Jill Kerby

DON’T FALL FOR THE HYPE:  ALL CREDIT COMES AT A PRICE

Not everything is as it seems, especially when it comes to money and financial products.

I was at a movie the other day and one of the pre-film advertisements was about the mortgage offer from Permanent TSB.

Up there on the giant screen was a buy-now-pay-later offer of 2% of the value of your new mortgage as ‘cashback’ – enough, claimed the ad, to kit out your home right away instead of waiting until you have the spare income or savings.

It sounded tempting: PTSB lends you say, €200,000 so that you can buy a €240,000 house.  (You have to come up with the €40,000 yourself under the 20% down-payment rule). It then gives you back 2% or €4,000 - in cash.  You buy your sofas and curtains and wide-screen TV.

But hang on, I recall the same bank, back in the bad old days of the property boom, offering mortgage holders their very own mortgage loan chequebook in which you could write cheques worth up to €3,000 against the equity in your house.

The problem with that offer – and this one - is that mortgages are long term loans, usually 25 or 30 year durations. Buying a short-term consumer good like a sofa, telly or even a holiday with cheaper mortgage debt may seem clever compared to paying much higher personal loan, credit card or hire purchase interest rates, but these loans are designed to be paid off over a relatively short term and long before the goods need to be replaced.  Paying off a €1,000 sofa over the remaining term of a 25 year mortgage, even at just 3%-4%, is complete madness. (See www.bonkers.ie for mortgage rate offers.)

PTSB’s mortgage rates are certainly not the most competitive on the market. This one starts at a variable rate of 4.2% which can change at any time. Opting for this gimmicky loan, which also includes a one year 0.5% interest discount and some ‘flexible’ payment options including another boom-time feature – a “payment holiday” -  is going to cost you a lot more than if you picked one that doesn’t come with bells and whistles.

This smoke and mirrors treatment is common in lots of financial products, not just mortgages.  But sometimes consumers see through the smoke…like they are doing all over the world in their use of conventional credit cards.

A recent survey of non-cash payments and the use of credit, debit, prepaid and contactless card use here has shown that we are moving ever closer to a cashless society.

Visa Europe reports that we have spent €31.7 billion with these cards in the past year, a 12% increase on the previous 12 months and that more than €1 in every €3 spent by Irish consumers is with these cards.  Meanwhile the number of transactions on Irish Visa cards increased by c16% over the same 12 months to a whopping 584 million transactions.   Even business to business spending with cards is up 17% to approximately €6.5 billion worth of transactions and now accounts for 21% of all Visa card transactions.

The use of cards instead of cash is growing everywhere and for good reason:  they are convenient, easy to use and widely accepted.  Cards that are lost or stolen can be replaced, but unlike cash they come at a significant price. Not only will you pay an annual stamp duty (€5-€20 depending on the kind of card), transaction fees every time you make a purchase, but also exorbitant interest rates on the credit card – typically 18% or more - if you don’t clear your balance every month. Even more penal charges apply if you miss making a payment and as anyone who has ended up seriously in credit card debt or even having to apply for a Debt Relief Notice (for unsecure debt up to €35,000), the misuse of their credit card proved to be disastrous.

The good news is that we are all becoming more discerning about how we use these ‘flexible friends’. In a release last December, the Central Bank reported that the value of spending on lower cost debit cards, which require you to have sufficient funds in your account to meet the transaction value, is now over 2.5 times higher than on credit cards, which give up to 56 days ‘free’ credit but then charges that double digit compound rate of interest on the debt.

We may be spending billions every month with plastic cards, but more and more of the transactions are straightforward purchases or ATM withdrawals rather than credit based.

The more people switch to debit cards, the less overall interest they will pay to the card providers.  A typical credit card user who only pays the minimum balance can rack up hundreds of euro in interest payments…over a lifetime it can amount to thousands. (See www.consumerhelp.ie for best credit card interest table.)

Just like paying over the odds for a “flexible” mortgage, rather than a basic one with a lower interest rate…

Jill’s 2016 edition of the TAB Guide to Money Pensions & Tax is now in all good bookshops. If you have a personal finance question for Jill, email her at jill@jillkerby.ie or write to her c/o this newspaper.

