Jill Kerby

EVERYONE NEEDS A PERSONAL FINANCIAL PLAN…EVEN THE SMALL BUSINESS OWNER

 

 

We take for granted the local businesses that provide us with so many services – the garage owner, the family run supermarket, the post office, dry cleaner, the butcher and chemist. We certainly notice them when they are gone.

There is also too much of a tendency to assume that the owners of small businesses in Ireland are personally doing all right financially, even if the business itself might be struggling in the recession. 

The reality is very different:  last year, five SME’s (with between 50-250 workers) were going out of business every day, a 2-% rise on 2011 figures. Half of all SME loans are impaired according to the Central Bank.

You only have to look around to see the empty shop fronts to see how difficult business is and the SME owner, just like his customers, is struggling with higher taxes, personal pay cuts, a neglected pension fund, a rise in personal debts linked to plant costs and meeting payroll obligations, as well as cancelled life insurance policies, reduced personal household spending and even mortgage arrears.

The difference between the trappings of wealth (an apt description), accumulated with credit and debt, and the genuine thing is going to be revealed as never before when the Insolvency Service opens its doors this summer.

It won’t just be homeowners unable to meet their repayments who will be seeking protection from insolvency; it will also be the local business people and many of them will inevitably find themselves in the new bankruptcy court.

Last Sunday, I was invited to speak about personal finance issues to pharmacists at the Irish Pharmaceutical Conference annual conference.

The timing couldn’t have been better. On the previous Monday I had been at a seminar held by the recently formed Society of Irish Financial Planners (part of a global network of certified financial planners) who are passionate about the need for people to understand that good financial outcomes are part of a process, that involves not just an understanding of their needs and goals, but how to control their fears and emotions too.

These issues, say advisors are just as relevant to people who own businesses and earn higher salaries as they are to the person on the average industrial wage.

‘Sometimes it is just a combination of luck and hard work that results in someone becoming personally wealthy by being a company owner, outside of selling their firm for a profit,” one advisor told me. “Proper planning doesn’t play a big part. The problem is, in order to hang onto that wealth as an active owner, you need to be lucky all the time.”

You may be that person – the local pharmacist, hairdresser, grocer, high tech company owner or farmer.

At the Pharmaceutical Union seminar I asked the following questions and suggested that the answers the participants came up with would give them a pretty good indication of the state of their personal and family finances and how much part luck was playing.

Why not take the quiz yourself…

-       How much do you earn every year?  How much tax do you pay? 

-       Do you save money regularly?  What rate of return do you get from your personal savings?

-       How much does it cost to run your household every year, including educating your children?

-       Do you keep all your company and personal banking separate? Are your personal finances ring-fenced from your business finances? Do you have a Will?

-       Do you have a personal or executive pension? A personal savings account? What is its current value?

-       Do you know what assets and funds are under investment and in what proportion?  Is your pension on target to meet your spending needs and goals in retirement?

-       Do you manage your personal investments/pensions/insurance contracts yourself or do you use an advisor?

-       Does the same advisor (whether a financial advisor or an accountant) provide services to your company as well? Are you happy that they give the same effort and weight to both?

-       How experienced/trained is the advisor? How is (s)he paid?  Are you getting good value advice?

-       Do you arrange an annual review of your personal finances, in the same way that you have a business audit/review (say, at the end of the tax year?)

-       If you don’t have a private pension and retirement plan in place, what will you live on in retirement?

Start-up businesses are often run on shoe-strings with the owners foregoing a living wage, let alone a personal pension. But that’s not a sustainable prospect forever. Everyone needs a personal and family budget, some savings for the future, insurance to cover accidents and health emergencies and a properly devised pension fund and retirement plan.

The small business owner who postpones that plan isn’t doing themselves or their families any favours. 

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INSOLVENCY PROCESS FLAWS NEED CORRECTING IMMEDIATELY

 

The website is in place. The helpline is manned. You can now read for yourself the guidelines that are in place that will be used to determine the living standard you will need to adopt if you wish to become insolvent in the eyes of the law.

And that’s about it.

The Insolvency Service of Ireland last week announced that their service would be operational from next June.  The headlines are full of the tiny amounts that families will have to live on for the 3-6 years of the insolvency work-outs, but just how eager anyone will be in taking up one of these three options could end up depending on whether the most serious flaws in the process can be amended or corrected in the next two months.  These include:

-       the insufficient number of licensed PIPs (Personal  Insolvency Practitioners);

 

-       clarification of how PIPs will be paid;

 

-       extending the free MABS service outside the Debt Relief Notice option;

 

-       the maintenance of post-discharge registers in the case of people who complete the Debt Settlement and Personal Insolvency Arrangement process;

 

-       the lack of a definition for what is a “sustainable” mortgage.

 

Let’s start with the Personal Insolvency Practitioners. The Department of Justice has guesstimated that in year one of the new service there will be 3,000-4,000 applicants for Debt Relief Notices for up to €20,000 of unsecured debt and between 15,000-20,000 applicants in total for either a Debt Settlement Arrangement for unsecured debt of any value or a Personal Insolvency Arrangements for unsecured and secured debt worth up to €3 million.

