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Money Times - May 9, 2017

Posted by Jill Kerby on May 09 2017 @ 09:00

HOW PREPARED IS THE BANK OF MUM & DAD FOR COMPULSORY STUDENT LOANS?

Secondary students are hard at their books this month, preparing for their Junior and Leaving Cert exams in June. Third levels students started writing their exams last week, as I know from personal experience.

(I can’t wait to get the kitchen and breakfast ‘study’ room back, a much preferred option to the college library due to the presence here of a large fridge/freezer and coffee machine.)

It is also a time of year when parents start to ponder how to pay for next year’s college fees. Many are living in hope that they’ll avoid any new funding scheme under debate in the committee rooms of Dail Eireann. If reports are correct, it could be a loan scheme that could result in all Irish graduates typically repaying at least €150 a month for 10 years once they start working.

The Irish third level system has been remarkably generous for decades.  Three nephews of my husband avoided paying fees; my own son’s ‘registration charge’ has gone from €2,250 to €3,000 over the past fours, a fraction of what we would have paid if he was studying science in the United States or even England and Wales where the lowest entry fees are £9,000 a year. (Quebec, where I went to college also heavily subsidises undergraduate fees and charges about the same as Ireland.)

The ‘study now pay later’ loan scheme (one option from last year’s Cassells report) that the Oireachtas Committee on the funding of higher education is considering, is similar to the model used in Australia.

Described as ‘income contingent’, the €4,000 - €5 per year for four years loan, if introduced, would only start being repaid once the graduate found full-time employment with a salary of at least €26,000 and on average, would be repaid by age 33, according to the report. The more you earn, the higher the repayment, but there would also be repayment flexibility that would take into account periods of unemployment, illness or loss of income.

The Oireachtas is under pressure from the Universities (and the Department of Finance) to find them more money – at least €600bn more between now and 2021 and then another €1 billion a year until 2030, according to Cassells.

The introduction of fees for all students will go some way to meet this funding requirement, say the experts, but if the idea is to maintain access to third level education for everyone, regardless of income, then a loan scheme has to be introduced that eliminates the current grants subsidy that 50% of college going students currently enjoy, and is properly designed to ensure the money borrowed is repaid to the state, the banks or a combination of both.

With emigration part and parcel of the Irish graduate experience, the Union of Students of Ireland (USI), who oppose any loan scheme, say even writing off just 10% of income contingent loans is “hopelessly optimistic”. (Cassells predicted €10 billion over 20 years.) Certainly, more conventional loan schemes, no matter how low the interest, like the ones that operate in the US, can result in huge defaults. The US student debt bill (federal and private) has now breached $1.4 trillion with an estimated seven million defaulters.

Well-off students and parents already borrow money from Irish banks to pay for third level education. A four year loan from AIB worth €20,000 means monthly repayments of about €500 a month, repayable immediately, at interest of 8.5%. The total amount repaid will be about €23,500. This is certainly a better arrangement than dragging out capital and interest repayments for 10 years or more after graduation, but is clearly unaffordable for many students.

With some new student loan arrangement looking more likely, the next group of Irish third level graduates could very well end up paying considerably more than €16,000-€20,000 worth of fees (not including interest) – an amount which will probably only keep going up as the years progress.

Parents of younger children who want to avoid their kids starting their first jobs with substantial debt should consider themselves on notice. They should create a plan now that avoids the risk of having to resort to last minute, expensive personal or credit card loans to pay fees. (Drawing home equity is not an option.) 

They should start by saving the €140 a month (€1,680 pa) child benefit payment in a tax-free State Savings scheme. Even a mere 1.5% average return over 18 years will result in a final balance of nearly €34,700.  Investing the money would be better – so speak to a good, independent adviser - but they need to hope the 40% exit tax is eventually lowered or abolished.

Generous grandparents may also want to consider gifting up to €3,000 entirely tax-free to every grandchild every year to boost those education funds.

The days of free/low third level costs in Ireland are on their way out. Along with jobs for life, defined benefit pensions and, for the next while at least, affordable homes.

The less student debt our kids carry into their uncertain futures, the better.

 

Please send your queries to Jill c/o this paper or by email: jill@jillkerby.ie

 (The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)  

 

 

 

 

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Money Times - May 2, 2017

Posted by Jill Kerby on May 02 2017 @ 09:00

LEO WANTS AN SSIA-TYPE PENSION PLAN BY 2012. DREAM ON

The Minister for Social Protection, bless him, thinks that 2021 is a realistic deadline for the introduction of a universal private pension scheme, based, perhaps on the successful Special Savings Investment Account model from the early 2000’s.

Readers may recall the five year SSIA scheme that ran until 2006 in which the government matched every four euro put into an approved savings or investment fund with €1. The maximum monthly contribution of €200 meant the account holder would receive a €50 euro top up from the State.  It proved to be hugely successful with over a million adults opened one account; many a new kitchen, let alone the down payment on an investment property was paid for by 2006 with the tax-free proceeds of the SSIA, considered to be one of the most generous savings incentive schemes in the world.

