Jill Kerby

LOW COMMISSIONS AND CAR CLUBS – SOME GOOD FINANCIAL NEWS

Two possible money saving opportunities crossed my desk last week that are worth sharing – one is a possible way to save on the considerable commissions that are paid on the purchase of life insurance products and the other is a substitute for car ownership.

LowCommission.ie is a new, direct, on-line insurance intermediary that offers protection insurance products from four insurers – Irish Life, Friends First, Aviva and Caledonian Life. 

Last week, Dublin City Council’s transport and traffic policy committee recommended that the full council put in place new by-laws to allow car clubs to set up on the capital – a vote will take place on December 3 and it that passes a public consultation place will take place in the early new year.  Car clubs let members pick up and drop off cars, usually for short-term use with huge savings for people, like me, who have a car sitting outside their house unused for most hours of every day.

First, LowCommissions.ie claims that by cutting out the broker middleman their customers can save a sizeable amount of the commission that brokers receive on every protection policy sold. The commission can amount to as much as up to 150% of the first year’s premium plus annual renewal or ‘trail’ commissions from year two.

So how much could you save? As much as 80%-100% discount of the commission element of the life insurance, mortgage protection, serious illness and income protections premiums, says Sharon Doyle, the company’s marketing director.

“In 2011 alone, over €90 million of new life assurance or protection policies were routed through brokers and banks in Ireland. The quantum of commission generated by this is conservatively estimated by LowCommission.ie at about €81 million. The cost of this commission is ultimately borne by the consumer.”

Let’s look at one of the savings examples provided – a couple seeking mortgage protection insurance:

“A couple who bought their first house in 2007 for €380,000 are aged 36 and 33 respectively and both are smokers. Their current outstanding mortgage is €362,000 with 30 years remaining. The quotes for a mortgage protection plan – life cover only would be as follows:

Cheapest Available Price in Broker Market               €80.81 per month           
LowCommission Price                                               €67.07 per month
Total Savings                                       €4,945.57 over the term of the policy

This is a very substantial savings, but describing it as the cheapest available price in the “broker market” suggests to me that the direct on-line market may not be part of this comparison, though LowCommission.ie may very well be offering the biggest discount of all.

Discounting commissions on protection policies is already common amongst many financial advisors, especially fee-based ones. Anyone buying a large, fixed term, fixed premium life assurance premium and paying an advisor’s fee should be entitled to 90% of the first year’s commission. The balance paying the actual cost of the cover for that year.

Straightforward term life insurance is not a complicated product, but where the policy is more nuanced – like serious illness or income protection cover – it is better to use a fee based financial advisor, who holds agencies with all the insurers, not just a select few and who can explain all the conditions, exemptions and tax implications of the recommendedy policy.  Heavily discounting on-line brokers work mostly on an ‘execution-only’ basis.

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Now to Car Clubs, which are now available in most good-sized towns and cities in the UK and other countries.

Last week Dublin got that much closer to having such clubs, and if they do work in the capital (from next year if the City Council approved them) they might also appear in other Irish town pr cities.

At the moment, GoCars operates in Dublin and Cork, but only from fixed locations (like indoor car parks) where members must pick up and drop off their short term use cars.  On street Car Clubs allow members to check where the nearest available car is, to pick it up, use it and then drop it off at the same or different on-street location. The longer you use the car and the further out of designated zones you leave it, the more it costs.

The attraction of Car Clubs is that the member ‘pays-as-they-drive’, contributing through their members and usage fee for their share of the capital investment, insurance, tax and petrol. With typical annual running costs between €4,000-€10,000) a year for most families in Ireland (depending on the age, size and value of their vehicle) not utilising any car fully is a high cost to pay for the convenience of being outside your door at all times.

This column has written many times about how low event car users and even short distance commuters would benefit financially by using taxis regularly compared to the cost of car loans, insurance, tax, maintenance and petrol for a car that is driven for just a couple of hours and then left parked outside your office or home.  Even renting a car for holiday travel is cheaper than low use ownership.

City authorities like Car Clubs because they lighten traffic and parking congestion and carbon emissions. The city still enjoys parking revenue from the club and unlike the DublinBikes scheme has no cost input since the clubs will use existing infrastructure.

We don’t know yet how much Car Club membership and usage fees will be, but it’s a pretty sure bet that owning a car is going to go up after the December 5 budget.

If car clubs become a regular feature in towns and cities in Ireland, for a fraction of the cost for occasional drivers (or two car families) it will be the greatest act of revenge against the taxman…until he figures out a way to get into the act himself. 

