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May, 2011

The row rumbles on over the controversial pensions levy to fund the Government’s Jobs Initiative with stark warnings about a flight of capital from Irish banks as an unintended consequence.

The Sunday Times devotes a full-page article to the extension last week of the bank guarantee scheme, which had been due to expire on June 30th. The Government has been forced to extend the scheme because of the flight of funds abroad over the past few years, the result of a continued lack of confidence in Irish banks.

The imposition of a retrospective tax on pensions is hardly likely to make savers sleep any easier at night; safe in the knowledge their funds are secure from a similar levy.

The newspaper cites Central Bank figures showing household deposits in banks operating in Ireland fell from €98.1 billion in March 2010 to €92.8 billion this March. Although some of this depletion can be accounted for by people breaking into their savings to keep themselves going through these very rainy days, an unquantifiable amount has been transferred abroad over fears of what a default would do to savings.

“People are losing confidence in Government guarantees,” said Helen Cahill, a financial adviser. “They’re moving savings to foreign banks in Ireland and, increasingly since Easter, to banks in locations abroad, such as Germany, Britain and Switzerland. There’s been a permanent change in behaviour. Savers will never again leave substantial amounts in one financial institution.”

The deposit guarantee scheme protects up to €100,000 of savings for an individual in a single bank. Anyone with more than that are advised is to split up their savings so as to remain under this threshold.

However, deposits of more than €100,000 in AIB, Bank of Ireland, EBS and Permanent TSB have unlimited protection under a different measure – the Eligible Liabilities Guarantee. This is due to run out next month but the Government has applied for an extension until December 31.

Most banks in foreign jurisdictions don’t offer as much protection cover for their depositors but that hasn’t stopped the flight of capital. It is all about confidence and it would appear many people are now sceptical about government assurances – and its ability to deliver on them. This is about safety, rather than optimising returns.

Anyone opening a foreign bank account must inform the Revenue. Interest earned in most EU countries is paid gross and is liable for tax at the Irish rate of 27%. Interest earned in non-EU countries liable to tax of up to 41% but some of this may be reclaimed if the country has a double-tax treaty with Ireland.

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