And that wasn’t just because the top-up was so generous. The SSIA was easy to understand and to set up. The savings option was cost-free and there were low-cost investment versions for those willing to look for them. It was transparent and since it was owned personally, account holders had the satisfaction of watching its value – the contribution and interest or growth – grow every month.

The fact that the SSIA’s final value was entirely tax-free was the icing on top: there’s nothing we love more than a tax-free asset.

Fast-forward 11 years and Minister Varadkar, who like every pension minister before him (and since I’ve been writing about personal finance, that is since 1991) acknowledges that ‘something must be done’ about the falling private pension coverage in this state and the fact that among those people who do have a pension, only a small minority are saving enough into their funds.

Mr Varadkar thinks a soft-mandatory (everyone without a pension is signed up, but can opt out), simple, transparent SSIA-like scheme in which the tax relief on current contributions becomes a cash top up is the way to proceed. 

However, he also thinks such a system – not unlike the universal private superannuation schemes in Australia and New Zealand can be introduced here within four years. On this front he is dead wrong: it took the British 12 years to introduce their new NEST soft mandatory universal scheme, with a low entry contribution level. It will be several years before workers and employers reach ideal savings rates.

The SSIA pension idea is worth considering, but the devil, will be in the detail: will employers be required to make contributions? (They don’t have to at the moment and are against compulsory funding.) How much will the State top up be? The 20%/40% tax credit on contributions is currently allowed? 

The Australians pay into the ‘Super’ with already taxed income but get their pensions tax-free. Here, contributions and growth are tax-free and we pay income tax only when the pension is drawn down.

At the moment, with the cost of housing so high and workers taxed at 40% on incomes above €33,800, Varadkar would be committing political suicide if they tried to force even a soft mandatory pension majority (c54%) of private sector workers who do not have a private pension.

Yet another recent survey by Irish Life confirmed that the pension participation rate has hit a near all-time low at about 46%. Of those in a scheme 76% are making contributions, but over half of them haven’t a clue how much their employer contributes. Irish Life reckons that 90% of people might not hit a target of achieving a pension of even a third of their final salary unless they save more. And where workers are members of PRSA group schemes, chances are the employer is contributing nothing.)

Millions have been spent over the past 25 years by the state supervising and regulating and raising awareness of pensions - and the danger of not having one - yet only 54% of the workers surveyed by Irish Life were even aware of the tax benefits of a private pension fund.

Is a universal, auto-enrolment pension the solution? Yes it is. Is there any great new resolve by the government, unions, employers and workers to finally introduce one? Hardly.

If you are a young, private sector worker without an occupational pension, ignore Leo Varadkar’s good intentions.

Time is not only your side.

Speak to your employer and demand at the least that (s)he sets up a low cost PRSA group scheme (a legal requirement for all but the tiniest of firms). Then badger them to also make a contribution. If that doesn’t work take out an individual one yourself and start saving into it.

Or do like Leo. Get a job in the civil or public service where pensions are generous and secure and ultimately funded from taxes generated in the private sector.

Rest assured that the Pensions Minister isn’t losing any sleep over how his retirement is being funded.

 

 

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Money Times - April 25, 2017

Posted by Jill Kerby on April 25 2017 @ 09:00

WHEN A GENERAL FINANCIAL SPRING CLEANING ISN’T ENOUGH…

I have a hugely ambitious younger friend, the mother of three children, who I will call Louise, who is emboldened by the fact not only is her house now out of negative equity, but she and her husband have also finally, voluntarily come off the mortgage forbearance plan they agreed with their bank.

Four years ago, they were in danger of losing their home, a four bedroom semi-detached house they bought in 2005 near Lucan, Co Dublin. They had moved there from a smaller, Dublin city terraced house in Fairview, their first home, which had simply grown too small when baby number three arrived. They made a significant profit on its sale, but still had to take out a €400,000 tracker mortgage on the spacious, modern house in Lucan.

And then the crash happened. And then in 2010, her husband lost his job. (She works for the HSE and became the only breadwinner for nearly two years.)  They eventually fell into serious mortgage arrears, borrowed money from both sets of parents, wracked up serious credit card debt. Eventually, with the assistance of a good financial adviser they came to an agreement with their lender: they’d pay interest and capital on one half of the loan, a small amount of interest only on the other half.

Four years later, they’ve reverted to paying the entire mortgage again. They are both earning good salaries again, and having “taken our finances by the horns” are far on the long road to financial stability.

My friend and her husband are the post-2008 success story that I relate when people ask about whether it’s possible to see the proverbial ‘light at the end of the tunnel’, amidst a personal finance disaster.

For many unfortunate people the crash did mean losing their homes, either voluntarily or involuntarily. But foreclosure figures remain comparatively low in Ireland and even halved in 2016, compared to the previous year, all the while over 33,000 are still in two or more years of payment arrears.