It is now expected that “several hundred” PIPs will be needed to deal with the DSAs and PIAs (The Money and Advice service will handle the DRNs for free.) Not a single one has been recruited, vetted or licensed yet.

Both Alan Shatter, the Minister for Justice and the head of the Insolvency Service Lorcan O’Connor reiterated that the fees to pay the PIPs will come out of the agreed credit repayment to all creditors. However, the Insolvency Service as part of a DSA scenario issued to journalists, noted that in this case,“the PIPs fees are made up of an initial fee of €1,500 to reflect the up-front work undertaken by the PIP and is followed by yearly amounts staggered over the remaining 5 years.”

The insolvency regulation does not specify how the PIPs – solicitors, barristers, accountants and qualified financial advisors- are paid. They will be able to charge a non-refundable upfront fee to potential clients as well as be remunerated from the amount set aside to repay creditors (including themselves.) But because there is no compensation should the insolvency application they design be rejected, the concern is that PIPs will not only demand upfront fees, but opt for high value insolvency cases where not only will their overall fee be higher by the end of the five or six year discharge period, but where an upfront fee is also paid.

Next, the free MABS service is to arrange and administer the Debt Relief Notices for people who are insolvent but with no more than €20,000 worth of unsecured debt, like credit card bills, personal loans or unpaid utility bills. 

The expected initial shortage of PIPs – and the problems of finding one that will take on low value insolvency cases – suggests that the free MABS service should be extended and qualified officials from MABS should be licensed as PIPs. MABS itself would then be paid the same fee that would otherwise be paid to the private PIP.

REGISTERS

Under the current, flawed legislation, only people who are successfully discharged after three years from their Debt Relief Notice will have their name removed from the public Insolvency Register. Anyone who successfully discharges their Debt Settlement Arrangement after five years or the six year period of a Personal Insolvency Arrangement, will permanently remain on this register. 

Being officially stigmatised – for life – could not just impact on future attempts to secure new credit, but perhaps even certain employment. This anomaly could discourage someone from seeking a DSA or PIA and needs to be corrected immediately.

Finally, the key component of the PIA process will be mortgage debt write down, yet there is still no accepted or statutory definition yet of what is a “sustainable” mortgage relative to income/debt. Debtors, their PIPs and the lender/creditors need to have such a guideline before any Personal Insolvency Arrangement that includes mortgage debt will have any decent chance of being approved and the untenable part of the mortgage written off.

Anyone considering seeking protection via the Insolvency Service from the end of July needs to consider all the above. Inform yourself: check out the new website – www.isi.gov.ie. You can also contact the ISI at 0761 064200 or at info@isi.giv.ie

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MABS DEBT SURVEY: OLDER MORTGAGE DEBTORS NEED IMPARTIAL ADVICE

 

There goes another myth.

A mortgage arrears survey of 6,000 clients by MABS, the free money advice and budgeting service has found that contrary to the common view that the majority of the 95,000 mortgage arrears cases involve younger, first time buyers, instead, 70% of these indebted borrowers appear to be people aged between 41 and 65.

The MABS report paints a complex picture of people who have not only found themselves in mortgage arrears but are also struggling with a pool of unsecured debts like credit cards and personal loans. This older age group, states MABS, have found themselves in this position because their higher incomes, and greater asset wealth (especially in the higher value of their homes) during the boom years at the time allowed them to borrow to extend their homes, trade up or buy holiday homes and investment properties.

In too many cases, their motivation was to provide for an enhanced pension at retirement.

The report (http://www.mabs.ie/fileadmin/user_upload/documents/Reports___Submissions/Mortgage_Report.pdf) contradicts census data about mortgaged head of households that suggested that they include 8.7% of people who are unemployed, 12.5% who are outside the labour force such as students or carers and 78.8% who are employed. Instead, MABS found that 37% of their clients with mortgages are unemployed, 17.8% are outside the labour force, and only 45% are working.

It also found that 83% of distressed mortgage holders in their survey had loans with the retail banks, only 13% had a subprime loan, 3% local authority loans and 1% credit union or foreign loans and that 86% of the 6,000 had other debts: 50% between two and four other debts, and 5% with 10 or more.

 

This data is very welcome and puts a different slant on the problems facing the banks. 

 

Just last month the Central Bank instructed AIB, Bank of Ireland, PTSB and Ulster Bank (Danske Bank is outside the CB remit and has the lowest percentage of mortgages in arrears) to start clearing the 95,000 loans in more than three months arrears by offering “long term and sustainable” refinancing arrangements to at least 50% of these distressed debtors by the end of 2013. It is understood that a favoured solution for the banks will be a split mortgage that parks the part of the loan that is unaffordable for a number of years, with new terms negotiated for the part that can be repaid.

