Sunday Times, Money Comment - 1 December, 2013

Posted by Jill Kerby on December 01 2013 @ 09:00

Your money is as safe as houses – in this case, hornets’ nests



Up to now I always thought that it was only eccentrics or cranky elderly bachelor famers, genetically hot-wired to keep their cash hidden from grasping relatives or the Revenue, who planted it under the floorboards.

 So it’s quite alarming to be told by otherwise sensible people, usually older ones unburdened by heavy mortgages or personal loans, that they are seriously considering physically taking their savings out of their bank or credit union deposit accounts and putting it somewhere they think would be more secure. (They should at least look into the new private, safe deposit vault service that opened recently in Dublin.)

They site negligible interest rates, penal Dirt rates and a total loss of confidence in the banks for such drastic action. Their don’t believe the government when it says that the cost of living is going up by less than 2%: their experience is that of food, transport, energy and health care costs are soaring while their state pension has been frozen for five years and private pensions are taking a hit from the pension levy and the restructuring of defined benefit schemes.

Pensioners may not be liable for the 41% Dirt on their savings if they are income tax exempt, but they probably wouldn’t be able to avoid a negative interest rate charge, if that went ahead.

The excuse the central bankers are giving is that this would force the still indebted banks to start lending out the cheap money they’ve been lent by the central bank and this would encourage more spending and ‘good’ inflation. Individual savers who faced a deposit charge would also spend, rather than hoard their money.

If historically low savings rates haven’t already sparked such spending binges, why should a fractional negative deposit rate? Older people are more likely to buy investment property here or abroad, in the (probably ill-judged) hope of getting a positive return than they are to hit the high street shops buying stuff they don’t need. 

We might be sinking into a deflationary economic hole, and we might be ridiculously complacent when it comes to higher taxation and austerity, but it is another thing to be able to force people to spend their money against their will.

There has never been such a thing as a risk-free return, not from deposits or bonds and certainly not from property or stocks and shares.  But I cannot remember a time when every possible destination for savings or surplus wealth has seemed so hazardous.

Every financial adviser I trust says the same thing: in a financial environment where all the old rules about prudent banking, sound money and risk versus reward are long gone, and the price of money is being endlessly manipulated, the best you can do is try to save or invest only with solvent institutions, diversify your assets and get the best tax advice you can afford.

The search continues by ACC and Danke Bank customers – and I’m one of them – for affordable, replacement current accounts before these banks close up shop next year.

In the full expectation that bank charges are only going in keep rising as the remaining banks scramble to clear their toxic balance sheets, I’ve been reminded of a super-cheap current account payment strategy that was popular long before anyone ever heard of the Celtic Tiger: the credit card.

Those were the days when the “flexible friend’ motif actually fit and the prudent bank customer paid all their personal and household bills and discretionary spending by credit card. 

The sizeable monthly card balance was then paid either by cash, by a single cheque or single direct debit from an account into which their monthly salary has been paid.

By paying everything by credit card - mortgage, groceries, utilities, insurance, petrol, the cardholder could take advantage of not just

56 days of free credit, but could avoid multiple mandate charges and cheque fees.

Withdrawing cash with a credit card isn’t free. Transaction fees daily interest applies so anyone looking into using a credit card to manage their spending will need a cash dispensing outlet. The nil cost credit union or a post office deposit account might be the answer.  An Post’s free bill pay service – see mybills.ie – is worth looking at as well from which you can automatically or manually pay off that big credit card balance every month.

Great sighs of relief are being heard in a couple dozen households this month as the first completed insolvency cases under the new Insolvency Act are finally emerging.

Some debtors have voluntarily given up their homes in exchange for total mortgage debt write-offs; others have worked out deal with their banks to write off only a portion of their mortgage and other unsecured debts in exchange for keeping them. 

This month, with the new bankruptcy act finally being enacted, the first bankruptcy cases are also expected to be agreed, resulting in the eventually writing off of all debts for those people.

That the banks appear to be acknowledging that mortgage shortfalls may have to written off in some cases is certainly good news. But the successful completion of the first debt relief notices (DRN), and especially the debt settlement arrangements (DSA) and personal insolvency arrangements (PIA) still only represent a fraction of debtors who need to be rid of their crushing debt burdens.

For every successful DSA or PIA (the latter involving secured mortgage debt) there could be up to six other failed applicants, say insolvency experts. Most people they meet simply don’t have sufficient assets to be eligible to make a successful deal with their creditors and already live on less money than is permitted under the ISI’s household expenditure guideline.

For these people, bankruptcy is probably the most appropriate solution, say financial and legal advisers. Going bankrupt doesn’t automatically result in the loss of the family home (at least not one that is in heavy negative equity. What it does promise, is that the discharged bankrupt will be entirely debt free within three years.

The insolvency and bankruptcy process is explained at www.isi.gov.ie .



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