• A system of social insurance credits towards the State Pension has been proposed to compensate people who take time out of the workplace for caring duties (i.e. caring for a child or a disabled adult).
• Arrangements are to be put in place to allow people to postpone receipt of the State Pension should they wish to do so. Individuals may choose to postpone benefi ts in order to receive an increased benefi t rate at a later date, or to make up for previous contribution shortfalls.
• At present, a person’s entitlement to a State Pension is determined by their average contributions over their working life, subject to certain minimum contribution levels. It is intended that a new system will be implemented in 2020 whereby an entitlement to 1/30th of a State Pension will accrue for each year of PRSI contributions, up to a maximum of 30/30ths.
• From 2014, there are plans to introduce an ‘auto-enrolment’ pension scheme for all employees over the age of 22 earning above a certain income. It will be mandatory for all employers to implement the system through payroll. Employees may opt out of the scheme if they wish, but they will be automatically re-enrolled every two years.
• There will be a once-off bonus payment for people who remain in the scheme for more than fi ve years continuously.
• Employees will contribute 4% of their gross wages within a band of earnings with Government and the employer providing matching contributions of 2% each, making a total contribution equivalent of 8%.
• Contributions to the scheme will qualify for relief from PRSI and the Health Levy.
• It is intended that a fl oor and ceiling for qualifying income levels will be set at a later date.

It should be noted that the Framework document states: ‘It is intended that the auto-enrolment scheme will be introduced in 2014 but only if it would be prudent given the economic conditions prevailing at that time.’

Relief fo Pension Contributions

• The proposed State Contribution would replace the existing tax relief system for occupational and personal pension schemes.
• Pension contributions are currently treated as a deduction from taxable income and give tax relief at the person ’s highest rate of tax, currently 20% or 41%. This has been seen as favouring high earners.
• The proposed State Contribution would be equal to 33% relief (2% State Contribution for every 6% contributed in total by the employer and employee).
• In order to simplify the current system and to provide parity between the various forms of pension product, it is proposed that from 2011 the following benefi t options will be available, on retirement, to holders of defi ned-contribution occupational pension schemes:Existing Personal Pensions and occupational Pension Schemes:
  i)   A tax-free lump sum of up to €200,000, subject to existing rules of calculation.
  ii) Any balance remaining in the fund may be invested in an Approved Retirement Fund (ARF), subject to certain minimum income levels, or used to purchase an annuity.
• The tax treatment of lump sums in excess of €200,000 drawn down on retirement is to be specifi ed at a later date.

Full framework document available at:
http://www.welfare.ie/EN/Policy/PolicyPublications/Pensions/Documents/National%20Pensions%20Framework.pdf

Full Newsletter: SHINE A LIGHT ON YOUR BUSINESS May 2010

Download and read the full newsletter in PDF format here.

In This Issue

- Tax briefs
- Cloud computing
- Business briefs
- Efficient business in 5 steps
- Legal briefs
- Debt enforcement

Investment Review and Outlook

Just over one year on from Lehman Brothers’ collapse, the world economy appears to be regaining its positive momentum and risk assets (i.e. equities, corporate credit, etc.) have performed remarkably strongly. The key equity market drivers have been risk and liquidity friendly economic policies, a robust corporate bond market, and the fact that many investors appear to be in underweight equities.

Yet, the story of the last quarter has not been entirely one of increasing risk. Government bond yields have fallen and gold has broken through the psychological $1000 levels – moves normally associated with increasing risk aversion. This suggests that some investors have not forgotten the events of the last year and are far from unanimous in embracing the ‘risk trade’.

The main problem that many investors face in their portfolios is that the asset class they chose to protect them against the ravages of the financial crisis – cash – does not earn enough of a return anymore, while the main reason for holding cash – uncertainty – is slowly fading away. Hence, the dominant capital ow in markets was the steady movement out of cash and into other better yielding assets.

THE NEAR TERM?

IT’S ALL ABOUT MOMENTUM,

WHICH CAN CHANGE QUICKLY!

All attention has now shifted to the shape of global earnings recovery. Predictions of a lacklustre economic recovery have raised fears that analysts’ consensus forecasts for 20–30% global earnings growth in both 2010 and 2011 are too ambitious.

The immediate macroeconomic backdrop is defined by strenghtening economic growth, very low in ation, ultra-low short-term interest rates, private sector deleveraging and extremely unorthodox monetary policies. Global interest rates remain at historically low levels and monetary authorities have clearly indicated that it is too early to shift towards tighter monetary policies. Investors are becoming less enamoured with cash returns and are being encouraged to move up the risk curve and into government bonds, corporate credit and, increasingly, equities.

Markets should also continue to benefit from a backdrop of earnings recovery determined by the moderation of inventory de-stocking, which will lead to some inventory re-stocking, a better (although subdued) employment environment, and the consumption benefits of some restored wealth via higher financial markets.

THE MEDIUM TERM?

IT’S ALL ABOUT THE HEADWINDS,

WHICH CAN CHANGE QUICKLY!

Despite gathering evidence of a recovering global economy, central bankers are sending a clear message that until they are convinced that further de-leveraging has taken place and unemployment is no longer a threat, the current stimulus will not be withdrawn. Therefore, today’s massive policy stimulus is likely to be maintained for longer than needed as insurance against an economic relapse.