 

A loan like this might be a suitable solution for a younger borrower who has 30 or 40 years of employment and the prospect of higher earnings ahead of them. Inflation will also help devalue the true cost of repaying their new split mortgage, eating away at the capital value that needs to be repaid. It might even make it easier for the bank to write off any remaining arrears at the end of the term.

 

But this solution, says MABS won’t work for older borrowers. How can a split mortgage be a long-term solution for someone in their 50s or 60s (already hit by falling incomes) in a market where prices are still contracting and which will increase any negative equity on their second or buy-to-let properties?

 

By retirement, such a person who does not enjoy the magic effect of time on their debt, could end up with a large mortgage shortfall in retirement and little or no employment opportunity. If they have no occupational pension, they may have to depend entirely on state pension income.

 

MABS believes that these older borrowers need debt write-off because forbearance measures like extended repayment terms and split mortgages will not work. Along with FLAC, (the free legal advice centre) and other consumer groups, MABS are calling for the provision of independent, impartial advice to be made available to debtors negotiating new deals to be included in the revised mortgage Code of Conduct that are now being considered by the Central Bank.  More suitable solutions can then be considered at are sustainable.

 

There is no guarantee that this advice will be made available, but financial advisors and business leaders have for some time noted that money locked in conventional private pension funds could be an ingredient in saving a business starved of bank capital.  Could they also be part of a solution to a serious arrears and debt problem for older borrowers if the banks are also willing to write off and not just park some of this debt?

 

Time really is of the essence as the banks work under the new clearance deadlines.  Difficult as it may be to find the money to pay a good advisor, anyone who recognizes their own situation in this MABS report should act as soon as they can to secure that impartial advice.

 

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FORGET ALL THE HYPE – INSOLVENCY GUIDELINES WILL HAVE TO BE FLEXIBLE OR THEY WILL NOT WORK

 

Were you frightened, or frightened for someone you know who is in serious financial difficulty by the unseemly and at times, hysterical debate in all the media recently over what will constitute ‘reasonable living expenses’ when the new insolvency process begins?

The leaking of the proposed living expense guidelines has been counter-productive because it is simply wrong for anyone to assume that all creditors will have an on-going, micro-managing role in how much is spent on food, health and child-care, insurance, entertainment for the five or six year duration of insolvency arrangement.

However, the process is quite wrongly being politicised and PIPs, personal insolvency practitioners, will be starting out with the Taoiseach’s unhelpful comments - that the vast majority of insolent homeowners “will not lose their homes” ringing in their ears. (He also said, after the Cyprus deposit debacle, that Irish depositors have nothing to fear.)

The only people who will ultimately make that decision are the debtor’s own creditors, most likely a number of banks, or in the case of the Irish state, the Troika.

The most reassuring commentary I have heard about how our brand new debt insolvency process might work, given have a chance, has been from insolvency practitioners who have been arranging informal and formal legal arrangements including bankruptcies for decades in the UK.

The biggest UK insolvency practitioners, the consultants Grant Thornton, have described how it has only been since 2008 when formal expenditure guidelines (very similar to the ones being considered here) were finally adopted by insolvency advisors and the banks/creditors, their Individual Voluntary Arrangements have worked with a greater degree of success than at any time since their launch in 1986.

The UK guidelines – and more importantly, how they are used by the supervising insolvency practitioner assigned to the creditor for the period of the IVA – allow for considerable flexibility within the repayment parameters of the arrangement, says head of insolvency, Gareth Neill. 

He expects the same will apply here, assuming that the banks agree that the guidelines are just that – guidelines - and are not written in stone. (With a 65% creditor agreement necessary, that may not be the case.)

Without flexible and “realistic” expenditure guidelines says Neill, the new insolvency arrangements “will not work and debtors may be forced to opt for bankruptcy.”

Neill told MoneyTimes that bankruptcy is not the ideal arrangement for any party: the borrower loses everything and the creditor gets far less of their money back than under an insolvency arrangement. But it does provide finality after the 3 year discharge period and the bankrupt is entirely debt free.

The launch of the Insolvency Service of Ireland(ISI) is behind schedule, but an information campaign is expected to begin soon and will lay out the starting parameters:

If you are insolvent – that is, if your income from all sources is insufficient to meet your debt repayments as they fall due, you should be eligible to apply for a (5 year duration) Debt Settlement Arrangement for your unlimited, unsecured debts like credit card bills, personal loans, HP loans, utilities, or for a (6 year duration) Personal Insolvency Arrangement that includes both your unsecured and secured debts, like mortgages worth up to €3 million. (A registered and approved personal insolvency practitioner from the likes of Grant Thornton or other accountancy practices will then take over your case. They are paid from the share of money that will also repay creditors.)

If you have no income and no assets (like a property/car) and unsecured debt worth up to €20,000, you can apply for a (3 year supervision) Debt Relief Notice under the administration of MABS, the Money Advice Budgeting Service.

