Readers focus on money worries

I never fail to be amazed at the astuteness of the Irish people these days, compared to the people in authority who are running this country. My mail-bag is full of letters from readers who are rightly concerned about five personal finance themes: the safety of their money; finding a good return on their money; the dismal state of their pension funds and worries about the state pension; mortgage arrears and the state of the property market; taxation and unemployment. There's an age bias here: the only people in this country with sizeable assets of cash, pension funds and property and who are possibly liable to considerable taxation, are older people, in particular well-off older people. They are facing higher taxation, lower deposit returns and reduced state services. Let's start with the safety of your funds. The Irish Independent last week carried a front-page headline: Government Perilously Close to Calling in IMF, report warns. Some will call this scaremongering, others say it is what Greece had to do last May when the interest rates it had to pay to borrow on the bond markets exceeded their long term ability to pay. So it is now for us. Consider securing your money in safe, solvent banks and credit unions (the €100,000 deposit guarantee applies. The 100% guarantee runs out at the end of this month except for term deposits over €100,000 with ELG scheme bank participants.) Try to avoid leaving all your wealth in euro cash and consider hedging the risk by shifting some (advisors usually suggest 5-10%) into real money like gold and silver. Anyone who worries that Ireland may leave the eurozone some day should investigate ways to legally put some of their money offshore, say into short-term German or other safe bonds or into stronger country currencies. Get independent, professional advice. Aside from a safe deposit yield, people looking for a better return on their funds need to accept that they must take some risk. Large, global, world dominator stocks with low debt and manageable pension fund liabilities pay steady annual dividends are one option as are well managed funds of companies but keep in mind that your capital may not be guaranteed. The markets are volatile - many advisors believe a fall in US markets in particular is likely - so a more defensive strategy might be better. For older people in particular this might mean opting for some strong corporate and sovereign bonds. Inflation is a risk here, so consider including inflation-linked bonds. Pensions The self-employed and anyone who wishes to top up an occupational pension with an Additional Voluntary Contribution (AVC) have until the end of October to make a tax-deductible contribution. Managed funds have performed poorly over the past decade and many people are now being advised to switch to what are known as 'global absolute return strategy' funds. All the main pension providers now provide these hugely diversified funds that aim to beat central bank plus interbank borrowing rates (c5% gross), with as little downside risk as possible. Anyone with a pension fund should have it reviewed and make sure that this sort of option is included. Meanwhile the government could introduce a single 33% tax relief rate on contributions, so this may be the last year that higher rate taxpayers can claim higher rate tax relief of 41% plus PRSI relief. Timing, as usual, is difficult as markets are hugely volatile. The ideal way to fund a pension right now is on a monthly contribution basis, so that you average in the ups and downs of stock prices. Anyone making a lump sum for October 31, may want to consider starting in cash or short-term bonds and shifting the money into equity or diversified asset fund choice over the rest of the year. Property Prices are still falling; mortgage finance is tight and getting more expensive; arrears are growing; a great overhang of toxic property is backing up in Nama and in the banks' balance sheets are full of domestic properties that would be in arrears if they hadn't made refinancing deals. Reports suggest that the US property market could fall for another three years; their property bubble (which was smaller than ours) burst two years before ours. Taxation Raising personal and business tax rates is no way to help unemployment. But the billions on deposit are an easy target and the suggestion going around is that the government might introduce a 'progressive' DIRT tax (it is currently 25%); they may also tamper with the capital gains rate and once again lower the inheritance tax threshold in the December budget. In other words, the more cash you have in the bank, or earn from selling an asset or inherit, the more tax you will pay. The tax-free income threshold for pensioners who can claim a DIRT exemption may also be lowered (it is currently €20,000 for a single pensioner, €40,000 for a couple). The Permanent TSB offer to pay annual interest upfront might be one way for everyone to beat a higher DIRT rate for this year.jill@jillkerby.ie