MABs, private financial advisers and the official insolvency service have helped tens of thousands of debtors and their homes. Even the nuclear option – bankruptcy is now discharged in just one year.

My friends came close to tossing the keys back to the bank, before they finally went for proper, professional help (something, I helped steer them to.)

Anyway that was then, this was now. “Mark and I have decided we’re going to have a really nice holiday – here in Ireland – in August with the kids. We’ve found a fantastic summer rental place in West Cork and my sister and her family are going to share it. But we figure we need €2,500 for the two weeks – our share of the rent, food, surfing classes for the kids, pony rides, eating out, fishing trips, the lot. And we don’t have it.”

I knew I wasn’t being squeezed for a loan; this couple have determined to live within their means (or as close to it) so no more credit cards, no more unnecessary borrowing; no more “unthoughtful” spending:  when they filled out the Standard Financial Statement, the form required by their bank as part of their debt restructuring, they discovered that they’d been spending as least €50 - €60 a week on takeaways and other fast food, “because we’d come home tired from work or a bit later than usual and after picking up the kids, we couldn’t be bothered to cook.” Towards the end, that was another €3,120 going onto their credit cards.

My friends are very careful spenders. They have a budget. They DIY everything they can, from car and home maintenance, gardening, and even haircuts for the kids. They still treat themselves and their children, but they only after they pay all the bills and most important put away regular savings into credit unions accounts and their pensions.

“At first I thought we were being very self-sacrificing,” said my friend. “We were swallowing our pride by admitting that we just couldn’t keep up the pretence of being ‘well off’. But we had huge credit card bills even when we earned €150,000.”

The toughest realisation, she said, “was when we realised it was always a pretence. We were in serious trouble with debt and incredibly stupid lifestyle choices before the crash. It got worse after 2009 – we nearly broke up.”

So what’s up now, I asked? 

“We’ve both decided to spend nothing for 30 days, so we can get up to the €2,500 we need for the holiday. Aside from food and the usual bills. Not. A. Penny.

“You always say you’re looking for good personal finance stories. And that you’re always spending too much.” (I do, but I only spend MY money.)

“I want you do to it with us.”

Stay tuned.

 

Please send your queries to Jill c/o this paper or by email: jill@jillkerby.ie

 (The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)  

 

 

 

 

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Money Times - April 18, 2017

Posted by Jill Kerby on April 18 2017 @ 09:00

SO YOU THINK WATER CHARGES ARE GONE? THINK AGAIN…

Did you pay your water bill? Are you entitled to a refund?

A million Irish households paid the controversial water charges with some customers paying up to €325 or a total of c€325 million.  According to the Housing Minister, Simon Coveney, the state then paid €89 million to approximately 890,000 households in the form of the €100 annual water conservation grant. 

Now that the politicians have agreed that there will be no future water charges and that water expenditure will come of out of general taxation – and assuming that deal is approved by the EU Commission - the logistics around the refund scheme will be complicated and slow. Not every household paid the same amount (my household didn’t pay the fourth water charge instalment and didn’t apply for the conservation grant). Another c1.3 million households refused to pay any water charge but some received the €100 grant, as this was presented as a universal payment. Will they be required to refund the €100?

The Minister has said that there has to be fair treatment for everyone so you probably shouldn’t count on any refund too soon, even if you could use the money urgently. This isn’t just because of the administration complications or the response of the European Commission but because there still needs to be some clarification about how the government intends to pay for the c€400 million repayment.

Optimists in the Department of Finance are already hoping that tax revenue will pick up again for the rest of the year (after less than stellar returns last month).  If revenues soar in Q2 and Q3 it may be sufficient to not just meet this huge refund but enough to also the usual multi-billion euro HSE over-runs, the Children’s Hospital construction over-run, the cystic fibrosis drug costs and potentially large compensation payments to mother and baby home claimants.

If the current Revenue surplus estimate for this year does not improve, and all the promised Budget ‘17 spending allocations are made, there won’t just be much to give away in Budget ’18 next October and the Government, which is very close to balancing the Budget for the first time in nearly nine years, will be forced to undertake more borrowing than was intended for 2018.

Irish Water has been a fiscal and political disaster from the start with massive staff and cost overruns. Other costs have soared – for security and legal challenges and parliamentary investigations.  Millions more may still have to be paid in fines to the EU.

The political ‘return’ from the Irish Water disaster will only be known in the next election, but someone is going to have to pay for the higher ongoing water costs and the most obvious sources of revenue will be businesses, via higher general rates imposed by local authorities; higher direct income taxes; a new flat percentage levy on higher earners like the Universal Social Charge or even a water levy added to local property tax, which has been frozen until 2019.

Imposing either a new water Social Charge on higher earners and the self-employed earning more than €100,000 is already a successful tax policy or a  water levy on property, paid directly to the Revenue Commissioners with their impressive, wide-ranging powers, in particular the sending of the Sherriff to your business or home, could be very tempting. Property owners are already extremely compliant (as are employers) and would simply have to adjust their respective payments to the Revenue.  