The final option, (3 year duration) bankruptcy, is court-based and for debtors with insufficient income and assets to ever repay their debts in full. A court ‘assignee’ is appointed to administer/supervise the sale and distribution of the bulk of your assets to creditors and sets you reasonable living expenses.

If you think you fall into any of these categories, you might want to think about your next response:  should you contact MABS, now if you haven’t already done so? Should you contact an accountant or tax advisor you know to find out if they will be acting as PIPs. Can they put you on a preliminary list of potential clients?

A 70 day moratorium against any legal action will apply once you start the insolvency process but the formal route only gives you one lifetime bite at the DSA or PIA; the next one will result in a legal bankruptcy.

An informal arrangement might still be possible for some people.

I will be returning to this topic as more genuine information emerges.

 

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HOW REAL IS BITCOIN, THE FIRST GLOBAL VIRTUAL CURRENCY?

 

Around 1996-97, a friend of mine who was involved in the satellite imagery business – his companies produced high grade satellite maps and undertook satellite mapping projects for mining companies and government agencies like the EU’s agriculture commission - told me about these amazing new things called DVDs, first invented in 1995.

I hadn’t a clue what he was talking about.  But I do remember thinking that I really had to learn more. It took a few years to abandon video cassettes, but today, DVDs are being overtaken by direct streaming, traditional internet search engines by Twitter and Facebook.

And now there is Bitcoin. (see https://www.weusecoins.com/; www.coinbase.com)

It was inevitable that in a world where physical money is being used less and less – overtaken by credit and debit cards, e-banking and computerised money transfers – that someone (in 2009) would come up with the idea of cyber-based or ‘virtual’ money.

Bitcoin (as in, computer ‘bits’ of information) has now gone mainstream and has been given a global boost by the events in Cyprus, where the sanctity of Eurozone cash deposits has been blown apart and capital controls have created a two-tier euro - the Cyprus euro that can mainly only be used there and the one the rest of use (for now).

The price of bitcoin in just the past fortnight has nearly doubled to $78 a “coin” (as I write). It was worth about 0.25 US cent when first launched and all the Bitcoins in cyber-circulation are reckoned to be worth about nearly $1 billion now, though no one knows for sure.

So what is Bitcoin?

Invented – it is reported – by a Japanese computer hacker, it is a decentralised digital currency that only trades via the internet. There is no central bank that issues, regulates or sets the price of bitcoin. Instead it operates through a peer-to-peer network of users, that is willing buyers and sellers with real goods and services.

Demand for the growing, but ultimately limited number of bitcoin – no more than 21 million bitcoin will ever be issued by the year 2140 – dictates the price at any given time. Bitcoin are issued within its agreed total limit of coins by the user networks, who are known as ‘bitcoin miners’. The miners, says its Wikipedia entry, verify every bitcoin transaction “and add them to a decentralized and archived transaction log every 10 minutes.”

Leaving aside the hugely technical explanation of how bitcoin operates in the virtual world (a great deal of ‘faith’ is required, just like with every other currency) your first purchase of bitcoin is going to be via a conventional currency like euro, pounds, dollars, etc.

Each bitcoin you buy from a supplier for the global price at that moment is then put into the Bitcoin wallet that you set up which in encrypted and encoded with ‘bits’ that represent the number and value of the coins you now own.  You don’t want to lose these codes…your digital signature …or you lose your bitcoins.

Once you have a wallet of bitcoins, you can start using them.  As I write thousands of ordinary retailers and service providers all over the world are being added to the growing network of real people who will sell their goods for a bitcoin.

You can now buy everything from a pizza to a house with bitcoin, somewhere in the world. Governments and central banks, which have no control whatsoever over this entirely private, virtual, encrypted currency say they are hugely worried that bitcoin is being used to buy and sell dangerous contraband like drugs and arms. They also say it is an easy way to undertake money laundering. This is also true – the Iranians buy bitcoin and then convert them into US dollars to get around trade sanctions.

Mostly, governments and central banks are concerned how easily bitcoin circumvents the use of their monopoly to create money out of thin air and then tax it, directly or debasing and devaluing it as the need (like now) arises.

These are all the main reasons why the sale and price of has soared since 2001. It is the only ‘real’ money that can’t be debased by central bankers.

That said, I haven’t bought any bitcoin - yet. I still don’t fully understand it and the risks. How ‘safe’ is it from computer hackers? The price is very unstable, even more than gold, which also rises and falls with demand. What are the tax implications? Can VAT and CGT liabilities be payable to the state in bitcoin?

And I’m old-fashioned: bitcoin is not tangible like gold (which can never disappear) and wouldn’t exist at all without a reliable broadband connection.

Then again, I had my doubts about DVDs and Twitter and…

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HOW SAFE ARE YOUR SAVINGS UNDER THE BANK GUARANTEE SCHEMES?

 

By the time you read this the fate of Cyprus will have been settled and from my current vantage point it looks like its depositors will be taking a substantial loss of their savings – perhaps only over €100,000 – as well as sacrificing some of their gold reserve, private semi-state pensions, a higher corporation tax and other concessions.

