AIB and BoI share value

Q&A:QShould the Bank of Ireland and Allied Irish Bank be nationalised in the future, will the holders of ordinary shares lose their investment totally or will they retain these shares and be allowed to cash them in some time in the future if and when the banks are re-floated in the future at the new flotation value? If the banks are likely to be nationalised, should we sell now?

Mr G.S., e-mail

A The basic premise of nationalisation is that the State assumes ownership of a previously privately held group at the expense of the previous shareholders. If the Government was to make such a move on either AIB or Bank of Ireland, it is certain that the value of the holding of existing shareholders would be significantly diminished if not obliterated.

As it is, the Government is taking preference shares in both of these banks as part of the ongoing recapitalisation programme to boost the coffers of financial institutions under pressure as a result of what is now generally accepted to be reckless lending. That move may, in itself, reduce the value of any shares held by existing shareholders by up to a quarter if the Government eventually converts those shares into ordinary stock.

Of course, we have some guide as to how the Government might act in the event of full nationalisation with the example of Anglo Irish Bank, which the Government took into public ownership earlier this year.

In that case, the Government established a process to assess the fair value of the shares at the point of nationalisation, holding out some prospect for shareholders that they will receive some small payment for their holding – not that it will be much comfort to Anglo shareholders who saw the value of their shares collapse long ahead of nationalisation.

More importantly, in terms of your question, in the event of nationalisation, there is no realistic possibility of existing shareholders being allowed to continue to hold shares with a view to gaining from any eventual upside for the stock. Nationalisation is the end of the ownership line for shareholders in the existing entity.

The logic here is that investing in shares is itself a bet on the future direction of a stock’s value. On the upside, if the shares rise as, in the case of the banks, they did inexorably during the boom, the shareholders stand to make significant gains. The necessary corollary is that they have to bear the pain if a company effectively becomes worthless.

Should you sell? I can’t really give you a definitive answer. It depends on all sorts of things, including, most importantly, when you bought your shares. If you bought relatively recently, your loss might not be too extreme and it might be an idea to cut those losses now and start again.

However, doing so will rule you out of any possible future gain should the bank stocks recover some poise. There is no guarantee these banks will be nationalised. In fact, the Government appears to be going to considerable lengths to avoid nationalisation.

If you bought the shares some time ago and are now nursing losses of as much as 90 per cent, there is an argument that you might be better holding on. After all, the losses cannot get much worse and, even in the event of nationalisation, there is the possibility (though no guarantee) of some reimbursement. And, of course, there is always the chance of a recovery. It might look unlikely now, but can you recall one analyst or adviser who countenances the prospect back in February 2007 of a 90 per cent fall in the value of bank stocks and the abolition of their dividends?

Clarifying liability for income levy

Q In last week’s column, you refer to a person who might lose their entitlement to a medical card, stating that if either party was aged over 70 and combined income below €40,000, they would still not be liable to pay the levy.

I am 69, but my wife is 70. I have a private pension below €40,000 per annum and if it is relevant, my social welfare pension including the allowance for dependant spouse does not bring my income near to €1,400 per week. My wife has no source of income. In the light of what you said last week, should I be taking the matter up with the Revenue or any other party?

Mr N.C, email

A The situation is even better than I outlined. The €20,000 per spouse threshold applies if either person is over 65. However, the downside is that you may be charged the levy up front and then have to reclaim the money at the end of the tax year. The way it works is that, if either spouse’s annual income exceeds €20,000, they will face the levy at 1 per cent on all their income.

However, assuming the couple is taxed under joint assessment, they are entitled at year’s end to earn €40,000 free of the levy.

Given that your wife has no independent income, her €20,000 threshold is added to yours. At that point, you will have to apply for a refund of all levy payments deducted from your income over the course of the year. It’s cumbersome, but that’s the system. According to the Revenue, in assessing your gross annual income as a couple, social welfare payments are not taken into account, including the State pension.

Options for investing pension lump sum

Q I am due to retire in four or five years’ time and I have approximately €40,000 to invest either in savings or in additional pension. Given all the recent problems with pension funds, would I be better off putting the lump sum in a safe, high-interest account and pay the taxes or buy additional pension through PRSA or AVCs. I am contributing to a pension fund, but I need to ensure that I have a better “income” when I stop work.

Mr J.C., email

A Pension investment carries tax relief advantages but as you say, there are uncertainties about performance. Having said that, returns cannot keep falling. The question is whether your four to five-year window – short in pension terms – will suffice to grow your lump sum. If markets continue to go against you, you will have very little time to recover losses.

The alternative is possibly more secure but the returns are unlikely to substantially grow your investment over that term in the current low interest rate environment. The answer comes down to your attitude to risk.

Please send your queries to Dominic Coyle, QA, The Irish Times, 24-28 Tara Street, Dublin 2 or by e-mail to dcoyle@irishtimes.com