ENHANCED PRSI CONTRIBUTIONS VS PRIVATE MARKET INSURANCE

You need to be either very determined or very desperate to become self-employed in Ireland today.

A couple of weeks ago RTE’s Liveline programme heard some pretty horrific stories from sole traders whose lack of access to the most rudimentary social welfare benefits like unemployment assistance or disability payments has had a devastating effect on their lives.

For too many of them – middle aged tradesmen in particular who are still waiting in an upturn in the house building market, the struggle of the past eight or nine years has meant that their chances of fully recovering financially from the 2008 crash is becoming even more elusive.

Perhaps not surprising, with the election only weeks away, the main political parties are all paying lip-service to the great contributions made to the state by the 730,000 self-employed and small business owners. They claim their changes will improve their financial positions.

Self-employment/sole tradership offers pluses and minuses, though on the tax front, the downside can outweigh the positives of being your own boss, setting your own hours and control of your cashflow with the requirement to pay income tax, USC, PRSI (but not VAT collections) once a year on October 31.

You also get to offset certain business expenses against your income – if you have them – and you can make tax deductible pension contributions and some insurance premiums to reduce the net relevant earnings that are subject to income tax and USC. 

Like qualifying PAYE workers, the self employed and company directors must pay 4% PRSI contributions, but unlike them, they can only claim a more limited number of social welfare benefits, the most important of which is the universal contributory pension.  They are not entitled to unemployment or disability benefits, currently c€188 per week.

The election has provided ample excuse to the different parties to jump on the self-employed bandwagon, or at least those members of it who say they want the right to access those additional welfare benefits.

In nearly every case, the manifestos support this view, but only if the self-employed person pays the combined employer (10.7%) and worker (4%) PRSI contributions. For someone with net relevant earnings of say, €100,000, this would amount, in theory, to an extra PRSI payment of €10,750 a year on top of their compulsory €4,000.

Realistically, now many sole traders or SME owners would agree to pay such an enhanced ‘premium’ for the (non-guaranteed) state unemployment or illness/invalidity/disability payments or pensions of c€9,776 - €10,072 a year?

The discount insurance broker, John Geraghty of www.LABrokers.ie told me that there is “a lot to be said” about such payments, which can theoretically last a lifetime (or at least until the state non-contributory pension kicks in at age 66.)

He warned that the private market alternatives to protecting your income and health – income protection insurance and specified illness policies - have grave shortcomings. For example, your period of enforced unemployment or illness must meet the strict criteria set by the life companies.  Not every stroke is serious enough to trigger a serious illness tax free payment; not every incident of illness of disability is serious or permanent enough to prevent you from doing a different job, than your existing one.

That said, thousands of workers successfully claim these benefits and in the case of income protection they can get up to 75% of their income up to retirement age if needs be. Two close women friends of mine who had mastectomies successfully claimed their  €50,000 and €100,000 lump sums and said this money made all the difference to their recovery during a most worrisome and financially difficult treatment year.

According to John Geraghty, a 35 year old, non-smoking, while collar worker can buy a €75,000 income protection insurance plan (the maximum you can claim on earnings of €100,000) that pays out after 26 weeks for €125.94 per month gross. The weekly gross payment is €1,442. He/she can buy another 20 year term, €100,000, tax-free specified illness (or death as the first event) policy for €33.62 a month. Together, after tax relief on the income protection policy, the combined annual cost is €1,053 a year, say Geraghty. This is a certainly a far cry from the additional €10,750 a year that the self-employed accountant or business owner would pay if he signed up for the enhanced social welfare contributions/benefits.

Going self-employed, or starting your own business is not for the faint hearted. It means forfeiting the security of employer contributions, especially into a private pension fund. The Social Insurance Fund of direct taxation which pays out the PRSI based unemployment and illness and pension benefits remains in serious deficit. Pension benefits in particular are unsustainable and must be reformed if younger workers are ever going to claim their retirement income.

No matter what the political parties promise the self-employed, you need to just accept that in Recovery Ireland, you have to weave your own safety net.