What the Cyprus parliament overwhelmingly rejected they may very well accept with some amendments, but the alternative would be to probably have to leave the eurozone, though not the EU itself.

Whatever the outcome from today (Tuesday), the Cypriot banking and financial services industry, a less successful version of our own IFSC – is finished.  Trust and confidence, the lynchpin of banking simply no longer exists there.

The capital controls that (I expect) have been imposed in Cyprus to stop a rush to transfer savings out of the country means it will take a long time to restore that confidence. Faith in the sanctity of the euro itself, and the credibility of bank deposit guarantees will certainly be shaken in the rest of Europe too.

It is this element of the Cyprus crisis that savers need to address here, especially those with sums over €100,000 in AIB, Bank of Ireland, ESB and Permanent TSB. Many of them now have their own critical deadline to consider – the end of the Eligible Liabilities Guarantee on Thursday, March 28.

Money left in term accounts for up to five years in qualifying ELG covered bank deposit accounts have been 100% guaranteed and will continue to be until their five year term ends.

However, any funds that are no longer under the ELG from Thursday must act to otherwise secure them as well as they can.

The standard €100,000 deposit guarantee scheme (DGS) is still in place, but (as in bankrupt Cyprus) the Irish state does not have sufficient money in the Central Bank’s €388 million deposit insurance fund, in which banks make a paltry 0.2% contribution every year, to honour losses of up to €100,000 if an Irish bank ever did fail. There is currently €102 billion in household deposit accounts. 

Also, it has now emerged that thousands of depositors in IBRC (formerly Anglo Irish Bank) who invested in tracker bonds with capital guarantees, but which had not matured before the recent liquidation of IBRC – have discovered that the guarantee for the first €100,000 of their money has not been honoured. Others, who bought Anglo Irish 5-6 tracker bonds (some as pension products) and even invested far more than €100,000 have lost huge sums. Total IBRC deposit/tracker bond losses, could amount to €93 million, €15 million lost by Credit Unions members who bought the trackers through their local CU branch.

The ELG will end on Thursday but the following options should be considered by ALL depositors:

-       Be aware that all deposits and pension funds could be targeted as part of future EU bailouts for insolvent banks or member countries;

-       Capital and currency controls could be imposed in any EU country and not just Cyprus, to stop people transferring out funds (despite the EU principle of free and open trade.)

-       Aim to leave your savings in the most solvent or highest investment grade institutions possible. No Irish banks qualify, but investment grade deposit takers include Danske Bank, RaboBank, Nationwide UK and UlsterBank.

-       The €100,000 deposit guarantee is only as good as the ability of the bank or the Irish state to stand over it, as IBRC depositor/tracker holders have discovered to their cost.  

-       All savings are at risk from taxation. Since 2009 DIRT has risen from 20% to 33% and from next year will be subject to 4% PRSI increasing the total tax to 37%.

-       All savings are liable to inflation risk: the spending value of your savings falls as inflation rises – this is a hidden tax.

-       Most financial advisors consider a 5%-10% holding in gold/silver will act as a hedge against the risk of taxation, and currency/capital debasement by central bankers to save bankrupts institutions and savings. (Check out www.goldcore.com).

Worried savers in Portugal, Spain and Italy as well as Slovenia and Malta, also due bailouts have been already moving their money out of the reach of their politicians/central banks. Yet, there are few currencies considered particularly “safe” anymore and all banks are lowering interest rates. Bonds are not particularly safe anymore either, warn advisors as that price bubble intensifies.

Anyone concerned about the safety of their cash or their pension funds should seek an independent fee-based financial review from an experienced advisor and aim for a solid, long term, diversified asset and maybe even geographical solution that suits their age, risk profile and needs.

If there is one rule we should learn from the Cyprus, where the bank crisis has been festering for a year, it is procrastination is the worse response of all. 

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NEW DEAL OR BAD DEAL FOR INDEBTED HOMEOWNERS?

 

“The worst thing is not knowing if the bank is going to keep extending the interest-only payments,” the young mother of two, said. “We can just about pay the mortgage interest, but they keep us in the dark until the last minute about whether they will extend the interest-only for another three months.

“The house is worth, maybe €250,000, though we bought it in 2007 for €550,000 when we were both working. We know four other couples on the estate just like us, with less income now and huge negative equity. At least one of them is now over 90 days in arrears.

“We really like the house, but we will go into arrears if the ECB rate goes up, and especially if we lose our tracker.”

Between now and the end of this year, six participating banks - AIB/ESB; Bank of Ireland/ ICS; PTSB; KBC and ACC but not subprime lenders, local authorities or Danske Bank (which has the lowest number of arrears of all the banks) - will have to offer a “long term and sustainable” repayment plan to at least 50% of their customers like Laura and her neighbours.

This might include long term interest only repayment terms, an extended repayment period, long term split mortgage in which up to 50% of the capital (which may include arrears) will be “parked”, ideally interest-free and in some low income/value cases, voluntary repossession that may include debt write-off, a tenancy or rent to buy option.