ADULT CHILDREN AT HOME?  SET SOME FINANCIAL HOUSE RULES

A number of my friends, who thought they’d reared their chicks to adulthood and watched them leave the family nest (with mixed feelings it has to be said) are now trying their best to re-accommodate them.  “Blame the recession,” they repeat and not with much enthusiasm.

The reason why so many of our young adults – 66% aged between 19 and 24 now with their parents compared to 59% in 2001 (the last Census) is undoubtedly mainly for financial reasons.

The cases I know about include young adults who have lost their jobs, quickly ran out of their savings and/or credit facilities and couldn’t pay their rent. In one case, a young unmarried couple (in their late 20s) are out of work and have lived both with her parents and now, his. No one is very optimistic that this latest move will work much better, though family number two has a rather grand holiday trailer in the south east to which both couples are removing themselves at every opportunity. The onset of winter means that option will be closed until at least Easter.

Other adult children, who do have jobs, move back in with their parents because despite having a wage, it isn’t enough to cover rent/mortgage, a car loan, credit card bills and the ubiquitous “I’m saving for a house downpayment / emigration fund.”

Most parents I know have some regrets when their 20-something finally leaves home. For others, the empty nest is eagerly anticipated and celebrated. How you cope as parents depends a lot of your frame of mind both when the nest was vacated and reoccupied. The state of your budget inevitably plays a part I that view. 

It’s been my personal experience – and years of observing the money habits of the Irish - that teaching children good financial habits from a young age and then advancing that process to include a financial charge when those children start earning money - isn’t very widespread here.

Somewhere between the very pro-active step of opening a post office or credit union saving account for the six year old, and then getting the 16 year old to hand over some of her babysitting money as a household contribution…there is a yawning gap.

I think it comes down to many parents being grateful that they are not been tapped for even more money by their teens, who can supplement the ATM of Mum and Dad with their own usually tax-free earnings.

It isn’t much of a leap then to discover that rather a lot of unemployed or low paid adult children, back living at home, only pay a token ‘rent’ from their unemployment benefit or income to their landlord parents.

“She never asks about the cost of the utility or insurance bills,” said one father of his 27 year old daughter who is back living at home since 2010. “She says she can’t find a better job. She says she needs her car, tells us never to expect her for meals, but complains if there isn’t plenty of food of her liking in the fridge. She objects to her mother asking her to let us know when she isn’t coming home.”

The social niceties and house rules, especially regarding boyfriends/girlfriends staying over, are always tough – each family has to sort this out for themselves, but the financial arrangements should be, as follows, a contractual matter between adults:

-       Agree on a target time limit for their stay. An open-ended one is harder to terminate.

-       Discuss and itemise what your current food, utility and insurance bills are at the moment and by how they could rise (a third? Half?) when the child returns.

-       Agree how much ‘room and board’ money will have to be paid relative to their income and ability to pay. Ideally arrange this as a direct debit.

-       Cash loans – as opposed to genuine gifts of money - should be given only with the proviso that they will be repaid, inevitably, interest free, but repaid.

-       Agree beforehand on a future review date of the new living arrangements. Your child is no longer a minor so it is no longer your business how they conduct their private life, including their attempt to find new or better paid employment so they can move out again, but they are your lodger and you have the right to renegotiate this contract when it hits the agreed maturity date.

Many years ago, a divorced woman I met who had three young adult children still living at home (two were working), asked me what ‘squatting rights’ they had to the family home.

She had moved out the previous year to a rented apartment (the house was mortgage free) leaving them to pay all utilities, food, etc as they each had – politely – declined to leave her nest. She now wanted to sell the house from under them.

Of course she had every legal right to do so and I hope she did (this was pre-2007) and is now living in some comfort off the proceeds.

No one wants to see their adult children destitute or homeless during this great financial crisis. But no one – in their right mind – wants to extend their ‘adultescence’ either.

(PS – Many thanks to everyone who has sent me their payment protection insurance misselling stories. Keep it up! I’m expecting news this week from junior Finance Minister Brian Hayes who is looking into the problem of the six year statute of limitations and how it is preventing genuine complaints. I will pass on his findings to you next week.)

PENSION REFORM?  NOT THE KIND WE REALLY NEED

In good economic times, most people don’t get too bothered about what others are getting paid or the size of their pensions. But when the gap between those receiving huge salaries and pensions – like ex bankers and politicians on €500,000 a year, paid for by the struggling taxpayer grows wider and hardship seems only to be happening to the payers and not the recipients -  the status quo is replaced by a new reality, of anger and resentment.