CANVASSERS AT YOUR DOOR? HERE ARE SOME QUESTIONS FOR THEM

Some people dread political canvassers knocking on their doors, especially if they are still eating their supper or about to sit down to their favourite TV programme. Around here, canvassers who knock on my door are the ones who should be in dread.

“Will you give us your Number 1?” they ask with a big smile.  “Only if you tell me how your candidate/party stand on certain issues,” I reply with an even bigger smile.

I share the great HL Mencken’s view that every election is nothing more than “an advance auction of stolen goods”. But I grudgingly accept that ‘democracy’, however flawed, with its illusion that every vote counts, is still better than a outright monarchy, theocracy or single party dictatorship.

The reality is that our style of national government – elected, but parochial and  with power highly concentrated in a small, senior committee of ministers (and mandarins) within the greater cabinet means there is very little policy that the ordinary citizen can influence through the ballot box. Our membership of an increasingly powerful, centralised and autocratic European Union and the globalisation of the powerful financial industry has emasculated the power of so-called sovereign nations.  

In the end, much of the promised reforms and changes we hear from aspiring politicians on the doorstep is just noise. This is why it’s so important, regardless of what party gets in – that you do your best to build a personal financial ark for yourself and your loved ones.

This means understanding exactly who you can and can’t control, especially about the financial issues that affect your life. These include the amount of money you earn and how much tax you pay; how you spend, save and invest the money the government allows you to keep; what schools you send your children to; how you access healthcare and take responsibility for living as healthily as possible, and how you wish to live in retirement and old age.

These are some of the issues that the senior politicians can influence and change. There’s a chance that you might be able to plant a kernel of an idea or a reform of existing policies or taxes or charges that could actually be delivered for the good of everyone (and not just their favourite constituents or vested interests).

Here are some such issues that I plan t raise, starting with taxation ones:

-        The Irish government has no control over interest rates as we do not have our own currency. But it does control deposit interest and investment exit taxes. At 40% and 41% these taxes discourage prudent saving and investing and should be reduced or abolished. The 40% DIRT tax – a compulsory higher rate tax on income - is also charged on child savings, despite children (or their parents on their behalf) not being permitted an annual individual income allowance.

-        VAT at 23% is one of the highest rates in Europe. Lowering it back to 21% or lower will encourage consumer spending and boost domestic job growth.

-        The reduction of USC is welcome, but what about equalising the rates? Why are only self-employed people subject to the 11% rate on income over €100,000 and not everyone who earns above this arbitrary amount?

-        Some self-employed people are demanding access to the same social insurance benefits that apply to PAYE workers, for whom employers pay 10.75% PRSI in addition to the workers’ 4% gross income contribution. This option (to pay 14.75% PRSI on gross income) should be introduced.

-        Only people with natural, adopted or foster children can leave the maximum €280,000 worth of their assets tax-free to these heirs. This discriminates against individuals and couples who cannot have children of their own or who are unable to adopt. This arbitrary, tax-free sum should be extended to adults with no offspring.

-        If public servants are to receive a refund of all or part of the Pension Levy imposed on them since 2010, so should the €2.4 billion pension levy on private sector pension fund holders since 2011 be refunded.

-        All state and public sector Defined Benefit pensions (which are neither adequately funded nor invested) should be converted into funded/invested Defined Contribution ones.

-        The state old age pension is unsustainable and has to be reformed. PRSI contributions earmarked for this benefit should be voluntary.

-        Hundreds of millions of euro have been lost in the misselling of investment and insurance products due to commission remuneration. Commissions should be abolished.

Jill’s 2016 edition of the TAB Guide to Money Pensions & Tax is now in all good bookshops. If you have a personal finance question for Jill, email her at jill@jillkerby.ie or write to her c/o this newspaper.

EASING OF BANKRUPTCY RULES OFFERS A GENUINE DEBT LIFELINE

Insolvency and bankruptcy are debt solutions that should finally come into their own in 2016, now that the legal process and regulations have finally been revised to reflect the reality of personal indebtedness in Ireland and how it is done in the UK and other economies similar to our own.