The split deal will involve the customer only paying capital and interest on the other, affordable, half of the mortgage, but how long such an arrangement continues will depend on the customer’s own financial circumstances, how soon the property market recovers or whether the house is sold.

What happens to any shortfall once the property is sold, or at the end of the repayment term, is still not clear but the CB hinted last week that some relief of the remaining debt might be possible.

Meanwhile, changes to the existing arrears code of conduct will allow the banks to finally foreclose on investment properties, on strategic defaulters and those who are clearly insolvent, though such customers can also pre-empt this by applying for a Personal insolvency Arrangement in an effort to remain in the family home. 

Consumer advocates and insolvency practitioners say that this ambitious new plan to clear the arrears logjam will only work if all the customer’s debts - unsecured credit cards, personal loans, utility arrears – are also taken into account.

So what should you do now in light of this new development if you are in arrears or in forbearance, or worried that you might be moving in this direction?

-       You can wait for a new offer from your lender, or you can be proactive and write to them now and request one.

-       If you have unsecured debt that is a problem, or could result in you falling into (or deeper into) arrears with your mortgage, arrange to see a MABS official. Complete the financial statement available on their website, www.mabs.ie  If you are insolvent –your debts are greater than all your income, savings and other assets including the house - a 5-6 year Debt Settlement Arrangement (DSA) or Personal Insolvency Arrangement (PIA) may be the better solution that one of these CB interventions. These involve the writing off of unsecured debt (which for many people is what they need most) and some secured property debt. You can download a guide to the new insolvency and bankruptcy rules here: http://neofinancialsolutions.com/insolvency-guide-published/

-       Don’t stop paying an existing agreement with your lender or stop communicating with them. The banks are getting the go-ahead to start foreclosing on such ‘strategic defaulters’, even those who argue that they had no choice but to pay the grocery, light bill or car loan first. Buy-to-let defaulters should expect very little mercy.

-       If you are eventually offered a “sustainable” deal, take up the government offer of a €250 session to talk it over with an accountant (see www.keepingyourhome.ie ). However, you are the only one who can decide if another ‘extend and pretend’ debt deal is really in your long term interests or that of your family. Is this really the house you wish to remain in, perhaps for the rest of your life, possibly with no equity to show for it after 30 or 35 years?

-       A PIA (in which you might keep your home) or even bankruptcy will be painful, but it could be the correct solution for the hopelessly insolvent. If you decide to file for bankruptcy, your home and other assets – car, jewellery, shares, some personal goods will probably be sold to repay creditors, but if successful you will be discharged, hopefully at the end of three years, entirely debt free.  Free to start over. 

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DON’T MISS SAVINGS DEADLINE FOR HEALTH INSURANCE

 

The steady increase in health insurance premiums has caused more than 60,000 people to drop their insurance in the past year, many of them younger members who are so important to the sustainability of the ‘community rated’ system by which everyone can purchase any health plan here, regardless of their age.

The latest price hike round involves

VHI increasing their rates by up to 8.5% on certain plans on March 1; Laya increasing some of their plans by up to 16.4% from April 1; Aviva increasing most of their plans by up to 6.4% from March 31 and GloHealth, the newest player, increasing their plans by up to 9.6% by from March 31.  All four providers have already increased their premiums from 3%-12% between last October and this past January. 

 

Dermot Goode of www.healthinsurancesavings.ie is adamant that anyone who has not reviewed their health plan in the last three years is paying “shockingly high” premiums in 2013, having been hit by one increase after another that may have raised their bill by as much as 135%, yet their provider probably has brought out equivalent, cheaper plans during that period.

 

Cheaper equivalent or near equivalent plans are still available, says Goode, but you need to know which ones are which (not easy with over 250 different plans between the four insurers) and ideally, the names of the corporate plans, which are often discounted to individual ones, but not advertised for individual users.

 

The insurers now all operate annual contracts that lock in the member for 12 months, but in the case of Laya and Aviva, says Goode, this lock-in “only came into effect from June 2012.”  Customers who are due to renew in April and May, “may be able to do a ‘stop and start’ on your cover to avoid the next price increase for a further 12 months, i.e. stop your current policy now and set up a new policy on the same plan on the current rates. 

 

“ You have 14 days after your renewal date to cancel or amend your cover.  After this, you could find yourself locked into an expensive annual contract and you could face financial penalties if you subsequently try and cancel the policy.  Therefore, it’s critical that you act on the renewal notice once it lands as complacency could cost you dearly”.

 

Comparing the price of two, popular plans offered by each company with two similar plans with the same provider, Goode has shown that the savings between 35%-46% can be achieved.

For example, a family of four – two parents, two children – who switch from their existing Laya Essential Plus (No Excess) plan to Laya’s Healthwise Plus No Excess plan will save a total of €1,947.32 or 46%. (You have until April 1 to switch.)