Of course these massive payments are wrong. The state is bankrupt.

The two worst banking culprits – Anglo and AIB – like the ESB, Irish Nationwide and Permanent TSB went bust. Their pension funds were/are hundreds of millions in deficit and without the state/taxpayer bailout would most likely have been wound up.  When other private sector companies go bust and their defined benefit pension funds (whether in deficit or not) are wound up, what money there is is used first to protect existing pensioners, then the workers’ and deferred workers’ pensions get to split the remainder (which might be nothing.)

In the case of AIB and Anglo, their pension funds were financially rescued or supported (in the case of Anglo) by the taxpayer since 2008. (AIB’s deficit of over €740 million was cleared by a €1 billion once off payment by the state so that they could offer an early retirement package.)

Their ex-bosses are being paid their massive pensions for life from these taxpayer-supported bailouts - €500k a year in the case of AIB’s Eugene Sheehy (a man only in his 50s). Even Sean Fitzpatrick’s wife is getting her share of her bankrupt husband’s huge bailed-out pension.

It’s exactly the same story for the politicians. Whatever about honouring the pensions of ordinary employees of the state who retired pre-2008, is it really morally correct in a bankrupt state to keep paying the vastly enhanced pensions of early retiring post 2008 politicians who participated in creating the policies that helped to collapse the state?

The entire pension system is deeply flawed. On a practical front, public service pension contributions, that even politicians make, are never invested.

Contributions are a very small part of the potential lifelong benefit that will be paid out, especially for early retirees who may end up living 30 plus years on pension earnings.  Some will earn more from their pensions every year than the workers who step into their old jobs. Many earn more from their pensions than they did in their jobs.

All state pension payments – including the state old age pension – are paid not from the contributions made (via PRSI) but by direct, day to day taxation. They are Ponzi schemes that will end when the ratio of young workers to pensioners gets too low – probably when today’s young workers are ready to retire.

Private sector pensions have failed on many levels as well:  for Defined Benefit pensions, recipients are living longer than the funds will last, the money invested is not performing well enough and bond rates are too low to provide a decent final income. Defined Contribution pensions put all investment risk onto the saver alone, and costs are too high. The government is making things worse by taking 0.6% of the total value saved from every private pension saver’s fund. They say they are creating jobs with this money…

The pension picture is very bad for anyone who does not work for very strong, well-off companies that can maintain their occupational pension schemes or has not been saving/investing for their entire working like.

We need to wake up to the dangers. Start by checking out your own position and then seeking out and paying for good, independent, impartial advice. Ask yourself how you will live if some day your private or public sector pension is less than you expect it to be, or if the contributory old age pension stops paying out €12,000 a year.

Meanwhile, do you have other savings? Could you keep working into your 70s?  Do you have children who will support you some day?

If you’re a young person, start saving and investing now. Take advantage of available tax relief and tax incentives while they last, but don’t count on them.  You have time and the magic of compound interest on your side – but only if you have the discipline to put at least 10%-15% of your income away every year and can find good, solid, diversified assets to invest in from the moment you earn your first paycheque.

A tough, but wonderful way to have a good retirement is to become an entrepreneur and build yourself a company that pays you a good living …and ensure a good retirement.

There was a lot of talk (pre-2008) about introducing a universal pension scheme to Ireland: everyone (except the public sector and politicians – its first flaw) would join, a minimum contribution would be made by workers and employers, and costs would be capped.

Unfortunately, minimum contributions tend to become the standard contributions and the risk is that everyone ends up with an inadequate pension.

There is no single silver bullet to solve the modern pension problem.  Prudent saving and investing from an early age is the only way and it has to happen voluntarily (a hard sell in a welfare dependent state). Pension reform, like tax reform, social welfare and health service reform needs more than just tinkering with. It needs to start again.

Until then, seek out a good, knowledgeable advisor who can help explain your current position. Pay them a fair fee.

There isn’t going to be any positive outcome for our retirement woes from the current tiresome row about the size of Eugene Sheehy or Bertie Ahern and Brian Cowan’s pensions. Proper reform would not be in the self-interest of the politicians, bureaucrats or pension industry chiefs who have vast pensions to protect.

Do what you can in your self-interest. Pension provision is part of building your personal financial Ark.