Last year it was estimated that Irish Water would need €5.5 billion or about €1.2 billion a year for operating costs and investment. Only about €700-€750 million would have been raised from household water charges so adding €1.2 billion to annual borrowings for water services isn’t going to happen if the Exchequer’s plan to return to surplus by 2019 stays on track. (The gross national debt is €204.77 billion with interest payments alone expected to be about €8 billion this year.)  A water USC charge or LPT water levy of €1.2 billion is far more feasible.

If you don’t think so, just remember that between 2011-16 the Minister for Finance collected €2.4 billion in cash from the retirement savings of just over 800,000 private pension holders. It was easily collected because the pension companies were threatened with significant cash penalties if they didn’t pay over their customer’s cash to Revenue.

Water services will be paid for one way or another. Not by people whose income comes from welfare payments or who earn less than €17,000, the cut-off for USC. The easiest way to bring in €1.2 billion will be to force employers to deduct it at source or to add it to fearful property owners tax bill.

And if you have a problem with that…you can just take it up with the Revenue.

 

Please send your queries to Jill c/o this paper or by email: jill@jillkerby.ie

 (The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)  

 

 

 

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Money Times - April 11, 2017

Posted by Jill Kerby on April 11 2017 @ 09:00

BANKING SERVICES DISAPPEARING ALONG WITH CASH

It’s hard to imagine a less consumer friendly sector than banking (water utilities perhaps?)

Nine years after the bank collapse, revelations continue about how the retail banks treated their mortgage customers. The Central Bank is now in discussion with the Gardai about the personal culpability of individual bank officials in what is now being alleged to be the outright theft of c10,000 low cost tracker rates from as early as 2006, though few expect any successful charges and convictions.

Meanwhile, bank and post office branches continue to close – Ulster Bank being the latest to announce another 22 branch closures and 40 post offices are slated for closure. This past week another bank cut its savings rates in the relentless downward spiral to zero or even negative returns.   

The bank closure campaign is happening everywhere. On-line and cashless  banking is now the ultimate intention of global financial institutions (perhaps with the exception of Irish credit unions which have always lagged behind technologically) in order to drastically reduce costs and rebuild their shattered balance sheets.

Fighting against the new IT dynamic is probably fruitless, at least so far as private banks are concerned and consumer campaigns should really be directed at keeping post offices open, but with expanded services that ideally would include acting as bank proxies and in encouraging the advancement of credit union services.

Until the credit unions are restructured, with their bad debts and bad lending practices fully purged; re-training and mergers completed, and there is a proper roll-out of essential banking services (current and saving accounts, debit and credit cards, on-line access to accounts, mortgage as well as business and personal lending), bank customers in villages and towns where closures are happening have little choice but become proficient on-line banking customers.  Depending on where they live and the availability of ATM machines or merchants that allow cash top-ups on purchases, most of their purchases will probably also be cashless.

Not everyone is comfortable with cashless banking – but the cost and risks associated with cash-dispensing post offices means that even pensioners and social welfare beneficiaries are going to have to get used to cashless services. (Cashless is already the norm at KBC Bank which doesn’t even accept cash deposits.)

Meanwhile, last Friday (April 7) KBC Bank was the latest bank to cut its demand interest rate, dropping it to 0.05% from 0.15%. 

It is hard to believe that this is still one of the higher deposit rates on offer: Bank of Ireland, AIB and Ulster Bank have reduced their demand rate to zero and 0.01% respectively. You might get a fraction percentage higher if you open an on-line account only, say with RaboDirect that is offering 0.04% but no matter what extra fraction of a rate you get, the automatic 39% DIRT (unless you earn pension incme of less than €18,000 of an individual or €36,000 for a married couple) will leave you with an insignificant return, even on a substantial deposit.

In a recent blog, the excellent bonkers.ie which compares deposit and current account rates, noted that a demand rate of 0.05% means that someone putting €10,000 into such an account will earn interest of just €5 at the end of 12 months. The 39% DIRT tax means you get a net sum of €3.05. At 0.01% interest the person with €10,000 on deposit would earn a laughable €1.

Bonkers.ie suggests that a flexible, strategic approach is the only way to achieve any kind of return. “Despite the continuing cuts, there are still decent returns available, if you know where to look and are willing to adapt to certain restrictions,” it reports. “For example, EBS’s Family Saver Account currently offers a [annual] rate of 3.00%, but it requires you to contribute monthly and has a maximum monthly contribution of €1,000.

“For lump sum savers, the rates aren’t as attractive, unfortunately. At the time of writing, KBC's 12-month fixed rate account is offering a return of 0.80%, which will give an after-DIRT return of €48 on a lump sum of €10,000 locked away for a year. Permanent TSB is offering a 0.75% rate for lump sum savers.”