A family with Aviva’s Level 2 Hospital plan will save €1,286.60 or 38% by switching to Aviva’s Family Value plan. (You have until May 1 to take up this offer.)

Meanwhile, Goode says that GloHealth’s equivalent best value plan, Better Plan, which was only launched last July, costs, in total, €2,200 and also represents very good value for a family of four.

(VHI comparisons are not included here because the renewal switching deadline was last Saturday, March 9.)

Healthinsurancesavings.ie offer similar same-company comparisons for single people and older people, the latter, surveys show, are far less likely to cancel their plans than younger people. Older people also tend to buy more expensive policies, with greater coverage for outpatient and hospital treatment and better accommodation options.

While savings like the above are very significant, other cost cutting solutions www.healthinsurancesavings.ie suggest include, especially for families with very young children, switching providers.

Special child discounts that were all the rage last year with VHI, Laya and Aviva are now gone, says Goode, and only newcomer, GloHealth still allows all children under three to go free.

All parents should be reminded, that you are not obliged to keep your children on the same plan as the parents’ and that lower cost/accommodation plans are suitable in most cases because adult-style private or semi-private accommodation is not usually available in the children’s hospitals.

Meanwhile, Goode warns all members that from this month, the €65 increase in the risk equalization levy (to €350 per adult) and the extra €25 for a child (to €120) will not apply if your plan qualifies as a ‘non-advanced’ or low cost entry level plan with little access to private hospital treatment.  Unfortunately, this means that providers must eliminate benefits like MRI scans and other out-patient treatments in private hospitals from these plans.

“People with entry level plans will really have to decide whether it’s worth moving to a new ‘advanced’ plan, however basic that may still be the same price as their old one, but with the extra levy, or stay with their existing entry-level one and lose access to tests or treatments at a private hospital.” 

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TOOLS FOR SELF-VALUEING YOUR LOCAL PROPERTY TAX

 

 

Every property owner will be receiving the local property tax (LPT) estimate and guideline from the Revenue Commissioners starting next week

 

Accepting the Revenue’s estimate means they’ll leave you alone once you’ve paid the tax (returns must be made by May 7 or 28 depending on whether you file by post or online; the half year payment must be made by July) and the valuation will last until November 2016. The LPT is being described as a ‘self-assessment’ tax, but rejecting the Revenue’s estimate and submitting a lower one could leave you open to penalties and sanction if it is rejected.

 

So how should you go about the self-valuation?

 

Mortgage brokers, financial advisors, economists and estate agents all say that it is difficult to assess the real value of any property in a market that is less than one-tenth the size it was before 2007-8. Mortgage finance, they say, is still extremely difficult to secure, the arrears problem is a price dampener, and a flood of foreclosed buy-to-let properties could be imminent, which could also have a negative effect on prices.  Outside of Dublin, prices are still falling, though at a much slower rate.

 

Nevertheless, there are ways to self-assess your property, they say, though not all of them may end up being included in the Revenue guidelines.

 

Independent Valuation

 

“First, anyone who submits a lower valuation than the Revenue’s, should get professional backup in the form of two or three independent written valuations,” said one advisor. “In Dublin that will probably cost you between €100-€150 for each one, maybe less down the country. It has to be worth at least €300-€400 in annual tax savings for it to make sense to do so.”

 He also suggests that you hire those who turn over the most property in your town or area. “This is never more important given the small sample of transactions these days.”

 

The National Property Price Register 

 

Next, check out historical sales on the new property register, which is most easily accessed via the www.myhome.ie website which also includes a simple tax calculator.

Prices achieved since 2010 are listed on the Registrar, but those recorded in the last six months or year are more representative. Prices can vary a great deal as your radius of study widens. The desireability of certain locations differs as does the size, age, condition and type of house/apartment.

Also keep in mind that while neighbourhood amenities are something that everyone shares and so should have the same weighting for LPT values, the fact that you happened to spend €50,000 on a kitchen back in 2006 may not have the same price value impact in this market than it did back then.

 

CSO Surveys

The monthly Central Statistic Office’s residential price index (go to www.cso.ie) surveys give a snapshot of monthly price changes and the annual price to date. Last January, for example, prices fell, nationally by just 0.6% but in the year to January, by 3.3%. In Dublin, prices rose by 0.5% in January and, in the year to January, by 2.1%.

 This survey, and annual ones like the www.daft.ie and www.myhome.ie county by county price surveys can also provide you with statistical data to back up a price fall, for example, if you believe that the Revenue may have not taken such data into account in their estimate of your home’s value.

 

Rental Values

 Professional landlords and investors use a mathematical formula that involves the rental yield of a property to gauge whether the asking price represents good value, and this is also a tool you could use to try and value your home.

 It involves taking the annual rent currently being achieved for a house or apartment in your neighbourhood or area (Daft.ie is a good source or go an ask your renting neighbour). Investors then multiply this amount by a factor that represents – for them - a reasonable period in which to recoup their capital.

