There are plenty of good reasons to be saving money these days.
A contingency fund with three to six months net pay in it can meet unexpected expenses like a busted central heating boiler, car repairs, school fees or even a family holiday that can’t be paid for out of the pay cheque/ credit card.
Many people who have been put on short time of late or have lost their jobs are discovering just how handy it is to meet their immediate household expenses.
Unfortunately, it looks like another reason to save could be introduced – the re-introduction of a universal property tax – and could supercede all the others.
By the time you read this, the government’s €2 billion spending cuts and tax add-ons will have been announced.
If the list includes a tax or levy on second homes it isn’t expected to be a particularly large sum (€200 has been suggested) and isn’t expected to raise more than about €52 million a year, then that’s a drop in the ocean of our annual expenditure.
Instead, the introduction of a tax on all principal residences is what Central Bank assistant director Tom O’Connell believes is needed to plug the huge revenue shortfall the country is facing.
Last week he said that a €1,000 charge would raise €1.7 billion annually (This year’s tax gap alone is €2 billion).
A universal property tax is unlikely to be introduced immediately. The impact would be huge, politically divisive and would require major property tax reform, especially on existing stamp duty rates and the current capital gains tax exemption on principal private residences.
A flat property levy of €1,000 is unlikely since it would not differentiate between the elderly person living in a tiny cottage and the multi-millionaire in their mansion or the realistic annual yield (i.e. how much rent the property could realistically raise).
It also smacks of the hugely unpopular poll tax that finally helped to bring down Margaret Thatcher’s government in the early 1990s.
Instead, the government is likely – probably on the urging of the Commission on Taxation, which is preparing a major report by the Autumn – to consider a more conventional property tax formula, such as those already in place in other jurisdictions.
These places most commonly set their rates based on a percentage of the market value (as determined by the local authority) perhaps with tax relief applying for households owned by low earning pensioners, the disabled or families with children).
A typical percentage of market value is somewhere between one and two per cent. The rate usually varies depending on location, population and the cost of services to the local authority or municipality.
At one per cent per €1,000 market valuation, a typical property worth€260,000 (according to the Permanent TSB/ESRI property index) would result in an annual charge of €2,600.
Anyone whose home is still valued in the region of €1,000,000 might face a bill of €10,000 a year.
Such a drastic change of tax policy here will be a huge political issue and will inevitably be resisted.
Given how much unwinding will be necessary of the current way taxes apply to property, changes will most likely have to be introduced gradually if only because any universal property tax would further depress house prices and, it must be said, taxable valuations too.
If this tax is introduced, would you be able to afford it, whether it is deducted directly at income source or, more typically in other jurisdictions as an annual or bi-annual payment? Some allow monthly payments, but with an added premium costs.
If you are a homeowner, and don’t already have a good regular savings account, you should seriously consider opening one – forewarned is forearmed.
The best regular savings accounts are currently available from AIB and the EBS Building Society, ostensibly for parents saving for their children’s future, but there is nothing to stop anyone from opening the account.
For example, the AIB ‘Parent Saver’ pays interest of 8.25 per cent, six per cent of which is the premium over the ECB rate until May 20th on maximum monthly savings of €200.
After that date, the bank will pay the ECB rate (currently 1.75 per cent) plus four per cent until May 20th 2010. As a variable rate account, you should expect the rate to be adjusted again after that date.
The EBS ‘Family Savings’ account pays fixed annual interest of 5.1 per cent for the first year on regular, monthly sums of between €100 and €1,000 after which the rate will be reset.
Anglo Irish Bank and Bank of Ireland both have substantial regular savings rates of 7.3 per cent fixed for one year – in the case of Anglo Irish on sums of up to €1,000 a month while Bank of Ireland is offering a variable rate, currently seven per cent, on sums of up to €500 a month to a maximum of €5,000.
Each bank varies the number of withdrawals it allows so check the terms and conditions.