State Savings products should also be included in your list, but is it worth locking in your money to achieve a slightly higher fraction of a return?  For example, the current tax-free annual return on the 4 year National Solidarity Bond is just 2% or 0.5% per annum. The 10 year Bond pays a cumulative tax free rate of 16%, or just 1.5% per annum.

You may not feel comfortable about voluntarily giving the Irish state the loan of €120,000 for 10 years (the maximum amount an individual can leave in this Solidarity Bond) but the State promises to pay a net return of €2,400 (€600 per annum) plus the €120,000. Something no bank or credit union can match.

 

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Money Times - Febuary 28, 2017

Posted by Jill Kerby on February 28 2017 @ 09:00

APRIL HEALTHCARE LEVY WILL MEAN HIGHER INSURANCE COSTS

Anyone who is either renewing their health insurance or finds themselves in a public hospital bed soon, is in for a Spring money shock.

First, the public hospital bed.

Slipped in when no one was noticing on New Year’s Eve, the HSE announced that from January 1, 2017, the cost of a public hospital bed would go up to €80 a night from €75 for a maximum of 10 nights, unless the patient is a full medical card holder. (Infants up to six weeks old are not charged; women receiving maternity services and people with infectious conditions or children suffering from certain disabilities or disorders are also exempt.)

The hospital will either present you with this maximum €800 bill as they discharge you or they will send you the bill by post. If you have private health insurance but have been treated as a public patient, your insurer will refund you this cost. If you don’t have VHI, Laya or Irish Life Health insurance or a cash plan from the likes of HSF.ie, which will partly cover this expense depending on your policy, you will have to stump up for the overnight rate yourself.

Meanwhile, if you have private health insurance and are entitled to a private room in a public hospital, the overnight charge now ranges from €659 to €1,000 a night depending on the type of public hospital you’re attending and whether you are in a semi-private or private single room. 

However, there is no guarantee of such private accommodation, and many insured patients are also ending up on A&E trolleys or in public wards. Should you unwittingly admit to being a private insurance customer, the public hospital will bill your insurer for the full overnight private rate (which is averaging at €813 per night) even if you don’t get a private/semi-private room.

The blatant overcharging is one of the reason’s why private health insurance premiums have been soaring in recent years.  But from April, there will be another reason – yet another increase in the Health Insurance Levy which is to rise from the current rate of €403 to €444 for every adult policy that costs €1,000 or more and from €134 to €148 for a child’s policy. 

This levy, a ‘risk equalisation’ measure, is collected by every insurance company and paid to the State to effectively subsidise the VHI, the government’s own health insurer for its disproportionately larger group of older customers.  The levy was introduced in 2009 at a rate of €285 and €95 respectively.

Under our lifetime community rating system, everyone pays the same premium for the same product, regardless of age or state of health. In other words, older, sicker insurance holders are not penalised with higher premiums; instead they are subsidised by younger insurance holders who make fewer, less expensive claims.

However the legacy of so many older members at the VHI – which was a monopoly for 30 years until the mid-1990s, means that all c2.1 million private health insurance members subsidise the state company for their higher costs.

I’ve argued in this column many times that such high transfer payments could have been avoided or mitigated if the VHI had been broken up into a number of smaller companies and privatised. This was never done and it remains in the full ownership of the Department of Health.

What has happened – inevitably as the population ages and treatment costs increase – is that the risk equalisation charge just keeps going up and many younger people drop down to cheaper, lower benefit plans.

With nearly three quarters of all private health insurance customers renewing their policies in the first three months of a new year, you need to keep these still rising charges and levies in mind when shopping around for the most affordable policy. The cheapest plans do not provide the best value. Talk to a good broker.

For people on very tight budgets, and especially families who cannot afford health insurance, a cash health plan like www.HSF.ie may be a good option. These single premium plans (there are seven to choose from) cover every member of the family and provide a tax-free cash payment for medical expenses like hospital overnight and day cases, GP and consultants, prescriptions, dental, optical, physio, chiropractic and osteopathy and other alternative treatments, osteopathy, medical tests, surgical appliances, accident cover and even adoption and maternity grants.  Monthly premiums range from €11.28 to €65.45  (€135.36 to €785.40 per annum.)

Mid range HSF plans – at €369.60 and €508.20 per annum – will pretty much cover the overnight charge of €80 for a public hospital stay, up to 40 nights in any calendar year.  HSF membership won’t allow you to jump long waiting lists to get hospital treatment, but the cash payments will help cover the cost of some private diagnostic visits and treatments and if you do end up in hospital, the inevitable travel and parking costs once you get there.  jill@jillkerby.ie

 

 

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Money Times - Febuary 21, 2017

Posted by Jill Kerby on February 21 2017 @ 09:00

HOW MUCH WOULD YOU – A LANDLORD - PAY FOR PEACE OF MIND?

Finding an affordable place to rent in Ireland – especially in the main cities and all of the greater Dublin area - has become such a political hot potato that most politicians I know prefer conversations about the state of the health service or Brexit.