Typically, this is 12-15 years.  For example, if you know that the property rents for €1,000 a month or €12,000 a year, when multiplier is done, a fair investment value might be between €144,000 and €180,000. Would the Revenue accept this formula for an owner-occupier?  Would a higher multiplier, of say, 20 (once a typical mortgage period) be more acceptable. Using our €1000 a month rent formula, the house would have a valuation of €240,000.

 

The Ronan Lyon’s Calculation

Last January, in the form of an open letter to the government, the economist and Daft.ie spokesperson Ronan Lyons (see www.ronanlyons.com )

published his own valuation model, based on previous site value/Land Registry data that he produced.

 “The starting point (a 3-bed semi-d in Louth) and then multiply it by whatever factors you need” and supplied in his county-by-country table.

 “In particular, pick your county or urban area, if different; and pick your property type and size. So for a four-bed bungalow in Sligo, the €108,000 starting point is multiplied by 0.875 (prices in Sligo relative to Louth), by 1.355 (prices for 4-beds compared to 3-beds) and 1.221 (prices for bungalows, compared to semi-ds). Multiplying them all together gives an estimate of the property’s value in Q4 2012: roughly €156,000.”  Try it yourself.

 “Valuing houses in this market is guesswork,” one property expert told me. “But this is about getting households registered and €500 million collected. It’s not about a proper source of funding for local authorities.” 

 Owner beware, indeed.

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ARE YOU READY?  PROPERTY TAX VALUATONS START ARRIVING NEXT WEEK

  

Starting next week every homeowner will receive a notice from the Revenue that includes some guidelines on how to value their property for local property tax (LPT) purposes as well as the Revenue’s own estimation.

If you accept the Revenue’s valuation, then all you have to do is sign the declaration of chargeable value and send it back to them with the half-year payment by May 7 or May 28 if you pay on-line. If you believe you qualify for either an exemption (say, as a new first-time buyer, or live in a ghost estate) or a deferral (because you are on welfare, or have a very low income), you still need to fill out the appropriate application and return them both to Revenue. (Go to www.revenue.ie for the official LPT Guide.)

 If you opt to do your own valuation, you might want to get cracking: late returns and payments will carry stiff penalties and by July 1, the Revenue will take action to just take the tax payment from your wages, your bank accounts, from your social welfare payment or farm payments.

 The legislation permits them to enter and inspect your home if hey so wish, and they can reopen your file and question your valuation at any time during each LPT payment term (3.5 years from mid 2013 to November 7, 2016, but four years thereafter) even if you’ve agreed with their valuation.

Making a false declaration, or refusing to make one, both carry fines that start at €500 per month and rise to €3,000. Delaying your payment carries an interest penalty of 8% per annum on any arrears. Even opting for a deferral – which only applies if you are on a very low income, will incur a cost 4% per annum interest charge whenever you do get around to paying the back tax.

Not paying LPT on time could also trigger a wider audit of your income tax or corporate tax position and should you decide to sell your house between now and November 2016 when this first LPT valuation term ends, there is a €500 fine for not disclosing the LPT to a buyer. (Who would buy a house without finding out the LPT first?)

Bizarrely, the legislation also obligates a buyer who has reason to believe that the LPT, as declared by the seller, is too low and was not “a fair and honest valuation”, to report their concern to the Revenue.

This “snitch” clause, as it has become known, can only really be triggered if the new purchase price pushes the house into a higher tax band. For example: the property is LPT valued for the first time on May 7, 2013 at €300,000. On July 7, 2015, the new owner pays €375,000, pushing the property into the next, higher tax band. If the purchase doesn’t trigger a higher tax band, the new buyer pays the same LPT until the next valuation term and has no reason to make a new valuation submission and continues to pay the same LPT until November 2016.

A new owner couldn’t possibly know how or the seller came up with their original valuation back in May 2013. All they can know is why they were willing to pay a higher price for the property, months or years after the previous valuation date.

However, if the Revenue also decide, on foot of a notice by the new buyer that the original declaration was “too low” and is now higher, they have the power to pursue the seller for the tax shortfall from 2013.

“The only reason why Revenue are in charge of property tax valuations and collection,” Karl Deeter of Irish Mortgage Brokers and Advisors told me last week, “is because everyone is afraid of them. No one is afraid of the local authorities.”

So that pretty much sums up any chance of avoiding this tax, or even delaying its payment. 

The Revenue, in their deadpan fashion, insist that the LPT is a self-assessment tax, despite including their own valuation with the declaration form (rather than just providing guidelines on how to come to a valuation) plus warnings of dire consequences if you submit a lower valuation with which they may challenge at any time.

The government is probably hoping everyone will be too intimidated to challenge the Revenue valuations.

 They could be right. 

But if you believe that you are better placed than the Revenue to come up with a “fair and honest” valuation of your property, and you are courageous enough to challenge the Revenue valuation, next week’s column will look at many different methods and sources you can use to achieve that valuation.

And if any of these should provide a higher valuation than the Revenue one, you can, perversely, still opt for theirs’. 

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