final pension fund value and enjoy the 40% income tax relief (this is assuming you are not already fully funded.) Keep in mind too that for the purpose of tax relief on pension contributions, net relevant earnings in any given year are €115,000.  Sandra suggests you speak to the company accounts manager or pension trustee before you do anything to ensure that you get the correct income tax deductions.

Mr MD writes:  My wife and I are thinking of retiring to Portugal, have not yet converted our pensions to ARFs or annuities and are looking at the 10 year NHR (Non Habitual Residence) system. I’ve done a tonne of research but still don’t know if the payments from an Irish Approved Retirement Fund will be paid tax-free in Portugal.

I asked Marc Westlake of Global Wealth Management in Dublin, (full disclosure – Marc is my financial adviser) about this issue and he explained that “This is a very good question and turns on the right of the Irish Revenue to recover the tax already relieved on the pension contributions vs the rights of the individual to retire where they please.” Much will depend on your permanent residency status and you need to get a definitive answer from Revenue before you base your retirement plans (like whether to opt for an ARF or annuity) on any assumptions about the tax status of your payments.  “This is absolutely not a DIY area in my experience,” he said.  A qualified, impartial review of your retirement plan from a fee-based financial planner is probably the best next step you can take.

Ms AM writes:  I have a house that I have rented since 2013 when I moved abroad, but I wasn’t aware until now that the tenant was supposed to deduct 20% and pay it to Revenue each month.  I am a registered landlord and have declared the income and paid all the tax due. I am worried sick now that the tenant should be paying this amount every month to the Revenue, even though I don’t think they should be responsible for doing so. 

My understanding is that this rule was introduced to ensure that at least the standard rate of income tax on rents was paid to the Revenue where a property is owned by a non-resident landlord who would be very difficult to chase for the money. The fact that you have diligently reported your income and paid any tax due each year means that there is no tax shortfall issue in your case. A tax adviser I spoke to – unofficially – said “Let sleeping dogs lie”.  He also said that you could register/contact the ‘myEnquiries’ helpline at www.revenue.ie to ask their opinion on your current arrangement.

Mrs HW writes: I have inherited a sum of money and would like someone to manage it for me as I have really no experience. I understand certain firms do this and that their charges can be high. Also that a good stockbroker can also advise costing possibly less. I feel very vulnerable and would like your advice.

I can understand your concerns, but ‘vulnerable’ women with money to invest are often the unwitting victims of unsuitable, commission-driven “advice” from banks, stock broking firms and investment salesmen.  You need to engage the services of a fee-based, impartial, independent financial adviser – certainly not a stockbroker - who will review your situation and make suitable suggestions for your circumstances. I suggest you check out the website of the Society of Financial Planners of Ireland (see www.sfpi.ie) and find such an adviser near you. Dublin based members usually service clients nationally.