With the average Dublin rent now rising by 15%, and between 10%-13% in the four other main cities. On February 1, 2017, there were just 4000 homes available to rent across the entire county, reports Daft.ie and while this is a 10% increase on the same date last year, it isn’t much better than in April 2007 when there were only 4,400 places to rent but a far lower number of people seeking rental accommodation.

The surging rental values have been clipped for existing tenants by the 4% rent increase cap that applies from January 2017 in the list of Rent Pressure Zones in Dublin and around the country.

The new regulations mean that fewer people will have ended up homeless after being unable to pay large increases once their two year rent freeze was up, but it’s done nothing to help others find an affordable home:  only a surge in affordable high rise accommodation in the cities can do that, and this is still some way off as are the implementation of other proposals to build more social and private houses and apartments; to renovate empty spaces above shops and businesses; force local authorities to renovate and repair (more quickly) the thousands of their own idle, vacant properties and to impose levies or surcharges and taxes on similar empty, abandoned and derelict private properties.

And while this is a very tough time to be an aspiring or existing tenant, especially for those in the latter category with limited budgets and the risk of evictions when their property is sold to vulture funds, the property nightmare continues for many of the 300,000 amateur landlords in this country.

Negative equity, mortgage arrears, high property-related taxes and charges have taken their toll, though rising capital values have provided an exit route for increasing numbers.

Nevertheless, stories still abound of tenants who have stopped paying their rent, have caused expensive damage, lost their jobs and have nowhere else to go, etc.  Such is the pressure at the Rental Tenancies Board that disputes can take up to five months to be resolved.

Both sides have their champions – the RTB as well as private agencies like the Residential Landlords Association and Threshold - but now a new commercial service has become available to landlords to help cover the costs of disputes and rental income default.

RentAssured.ie is an on-line insurance provider for private landlords with annual rental income of between €6,000 and €48,000.  The policy covers tenant rental defaults worth up to 11 months worth of rent; it offers rent dispute legal assistance worth up to €5,000 plus VAT; and compensation worth one month’s rent for malicious damages. It also offers two annual, free, pre-rental tenant checks by the credit service, Stubbs Gazette. The policy costs the equivalent of 2% of the annual rent. (For an €18,000 rental stream, that is, €1,500 x 12 months, the premium would be €360 per year.)

Here’s an example of how it works:  You own a three bedroom suburban house that you have been renting to a tenant for €1,500 a month. The tenant stopped paying his rent three months ago over a row about some malicious damage to the property- broken doors and windows that cost €500 to repair/replace.

The dispute went before the RTB, but just as it was to be heard – two months later – the tenant disappeared.  You have lost five months rent, less the one month deposit, plus the €500 for repairs and the €1,000 you spent taking the case to the RTB.

According to Robert Kelly of RentAssured.ie, assuming that this landlord met their policy qualifications – they had sought references, (in the case of a new tenant, Stubbs would do the check); provided a lease; took a one month deposit; reported the damage to the Gardai and followed the RTB landlord dispute protocols – the RentAssured policy would have paid out four of the five months lost rent, the €500 malicious damages and the €1,000 plus VAT dispute/legal costs (also done in association with Stubbs.)

With rental property is such tight supply, not every landlord will need a service like this, since there is a 60 day delay before claims can be made (as part of the initial RTB dispute period) but “it does provide a degree of comfort for landlords from a potential financial loss from rent default or damages” that they would otherwise not have had, says Kelly. 

But ‘once burned, twice shy’. Amateur landlords who haven’t been able to unload their property, but have had poor tenant experiences might want to carefully weigh up this insurance premium against potential future losses.

 

 

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Money Times - Febuary 14, 2017

Posted by Jill Kerby on February 14 2017 @ 09:00

GETTING CHARGES DOWN BOOSTS INVESTMENT RETURNS

Investment funds that are sold in Ireland come with fees, charges and commissions, charges that will impact on the on-going and final value of your investment, especially a long term one, like a pension fund.

It is only in the past two decades that investment fund providers have been required to disclose all these charges in writing, yet anecdotal conversations that I have had over most of those years with readers, too often resulted in either the person telling me that they have no recollection of any discussion about charges or no recollection of the charges even if they did have such a discussion.

The reason why it is important to have a full grip on product and fund charges is to make it easier to shop around for the most suitable product and to compare how different charges can affect the value of your investment. The lower the charges, the better the long term financial outcome.

Since this can be time-consuming and complex, it’s always a good idea to use a good, independent, impartial broker or adviser. Otherwise you might be tempted just to settle with the best advertised product from a well know life assurance or investment company that, naturally, will only sell you their product.

The problem is that the vast majority of financial intermediaries in this country are paid by sales commission – that is, a small percentage of your investment contribution either upfront when the money is paid over to the investment company or as a ‘trail’ commission, usually over a period of years.

