Three strikes - are we out?

The Budget announced new provisions to withdraw property-related tax incentives. Before being introduced, an assessment will be carried out to look at the impact. The question is will it take into account the impact on NAMA bound properties as well as the full extent of unsold tax-incentive properties across the country.  

There really is so much more at stake here than a populist withdrawal of tax-relief from individuals. High-earners already had the annual benefits of these reliefs curtailed dramatically. If the changes are enacted, we will see many of the 'elite' property owning class find themselves in a situation where they simply cannot re-pay mortgages. 

Now, many landlords are facing further rent reductions, further hikes in interest rates and most likely reduced earnings as well. You would imagine that the only other thing that could possibly go wrong is for the tax relief to be withdrawn. But there's more. If the ability to pass on the tax relief to a new purchaser within the original tax-life of the property is also withdrawn, this will have a further significantly detrimental effect.

Who else will suffer?

Oh yes, the Exchequer, i.e. We the taxpayers. While the value of the reliefs may be saved (and this is a declining value every year as reliefs are exhausted), there will be:

• reduced stamp duty payments,
• reduced flow of VAT from sales of new properties,
• no corporation tax, and
• no capital gain tax as everyone in the supply chain loses money.

Hopefully the assessment will take full account of these figures too.

Secondly, we'll suffer even further as many of these properties find their way into NAMA, never to recover even close to what they cost.

And thirdly, we'll suffer even further, as the banks that we own, take massive further losses on small landlords. Even Joan Burton, one of few politicians fully on top of their brief at all times, fails to see that many of her own constituent class took this route as well.

So three strikes - can we recover from that? There are currently over 300,000 vacant housing units in the country. Is there any glimmer of hope at all?? Remember the closing of the stamp duty loophole for developers? Back in 2007? The one that was, well, never actually closed....................

Sonia McEntee

Canvassing Irish Government on Pensions Issues

Pension Adjustment Orders

The new standard threshold for pension funds introduced by Budget 2011 has caused some consternation among pension holders, particularly those who are near or above the €2.3 million cap and have not yet planned to retire. Apart from those concerns, the new threshold also brings into focus some of the rules for a pension scheme where a pension adjustment order (PAO) is in place.

A case I am currently dealing with involves a client (43), with a pension of €1.8 million, who is currently going through a divorce and where the court has indicated that 50% of the client’s pension benefits are to be awarded to the client’s estranged spouse. You would think that the client would then be allowed to fund for an additional €1.4 million to take the client’s fund up to the €2.3 million cap. But you would be wrong. Revenue’s view is that, for the purposes of the client’s funding, the estranged spouse’s interest must be taken into account. On the flipside, when calculating the estranged spouse’s funding levels, you ignore the benefits under the PAO. So the client will only be able to retire with a maximum pension fund of €1.4 million and the estranged spouse can legitimately retire with a maximum fund of €3.2 million.



This situation reminds me of a famous quote- “The difference between genius and stupidity is that genius has its limits”

Paul Gilmer

Definition of Madness...

Here we are again, the start of a new year.

What can we expect in 2011; we know about the Budgetary changes, we know there will be an election & we know that there will be a new government.

However we are still in a state of flux with our economy and planning 3-5 years out remains difficult. I suspect most of the general public are looking at their current financial situation & at a minimum are looking to learn from the past. Less consumer debt, more saving etc …

Clients we meet are far more aware of their financial world and what represents value for money. Despite this, the majority of the Irish public continue to invest with fund managers who average negative returns over 3 and 5 years. The average managed fund return is -4.1% per annum over the past three years. The five year returns to the end of December are mostly negative, with an average return of -0.6% per annum over this period.

This begs the question: where is the value for money in this relationship, particularly with an average annual management charge of 1% per annum?

Everyone is aware of the well worn definition of madness, doing the same thing but expecting different results. This also applies to pensions!

Michael Keyes

The Fund Cap - read the fine print

The 2011 Budget was clearly focused on getting our financial house in order. I think everyone accepts that pain was inevitable and we are all happy to grin and bear it if the pain is distributed equitably.

However in some instances the budget fails in this regard.