Perhaps the greatest challenge to corporate profitability will be in late 2010/early 2011 when we should have already seen a cyclical recovery in profits, but when monetary and fiscal policy are likely to be tightened.

Of course, no market moves in a straight line (up or down!) and periodic reversals are highly likely, especially with potential confusion from upcoming economic data as upward momentum slows. When things become less supportive on the economic front, risk appetite could moderate and even turn adverse. It is anticipated that investors will become more defensively oriented. In addition, future investment returns may start to re-emphasise dividends/yield, given the substantive differential between cash returns and dividend yields. Private investors who cannot put up with any possible volatility should steer clear of equities no matter what their perception is of current market conditions.

SUMMARY

There is every reason to expect an uneven pattern of economic data releases to emerge because rates of growth clearly accelerated sharply around mid-year and are now expected to level off. It is also highly likely that the challenge from ongoing de-leveraging in the household and financial sectors will make future growth rates lower than we have been used to. A foundation for recovery is intact, although not all the pillars are in place, and the latest economic news (particularly unemployment) provides reason to recognise the downside risk.

While it is tempting to recommend an exclusively relation based strategy, in light of the scale and duration of the rally to date, the rise in asset valuations and the existence of some unique upside and downside risks, a broader, slightly conservative approach is going to be most appropriate for many private investors.

Full Newsletter

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Your personal economy is in your hands, so know how to manage, plan and control it. By Johnny McNamara

From the risk of redundancy to the tightening of credit lines, there is no doubt that times are tough with many of us now facing our own ‘personal recession’. In the backdrop of this global economic downturn where we have all been affected in one way or another, how can you regain some element of control?

Many of the factors that are causing these problems are outside of our control and as such, we have little or no influence on them. However, there are factors in our financial lives that are firmly in our control and it is these factors that we must plan carefully to ensure that we not only survive the economic downturn, but that we are in a position to thrive when the turbulence thaws.

How do we do this? Well we can look to Ireland as an example. Ireland is a small, open economy and therefore, we as a country have no control over decisions taken by the larger economies of the world. Yet they have a very real and dramatic effect on the economy as a whole. We need only look to the recent US sub-prime crisis and the knock-on effects we have experienced as evidence of this. So what should the Government do to protect the country in this environment?

Well, every year the Minister for Finance produces an annual Budget for the Irish economy. This sets out the fi nancial plans, goals and objectives for the year ahead using the tools available, which include everything from altering tax rates to amending capital expenditure. The purpose of this is to ensure that the economy remains in a stable, balanced position while also implementing strategies that can create wealth for the country in the future.

So even though there are many factors at play in the global economy that Government can’t control, there are also many factors that they can control and it their responsibility to co-ordinate these factors in such a way that helps us make it through global downturns and prosper in periods of global stability.

How can this be applied to you and your finances? We know that the decisions made by Government have a massive impact on our lives and even though you can’t control it, you need to understand them and take the necessary steps to manage your way through any economic environment.

It is up to every individual to learn how to plan and control their own personal economy to ensure that they are running as efficiently as possible and to be in a position to plan for future wealth creation in the same way as the Government of a small open economy plans and controls.

How many individuals can say that they prepare their own personal economy budget and implement necessary strategies using the tools available to them? Based on our experience, very few people think of themselves in this way but rather continue to plan their finances in a haphazard manner as a need or problem arises. By doing this, people will never fully maximise their efficiency nor will they be in a position to take advantage of any possible wealth creation opportunities.

It is now vital that people take this holistic approach to personal financial planning and the key to doing this is to understand what the factors are that influence your personal economy and more specifically what factors you can and cannot control.

What are the elements that make up your personal economy? Many elements of the fi nancial world are outside of your control, however the elements that can be controlled must be managed and developed to maximum efficiency through careful planning and advice-driven decision making.

There are a number of key elements that make up any personal economy. Each of these elements are so intrinsically linked, it is vital that you understand the effect of decisions made in one area on the next. We believe that you cannot separate each of these elements when planning your finances, but rather you must plan them as one entity – your personal economy – which includes:

• Cash flow management
• Tax planning
• Financing and mortgaging
• Investment planning
• Wealth creation and planning
• Retirement planning

The management of a personal economy will be different for every individual and will depend on a wide range of factors specific to you. This is where the need for a competent, qualified financial adviser comes into play. Through our holistic approach to tax and financial planning, we can help you to deliver a strategy that can put you back in control of your finances.

We have seen the implications of poor economic strategy and the ripple effect that this has caused throughout the global and local economies, not to mention the knock-on affects that this has caused on your financial lives. This is a lesson that we can all learn from. It is vital that you take back control of your own personal finances and implement strategies that protect you in bad times and maximise opportunities in good times.

You need to start thinking of yourself as a small, open economy and use the tools at your disposal to protect yourself and maximise your efficiency. It’s your personal economy, so plan it, control it and understand it!

For more information or to arrange an appointment, call McNamara & personaleconomy.ie | Commercial profile MAY 2009 | YOU&YOUR MONEY 35 Associates on 01 230 9000.

NEXT MONTH… PersonalEconomy.ie will develop this concept and provide case studies to help you control, plan and manage your personal economy.