The commissions they receive will usually differ – some will be higher or lower.  It is in their personal financial interest, or that of their brokerage to sell product that carry the highest sales return.  And since not every prospective client who walks into their office will actually buy an income protection policy or a pension, or an investment fund for their children’s third level education, the commission they do collect from every third or fourth potential client needs to be sufficient to cover the salaries and overheads.

A fortnight ago, Aviva Life and Pensions announced that as part of a major review and streamlining of their products, that they were eliminating all policy fees and charges for new customers on their list of 23 different fund. These include old monthly policy administration fees that could amount to as much as €4.50 a month (another life company charges as much as €5.24 per month) and fund switching fees of c€20. There is now only a single management fee per fund, amounting to no more than 1% of the fund value. Over the course of a long term investment, like a pension, the savings could amount to as much as 8% of the fund value, I was told. (For a fund worth €500,000 that is the equivalent savings of €40,000.)

Meanwhile, last week the Central Bank announced that it is now reviewing the hundreds of submissions it received as part of its inquiry into commission payments to financial intermediaries. It will publish its recommendations later this year. 

Many of the industry submissions – from fund providers as well as brokers – favour maintaining the existing commission system on the grounds that fee-based advice would be too costly for the majority of Irish investors. Many added that in the UK, where commission has been abolished since 2012, there are now fewer intermediaries. If buyers do not pay an upfront fee, they must go directly to the manufacturer and lose the opportunity for independent advice.

What most of the supporters of commission always fail to note is that commission payments are paid by the buyer out of the money they hand over to be invested or from premiums collected for the life assurance product.  There is no such thing as “free” advice. You pay overtly – a fee – or covertly – by commission that may not always be properly explained.

Aviva are the first life and pensions company to abolish extraneous and outmoded policy administration fees. They admit that computerisation and technology no longer justifies some of them.  They accept there will be an associated cost to the company, but believe they’ll benefit with more sales and happier customers.

Should sales commissions also be abolished?

So long as an intermediary depends on commission and might be influenced by its size (for example, you get no commission if you recommend a Post Office savings scheme) the adviser’s impartiality has to queried.

Commission isn’t just about the number of euro being paid out; it also leaves the broker open to a charge that their advice is centred on the “product”, not the client.

Replacing it with a fee-based payment from the client that recognises the adviser’s expertise, the time spent on your case, focuses the relationship back where it should be – between the adviser and the client. Not the adviser and investment provider.

 

Please send your queries to Jill c/o this paper or by email: jill@jillkerby.ie

 (The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)  

 

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Money Times - Febuary 7, 2017

Posted by Jill Kerby on February 07 2017 @ 09:00

NO ONE-SIZE-FITS-ALL SOLUTION TO A CASH WINDFALL

“I didn’t win the €88 million in the EuroMillions jackpot,” a reader from the Midlands wrote last week. “But I have recently inherited just over €120,000 from my late father, a former teacher. We were all a little surprised – I have three other siblings – since he and my late mother had lived quite well and we thought they only had their pensions and house which we sold for just over €250,000.

“My husband and I are in our early 50s, our youngest is nearly finished college. The other two live in the UK and Australia and have good jobs. I work part-time and my husband has a good job and pension. (He is also a teacher.)  Our house is paid off and we only have a few small loans, so we’re in no huge need for this money.  Any suggestions on where to invest it? (We have some savings which are paying only a tiny bit of interest.)”

I received quite a few emails and letters like this – and about sums as small as €5,000 - after the lottery win column. Most people only ever benefit from modest windfalls - an inheritance, a redundancy payment, a retirement lump sum or a capital gain after selling an asset like a property or a business they’ve spent a lifetime building.

Most people, in my experience, tend to be pretty conservative when they find themselves with an unexpected sum of money, even a large sum.  It’s size, relative to the person’s existing income and financial position will impact on investment decisions, say investment advisers. As will their immediate and longer term expectations for the money, their capacity to live with market risk and price volatility. Age play a big part too; a free-spending, ‘easy come, easy go’ approach is usually reserved for younger lottery winners or inheritance beneficiaries with few financial responsibilities and liabilities – like a mortgage and other bills, a family to support or chronic indebtedness.

In other words, there are simply no ‘one size fits all’ solutions whether the sum is €10,000, €100,000 or €1,000,000.

My correspondent from last week is also typical of the person who has no immediate money pressures who seeks some help in what to do with their good fortune. In such cases, financial advisers often report that after rewarding themselves and their loved ones with modest purchases, such clients often take a longer term view of the money, say, to pay for a wedding, or for retirement or to pass on to the next generation(s).

This is why the first step has to be a proper wealth review in order to confirm the status of this money, relative to their expectations and desires.  Has the person factored in the importance of clearing existing high cost credit card and personal loan debt, overdrafts, perhaps even higher variable rate mortgages or the real cost of long term liabilities, like medical and nursing costs in their advanced age?

No matter how large or small the amount at stake, a good adviser will ask you what your expectations are for your inheritance, retirement lump sum, capital gain, etc and plan around your answers.