A classic example is in relation to the new Fund Threshold of €2.3m. On first glance this appears equitable. It applies to all benefits whether public sector or private sector or whether defined benefit or defined contribution.

However the devil as they say is in the detail.

For private sector workers with defined contribution benefits it is easy enough to apply the cap – the capital value of their fund is whatever it is worth at the relevant time. For public sector workers things are slightly more complicated. Because their benefits aren’t funded in advance their entitlements are generally expressed in income rather than capital terms. Thus a public servant retiring on a salary of €200,000 will typically have an entitlement to a pension of €100,000 per annum increasing in line with earnings.

What is the equivalent fund value?

The government takes a simple approach and simply says multiply the benefit by 20. Thus the official value of this benefit is €2m and the limit isn’t breached.

However this approach undervalues the cost of the benefit.

Under the funding table published by the Revenue in relation to private sector workers a factor of 32.4 applies to a male age 60 with an entitlement to a spouses benefit. This would generate a value of €3.24m for the public servants pension.

In practice however the Revenue table is only designed to capture normal private sector benefits. In particular it doesn’t have the ability to capture a pension benefit that has the potential to increase in the future in line with earnings. In practice this is a much more expensive benefit and would result in a conversion factor of 40.

Thus the market value of this public servants pension is €4m.

This may seem like an incidental matter. However the overall value of this concession to this civil servant is €697,000.

When all other tax breaks are being closed down it may seem strange to see the government creating a new one. But then the only people that will benefit from this are senior civil servants and government Ministers.

Aidan McLoughlin

Creditor protection of ARFs

Recently various commentators have made the argument that ARFs do not enjoy protection against creditors because ARF funds are personally owned property of the individual and not protected by trust law. I recently saw this view forwarded by the Pensions Ombudsman and (too) readily accepted by commentators.

Whatever about the accuracy of this idea – ARFs can also be established under trust and enjoy protection of trust law – I find it baffling that commentators without discussion willingly accept that providing for retirement in good times is an idea which may be challenged by your creditors when things get bad.

Compare the regime protecting an individual’s transfer of assets to the spouse. Such transactions are, subject to certain criteria, protected by the courts. They are even encouraged by legislation as there is no CAT and no stamp duty. One has got to ask oneself why funds that you set aside for the honourable purpose of not being a burden to the State in retirement shouldn’t be protected while funds siphoned off to the missus is. I don’t see any reason for this.

And whatever the media may want to make you believe, there is no Irish case law to confirm that creditors may come after ARF funds, not even the recent Brendan Murtagh case. In that case it is reported that Mr Murtagh’s lawyers without argument made his ARF funds available to pay his debts.

The ARF regime is an innovative way of dealing with the annuity problem. Why commentators are so willing to sacrifice it when there are many laudable reasons to protect it, is beyond me but then again, the insurance industry never liked ARFs. I also think that the argument is fundamentally flawed. ARFs are protected, subject to certain conditions.

Tommy Nielsen

Budget 2010 – Good for some?

Much will be written over the next few days on the details of the budget. However it is sometimes useful to stand back and take a wider view of matters. What will the long lasting impact of this budget be?

The first impression that comes to mind for me is – an opportunity lost.

Everyone accepts that we needed to alter our finances to put things on a more stable footing.

However the opportunity to make some long-lasting changes appears to have been missed. The measures on pensions, property and employment smack of short term raids and incentives rather than a longer term realignment of priorities, broadening of the tax base and control of expenditures.

The second thought that strikes me is – can you ever trust the government again? Those that invested in a vast array of tax incentives are seeing those tax breaks ended prematurely with the promised relief curtailed. What impact will that have on future tax breaks e.g. the new improved BES scheme?

A final thought relates to the public sector – particularly the golden generation that joined the service before 1995. These individuals will continue to enjoy pension benefits far beyond those enjoyed in the private sector. The capitalised value of these mushroomed from €75bn in 2007 to €129bn in 2009 – an increase of approximately €145,000 per person. The 4% reduction now proposed is only a drop in the ocean compared to liabilities that grew by €54bn in the last two years alone. If we genuinely are all returning to 2007 living standards surely we should have “gained” another €50bn?

The lasting impression therefore is one of sadness – Animal Farm is alive and well in Ireland.