PAYMENT PROTECTION COMPLAINTS NEED TO BE HEARD DESPITE STATUTE OF LIMITATIONS

Last month, the Central Bank announced that six financial institutions, Bank of Ireland, Allied Irish Bank, EBS, GE Money, Ulster Bank and Permanent TSB must now go through their files and undertake reviews using independent third parties who will identify those who took out payment protection insurance on personal loans, mortgages and credit cards and establish whether the contract was a valid one. Where it was not, they have to work out a proper refund and/or compensation process.

This is all going to take time, but in the end, the total amount of PPI compensation could be considerable – some reports suggest as much as €300 million.

Of course this figure is woefully underestimated due to the six year statute of limitation that applies on all complaints to the Central Bank and financial Ombudsman’s office. Many thousands of PPI policies were sold in the days, let alone years prior to the October 2006 complaint cut-off date.

Dermot K, a self employed taxi-driver, is in exactly this position:

“I’m self-employed, a sole trader, and I bought a new car in 2006, got a loan from my bank and was told it was a good idea to buy payment protection insurance.

“I paid back my five year loan last year, the payment protection ended and I didn’t give it another thought until I heard you on the radio and in your columns about how self-employed people do not qualify for PPI and should never have been sold it.

“I wrote to my bank and told them I thought I was missold this policy. They wrote back and said that I signed the contract and ticked the box stating I understood the terms and conditions. They said I never took up my right to cancel the policy within 30 days of signing and they even said that if I had made a claim, well, they would have paid out the benefit.”

Whoever wrote that letter – Mr K also had phone conversations with the bank – was either being intentionally misleading or misinformed themselves.

The selling of PPI to the unemployed, and not explaining the terms and conditions of these policies in simple language are going to be two of the main reasons why tens of millions in refunds and compensation will be paid here, and why billions of compensation was paid out here.

In Mr K’s case, his bank would never have paid out a benefit: as a self-employed person, this type of insurance simply did not pertain to him.  If he had made an illness-based claim, the bank would have obfuscated and delayed telling him why it was not being dealt with and then eventually they would have refused it, probably on some other ground. If he then found out about it being missold, they might have settled complaint with some form of compensation in the hope that would be enough to prevent him taking the case to the Ombudsman.

PPI should never be sold to the self-employed but also never to anyone who works less than 16 hours a week, or to the unemployed, to people working on contract, to those to whom the terms and conditions are not explained and certainly not as a condition of getting the loan.  Even someone with a pre-existing medical condition needs to be informed that benefits will never be paid if the claim is related to that condition.

Mr K’s bank clearly wants him to drop his complaint. That loan and policy, they are saying, is closed.  Unfortunately for him, his bank as usual, has a government devised loophole to slip through: the six year statute of limitations rule under which the Central Bank and Ombudsman operate.

Tens of thousands of PPI contracts were sold in the months leading to the October 2006 cut off date; they apply, unfortunately, to all financial product complaints taken to the Ombudsman in this in this country, not just PPI. It is a blunt mechanism that lets the big financial institutions avoid the official complaints procedure if misselling occurred more than six years previously. These include cases that amount to outright theft (like overcharging.)

In the UK, the six year statute applies from the date the buyer realises they may have been missold a product and makes their first complaint.

Mr K and anyone else who falls outside this arbitrary rule can still take legal action against their bank. The Small Claims Court is the place to go if the amount involved is less than €2,000. It costs €25 to argue your case.

There are also many legal firms prowling around, offering to deal with the bank on a ‘no foal, no fee’ basis in exchange for a 25% cut from any refund or compensation. Both the Central Bank and the National Consumer Agency (who say that everyone should at least inform the Ombudsman of their misselling experience even outside the statute of limitations) suggest waiting for the official CB investigation to end before giving up 25% of any refund/compensation.

The PPI scandal is bad enough – it is another indication of the corruption of the banks and the incompetence of regulators – but letting them get away it via a statute of limitations is even worse.

I’ve become almost unbearably cynical about politicians and the political process, but they are the only ones, short of a full blown revolution, that can change existing laws that are…well, just wrong.

I recently met Brian Hayes again. He’s the junior minister in the Department of Finance and while he has been known to say the most incredibly stupid things on occasion, he has also made some relatively intelligent and sensible comments about the state of the banks (in particular) and our bust economy.

I intend to raise this matter with him. I’ll ask him his views about the six year rule and I’ll let you know whether he thinks it should be changed on the grounds that it is the right thing to do, no matter how it negatively impacts on the finances of the banks.

Meanwhile, if you support this change – perhaps you’ve been a past victim of a missold financial product, -  I’d be happy to do include your views when I speak to Hayes. Just e-mail me at jill@jillkerby.ie.