The most important revision, just introduced, is the reduction in the bankruptcy discharge period to just one year from three. (It was a minimum of 12 years before 2012).  Bankrupts with higher incomes will no longer face income payment orders of up to five years to creditors; instead they have been reduced to just three.

With the general election just weeks away, and the coalition insisting that we’ve made a splendid recovery from the great 2008 recession, the broader consensus is that the recovery has been uneven, with Dublin and its commuter belt enjoying the bulk of new employment and higher consumer spending. While this may be so, the state of personal indebtedness – and recovery – is more nuanced.

All across the country, ordinary people are struggling with the excessive amounts of credit they borrowed, too often to buy investment properties that they hoped would make them a quick profit in the expectation that prices would keep rising. Many believed this was an opportunity of a lifetime to top up or create pensions from the buy to let house or apartment, too often financed with 100%, interest only non-tracker mortgages.) They, and their lenders simply never countenanced the bursting of the bubble in 2007-8 and the collapse of property values. Nor did they cope very well with the subsequent mass unemployment and emigration, the fall in rental incomes, or the rise in interest rates. Increasing demands by the banks to repay both the capital and interest, meant that now two parties were falling heavily into arrears:  the tenant and the landlord.

The unprecedented rise of household personal/commercial debt (peaking at c€185 billion in 2009) left both politicians and regulators stunned between 2008-11. Instead of acting decisively  - their excuse was that the state of the nation was taking all their attention – very little happened until 2012 when the mortgage arrears process was revised and the new insolvency legislation was finally introduced.

Unfortunately, both were deeply flawed – and widely criticised.  Instead of listening to the experienced, professional insolvency experts who warned that the onerous rules and restrictions would not work, the Ministers for Finance and Justice stubbornly insisted on making the new insolvency and bankruptcy rules as difficult, bureaucratic, expensive and emotionally penal as possible.

Today, property debt continues to be paid down at a rate of about a billion a month; over 110,000 mortgages have been adjusted via the MARPS process or written off. The reduction in costs and charges at the Insolvency Service of Ireland; more liberal bankruptcy discharge periods; allowing the courts to intervene to help settle disputes between creditors and debtors (ie the end of the bank veto) and a new legal support scheme for homeowners at risk of losing their homes (administered through MABS and the Legal Aid Board) means that the huge backlog of property arrears may finally be shifting.

According to the latest report from the ISI there were 70% more insolvency and bankruptcy solutions in 2015 than the previous year including 479 bankruptcies, 641 six year duration Personal Insolvency Arrangements, 221 five year Debt Settlement Arrangements for non-secured debts and 346 one year, Debt Resolution Notices (now up to €35,000 worth of unsecured debts compared to €20,000 originally.)

Meanwhile, anyone who went bankrupt in 2015 or 2014 under the old three year discharge rule will now be discharged after one year (that is, retrospectively under the new 2016 rules). 

What will hopefully emerge from these long awaited regulatory revisions is a greater realisation by both banks and debtors that large numbers of the 110,000 mortgage debt modifications (extended and interest only periods, split loans, etc) are not tenable over the long term, especially if property values fall or interest rates rise.

New Beginning, a well known private debt and insolvency company (see www.newbeginning.ie) claim that up to 37% of restructured cases (or 45,000) are unsustainable and 35,000 are now back in arrears.  The only long-term solution for many of them will be a formal insolvency or bankruptcy.

In a statement last week, New Beginning founder Ross Maguire repeated what he has said many times, that “The problem can only be addressed by an acceptance that debt must be written down – after eight years we must begin to realise that there is no other option.”         

Anyone who is in this position – with an interminable amount of debt that has still not be resolved satisfactorily, or has had a temporary resolution ‘solution’ that is simply not working, should contact a good PIP in their community or the Insolvency Service of Ireland directly at www.isi.ie .

The only thing you are sure to lose…is your anxiety.

Jill’s 2016 edition of the TAB Guide to Money Pensions & Tax is now in all good bookshops. If you have a personal finance question for Jill, email her at jill@jillkerby.ie or write to her c/o this newspaper.