No one can accurately predict investment growth consistently.  Which is why expecting positive results from a small collection of stocks or funds is also unrealistic.

The high tech stock you heard about – or even a single property fund producing high gross yields today, could still tank tomorrow, at great capital loss or be impacted, yet again by arbitrary government tax policies. The higher return, the higher the arrangement and management fund charges which will also eat into any return.

Only an independent, impartial financial adviser can advise our reader with the €120,000 inheritance where to invest her money, and only after a comprehensive, personal financial review.  It could be in the end that she and her husband simply won’t sleep if this money, which perhaps they ultimately want to leave to their grandchildren, was tied up in the bond or stock markets.

In that case, paying off the last of their debts and finding the safest deposit account might ultimately be where the cash remains. Or they might decide to disperse it as a contribution to higher education, or even seed capital for a grandchild’s business. 

What every beneficiary of an unexpected or earned windfall needs to accept is that genuinely suitable investment solutions are always going to be more bespoke that any popular, advertised ones.

And probably a lot safer too.

 

 

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Money Times - Januray 31, 2017

Posted by Jill Kerby on January 31 2017 @ 09:00

 

BIG LOTTERY WINS COME WITH MORE THAN JUST LOADS OF MONEY

As I write this column – a few days before it appears in your newspaper – rumours are swirling that a consortium of 30 shift workers at a pharmaceutical firm in Cork have won the EuroMillions windfall jackpot of €88,587,275.

Good for them. That works out at a tax-free prize of €2,952,909 each, more than enough money to pay off their bills, to buy a new car and house, and put all their kids through graduate school and probably buy a house for each of them too.

They’ll probably have enough left over to fill up a retirement fund and maybe even quit the day job and follow a few dreams.

A €2.9 million windfall is enough to change your life for the better but is less likely to result in the downside risks that come if just one person had scooped the c€88.6 million, a massive sum to have to navigate, probably for the rest of your life. That is, of course, if you don’t blow it recklessly or give most of it away, perhaps keeping a modest million or two for your own enjoyment.

I’ve only met one lottery winner, about 20 years ago and the sum he won was about £3 million.  By the time I spoke to him, he had about a million left having bought the inevitable new home, car, holidays and had generously given the rest away to his extended family, some friends and charities.  He was now concerned about the implications of his children possibly receiving very large inheritances while still at relatively young ages.

I passed him the names of some good financial and legal advisers, but I remember him saying that the process of giving away a large share of a million and a half pounds to his loved ones hadn’t turned out to be as happy an experience as he thought it would.

This is a common outcome for many lottery winners who nearly always say that you really find out who your friends are when you win millions.

Winning a huge windfall like c€88.6 million means you will certainly need a highly trusted team of financial, tax and legal advisers who might end up on the payroll for a long time. Even working out what do with €3 million, especially if you want to preserve much of the capital (after buying that new house, car, etc) will take time and probably more understanding of money and tax than you have. Too many are tempted to hand over the management to “the professionals”.

Whether it’s a huge jackpot or a diluted one, responsibly investing and divesting yourself of that kind of money requires a measure of faith and trust in the advisers you employ.

But it’s your responsibility in the end. Their respective roles are to help you work out a financial, tax and legal plan of action that reflects what you want to do with the money.

The financial planner should be experienced, trained and fee-based. (They shouldn’t necessarily charge a percentage fee of the winnings. 1% of €88.6 million is an annual payment of €886,000!)  Should the process of selecting a diverse, balanced, mixed portfolio of assets with capital protection and a modest risk/reward income return cost 1,000 times more than it would for a comparative pension fund?

The tax adviser will work with the Financial Planner to explain all the tax implications of your great windfall: there is no capital gains tax on lottery winnings here but all deposit returns (such as they are) is subject to 39% DIRT. Irish investment gains will carry up to a 41% tax bill. Investments in other jurisdictions will carry their own liabilities, including any inheritances that may be generated from the foreign investment. 

Gifts and inheritances in Ireland carry relatively small, life-time tax free thresholds:  just €310k between parents and child; €32,500 between siblings, to nieces/nephews and just €16,250 to non-relatives. Winners who want to set up family trusts for the benefit of future generations – and doing that badly could be catastrophic for your children if it’s not thought through with great care - will need tax and legal advice.

The solicitor you hire will also play an important role in setting up those trusts, completing property deals, preparing complicated wills, (perhaps in more than one country), even pre-nuptial agreements (where possible) and Enduring Powers of Attorney. Your lawyer will come in handy if disputes arise, especially if €88.6 million is at stake.

I’ve heard lots of suggestions about how the big winner (or maybe, the smaller ones) should proceed. “Take your time” and “protect the capital in the short term” sounds about right.

Finally, forget the notion that winning millions (or tens of millions) won’t change your life. It will. But the last thing you want is that your good luck turns into someone else’s misfortune.

 

(The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)

 

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